If You Haven't Reached Your Auto-Enrolment Deadline, You Need to Read This
By Martin Irwin, HR Consultant, Radius
By February 2018, all UK employers must have a pension plan that automatically enrolls employees, with mandatory minimum contributions from both the employer and employees. Employer deadlines, or staging dates, vary by company workforce size, and many larger UK firms must now have auto-enrolment plans already in place.
Despite widespread awareness of the UK’s auto-enrolment legislation and its ongoing staging dates — which started in October 2012 — a 2016 study of small businesses undertaken by the Federation of Small Businesses (FSB) shows that 45% of those yet to implement pension auto enrolment have a “limited understanding” of how to comply with the law. Research also suggests that those firms that haven’t implemented auto enrolment “may be underestimating the costs.” A quarter did not know their staging dates and were not confident that their businesses could cope with the requirement. In addition, there is a risk that employers that have yet to stage may struggle to find pension providers with sufficient capacity to serve the small and micro-business markets.
Although measures have been taken to cap management fees imposed on plan members, plan providers can still pick and choose the customers they take on. And as we’ll see, many financial services firms may decline to take on businesses with small workforces. This is not a new issue, but it takes on stronger connotations now that there is a requirement for all employers to have pension schemes in place.
With larger companies having staged already, and the process ongoing for smaller employers, there is increasing pressure on capacity within the pension market as plan providers struggle to process new customers. According to Carole Nicholls of Nicholl Stevens Financial Services Ltd, for example, approximately 200,000 employers staged and installed a workplace pension in the first half of 2016. In the remaining half of the year a further 358,000 employers will likely follow suit. The number of employers staging will continue to increase as we approach 2018. A lot of these smaller companies will end up having to fall back on the government-backed NEST workplace pension scheme, as they simply won’t have the headcount — and therefore the pension contributions — to attract private providers. It’s also important to note that private providers may simply not have the capacity to administer additional schemes at the time of a given employer’s staging.
The NEST scheme has been set up by the UK government to ensure that all employers, regardless of size, have access to a pension plan that is specifically set up for auto enrolment. NEST, however, has its drawbacks. Although simple to use — which is a blessing to SMEs that don’t have a dedicated in-house HR function — NEST does not offer the full spectrum of services and functions that private group schemes offer. The support provided by NEST to employers is relatively limited and the number of investment options available is significantly restricted compared to group pension plans, which typically have a wide selection of investment funds
In addition, NEST currently caps contributions at £4,900 GBP per year (£408.33 GBP per month) per member, with no ability to transfer accrued funds in or out of NEST. (The contribution cap will be removed starting April 2017, but the fund-transfer restriction will remain, at least for the short term.).
Given the limitations of NEST and the increasing strain on private pension plan providers as a result of the auto-enrolment requirement, many smaller UK employers that have not reached their staging dates should strongly consider starting their implementation journeys sooner rather than later. Working with the Pensions Regulator, a UK employer that has not yet reached its staging date can opt to bring that date forward. Indeed, many private pension plan providers are encouraging employers to do just that to avoid capacity-related problems expected by 2018.
If you’re a UK employer that has not reached its auto-enrolment staging date, here are some additional pitfalls you should be aware of:
- Not starting early enough. To ensure compliance with auto-enrolment legislation, an employer must take a considerable number of actions, and make a number of important decisions, before its staging date. Employers in this situation should plan on a minimum lead time of six months for the successful implementation of a qualifying pension scheme.
- Not budgeting enough money. The FSB survey shows that many small businesses are underestimating the cost of auto enrolment. Nicholls confirmed that a lot of businesses simply aren’t prepared for the costs involved. She says, “They may have only budgeted for the initial 1% employer contribution and are unaware of the costs rising to 3% in 2019. Similarly they are reluctant to pay the set-up and ongoing administration charges being levied by the insurance companies and trust-based schemes. They seem relatively happy to pay for advice because they recognize that they need this.” In order to cover the cost of auto enrolment a number of employers that have already set up a workplace pension have either frozen or reduced wages to accommodate costs.
- Forgetting your employer duties after your staging date. Employers must remember that their responsibilities extend beyond their staging dates. Aside from making pension payments, an employer must provide regular updates and information to the Pensions Regulator, reassess its workforce every pay period, keep records and ensure that pension-related communications are open and ongoing with its employees. Processes should be implemented to ensure all responsibilities are fulfilled, including implementing any necessary payroll-software and administrative changes.
In closing, it is critical that employers yet to stage are prepared for the complexities associated with pension auto enrolment and have the necessary resources and budgets in place. Bringing forward the staging date and implementing a scheme as soon as possible will not only help ensure compliance, it will also help reduce the risk of being affected by insufficient capacity in the pension insurance market. Advanced preparation will also enable businesses to more quickly realize the many advantages of pension auto enrolment. At the end of the day, the requirement helps employees save for retirement and therefore is a great way for employers to increase morale, productivity and employee-retention rates.