The Department of Work and Pensions has published the timetable for automatic enrolment duty, estimating that 380,000 workers will be signed up in October alone. From October 2012, the new legal requirements will place a duty on all employers to automatically enrol eligible workers into a qualifying pension scheme and pay minimum employer contributions or provide a minimum level of benefits.

However, a study of 245 employers, conducted by international law firm Eversheds, has revealed that half of those surveyed fear that the cost of compliance for automatic enrolment will be up to 10 per cent of their payroll. In addition, half stated that the additional administrative burden caused by the duty is likely to be their greatest challenge.

Other key findings from the study revealed:

  • 41 per cent of respondents want the duty to be changed to allow workers to opt-out in advance, rather than requiring employers to enrol reluctant workers despite their opposition.
  • 57 per cent of respondents said that their organisation did not anticipate recouping the extra costs associated with automatic enrolment from workers, for example, by limiting future pay rises
  • The majority of respondents are confident they will be ready for automatic enrolment by their staging date (the date the duty applies to them)

Counting the cost

Widespread concern has been expressed by employers and politicians about whether organisations can afford the additional cost of automatic enrolment (including the cost of pension contributions and administration costs), given the current challenging economic conditions.

Teresa Dolan, Partner at international law firm Eversheds comments:

“Just over half of our respondents estimate that the cost of complying with the new automatic enrolment regime, will cost their organisations up to an additional 10 per cent of payroll. Fifty-four per cent of respondents said that they do not anticipate recouping these costs from workers, for example, by limiting future pay increases, or reducing other benefits or headcount, while 16 per cent indicated that their organisations would consider such measures.”

Half of the survey’s respondents stated that the additional administrative burden caused by the introduction of automatic enrolment is likely to be their greatest challenge, with 28 per cent singling out the burden of dealing with opt-ins and opt-outs and a further 16 per cent referring to the monitoring of workers’ earnings as particularly confusing.

When asked to identify the one change they would most like to make to automatic enrolment, 41 per cent of those surveyed expressed a desire to allow workers to opt-out before being enrolled. Another 20 per cent would like the earnings threshold to be removed from the eligibility criteria, so that employers would not have to continually monitor workers’ earnings.

Teresa Dolan comments:

“Whilst the Government’s aim with the introduction of automatic enrolment is to encourage more people to save for their retirement, there will be an inevitable source of friction in workplaces when employers explain to eligible workers that they cannot opt-out in advance of being automatically enrolled. As a result, an employer will still need to enrol such workers even if they have previously asked not to join a pension scheme, leading to possible complaints from workers.

“In addition, where an eligible worker opts-out, he/she will need to be re-enrolled into a qualifying pension scheme approximately every three years from the employer’s staging date, whether or not they continue to object. These and other administrative burdens associated with automatic enrolment mean it is unsurprising that most respondents identified administration as their greatest challenge. It also underlines the degree of detailed planning, and changes to IT, payroll and HR systems, that is required to ensure compliance.”

Worker communication

As part of the legislation, employers will be required to provide information to workers about their new rights and to re-enrol eligible workers who opt out approximately every three years.

The study identified the two most difficult challenges in terms of worker communication were problems with conveying key messages in easy to understand language and getting workers to understand the reasons behind automatic enrolment.

In addition, around a third of respondents cited a general lack of engagement amongst workers and the need to communicate different messages to different categories of workers as being their most difficult challenges.

Teresa Dolan continues:

“Complying with the duty to provide information to workers is likely to pose a significant challenge for many employers due to the strict time limits and the different obligations that apply depending on the category of worker.

“While the Pensions Regulator has issued guidance as well as template letters, we recommend that employers invest time in devising easy-to-understand and engaging communications which comply with the various statutory requirements. Employers may find NEST’s Golden Rules for Communication useful in this respect.”

Teresa Dolan concludes:

“Our survey findings confirm the significant cost and administrative burdens when complying with automatic enrolment. However, it is heartening to see that 93 per cent of respondents are confident that they will ready to comply with their automatic enrolment duties from their staging date.

“Employers must prepare for automatic enrolment and take sensible steps to find out when the new automatic enrolment duties apply to their organisation put in place the correct administrative systems, payroll processes and record-keeping to ensure they do not fall foul of the law. This will require a coordinated approach and input from HR, payroll, pensions and IT teams. Compliance should not be viewed as a purely HR task.”