Getting ready for auto-enrolment

Preparing forINTRO
auto-enrolment…... 2
The final countdown…..................... 4
Quality and quantity…..................... 5
Playing by the rules…....................... 6
How prepared are you?…............... 8
No magic bullet….............................. 9
An opportunity for greater
engagement......................................10
Ensuring best value…......................11
in association with
INTRODUCTION
The
starting
line
Auto-enrolment and ‘2012’ pension reforms are no longer a
theory – the UK’s biggest companies are already beginning to put
arrangements in place to meet the legislation. Are you ready?
N
ext year will see the start of a
huge revolution in the provision
of workplace savings. Pensions
auto-enrolment, under which all
employers will be compelled to
offer most of their workforce a pension, will
start to be implemented, first by the very largest
of UK companies and then subsequently by
smaller companies over the course of the
next few years.
But auto-enrolment is not just a pensions
problem. For many businesses deciding
how to handle this new initiative will
involve all of the senior decision-makers
in the company, from pension fund
trustees to the finance director. Preparing
for it on both a practical and financial
level requires some significant decisions.
The sooner preparations are made, the
easier it will be to comply with the
legislation. In this booklet, we examine some
of the most important steps employers must take
to ensure they comply with the new legislation.
Not all companies will be required to comply
with auto-enrolment straight away – see ‘Autoenrolment: the basics’ opposite for more details
of which employers must comply at what point
in time.
Of course, there is no reason to wait for a
company’s deadline to arrive in order to
introduce auto-enrolment. Indeed many companies
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Pensions Insight/Engaged Investor
have already introduced it across their workforce.
For those companies, one of the biggest barriers
is that gaps still remain in the legislation
surrounding auto-enrolment. “Some employers
are running ahead of the legislation,” says Martin
Freeman head of product strategy at consultants
JLT Benefits. “they are getting to the point where
they need more detail.”
One example of the limitations of current detail
is the lack of definition of a ‘qualifying scheme’,
for companies that want to use their existing
pension arrangements for auto-enrolment. The
Department for Work and Pensions (DWP)
currently has a draft version of the certification,
but will not release the finalised version until
October. Similarly, there is still confusion over
whether the DWP will abolish short service
refunds. These allow employers and employees
to reclaim their basic contributions if they leave a
trust-based scheme within the first two years.
This could have a substantial impact on the type
of scheme that employers, particularly those
with high staff turnover, choose to implement.
Awareness amongst employers is also low – and
costs for employers could be substantial.
Freeman says that in a recent poll of large and
mid-sized companies, JLT found that 49% of
respondents did not know how much autoenrolment would cost them. “If companies can’t
answer that question, they are clearly not well
prepared,” says Freeman. He adds: “If there are
INTRODUCTION
Awareness of auto-enrolment
30%
31%
57%
57%
percentage of those working in the
hotel and catering sector that are
aware of auto-enrolment.
percentage of those working in the
financial sector that are aware of the
changes
percentage of those aged 18-24
working in the non-public sector
who are aware of the reforms.
percentage of those aged 55 and
over who are aware of the reforms.
Auto-enrolment: the basics
What: All employers must auto-enrol employees over the age
of 22 and earning more than around £7,475 into a scheme.
How much: Across the early years of auto-enrolment, employer
and employee contributions will be phased in gradually:
Transitional
period
Duration
Employer
minimum
contribution
Total minimum
contribution
1
Employer’s staging
date to 30
September 2016
1%
2%
2
1 October 2016
to 30 September
2017
2%
5%
3%
8%
1 October 2017 onwards
large expenses involved, employers need to
factor these into their 1, 2 and 3 year plans.”
Paul Sturgess, product development director
at Capita Hartshead identifies two key areas of
cost: that of providing the pensions themselves
and the infrastructure cost of ensuring that HR
and payroll systems are integrated with the
pension system. The first of those will affect not
only existing members of a workforce being
enrolled in a pension for the first time, but also
new employees who might only have been
granted access to the company scheme after a
certain length of time, say a year. “For a big
organisation with a 20% turnover per year, that
could mean a significant number of employees
who would not otherwise have enrolled in the
scheme now requiring a pension. That is a
material cost”.
Sturgess identifies infrastructure costs as a
particular problem for large companies. “For
small employers, their accountant can probably
do this for them, but for larger businesses this
is not just about getting a new module for the
system – they will have to pay out for this.”
Not just about the pensions manager.
Auto enrolment requires many of a company’s
senior decision makers to get involved with the
decisions surrounding auto-enrolment. Some
of the key questions are:
Human Resources and payroll
n Some of the data for auto-enrolment may
need to come from payroll systems, but other
details may be held on a separate HR system.
How will your organisation provide the
combined data required?
n How will the auto-enrolment process handle
staff turnover? Industries such as retail, for example,
have a staff turnover as high as 50% each year
n Auto-enrolment will live or die by the quality
of the communications to employees about
the new pension. If
When: Employers will be required to comply with autodone well, it will be
enrolment depending on the size of the company. Size of the
perceived as a new
company is judged on its PAYE data. If a company has more
form of saving; if done
than one PAYE scheme, its staging date will be based on the
badly it will start to look
largest PAYE department.
like a new form of
For smaller companies that share a PAYE number, a moratorium
taxation. How will the
has been introduced on the staging date for those employers.
company handle this?
This affects businesses with less than 10 employees (as of April
n Will the company
2011) and share a PAYE scheme with more than 239 people in it.
need more than one
scheme – for example,
a low-cost option for high turnover staff and
Finance Director
another scheme for executive or long-term
n How employers will handle the challenge
employees?
of providing a 1% pension, rising to 3% in
n How will part-time, contract or seasonal
2017 for most of their employees?
workers be handled?
n How will the company handle more employees
n What sort of scheme should the company
becoming eligibile for the scheme? It is no
use for auto-enrolment: an existing scheme,
longer possible to require a minimum period
the Government’s NEST arrangement or a new of employment before offering access to the
scheme specifically set up to handle autoscheme – how will this affect pensions payments?
enrolment? Some aspects of legislation relating n Will the additional financial cost require the
to ‘qualifying schemes’ has yet to be confirmed business to restructure itself in any other ways
by the Department for Work and Pensions.
– for example, will it need to consider the
timing and nature of loans paid to the business.
n What will the effect be on other forms of
n Does the company
benefits offered by the organisation?
need to consider the
Pensions manager and scheme trustees time of year when
auto-enrolment is
n If an existing defined contribution scheme is
implemented. For
being used, will auto-enrolment affect the
example, retailers
investment choices that the scheme offers as
may not want to
the scheme’s demographic changes?
implement
n How will auto-enrolment be communicated
autoto existing members?
enrolment
n How good is the quality of the data that the
scheme has at present? Does it need to be improved? during the
run-up to
n What will the effect be on existing defined
the
benefit schemes – will there be a need to close
to future accruals or carry out de-risking work? Christmas
season. n
n It is not permissible to offer inducements or
encouragements for employees to opt-out of
the scheme. Is the company complying with
this ruling?
Pensions Insight/Engaged Investor
3
NAPF
The
Final
Countdown
Catherine Cunningham, Policy Adviser
at the National Association of Pension
Funds (NAPF) explains why autoenrolment will lead to better quality
pensions in the future.
A
s the introduction of auto-enrolment enters
its final stages, much of the focus will rightly
be on the detail of implementation and the
impact it will have on employers and savers.
But we mustn’t lose sight of the bigger picture.
Auto-enrolment has been designed in response to the
UK’s ongoing savings crisis. Without it, millions of people
would face poverty in retirement. That’s why the Pensions
Commission recommended widening access to pensions
through auto-enrolment and the creation of the National
Employment Savings Trust (NEST). For the millions of people
currently not saving in a pension, auto-enrolment will be the
route to a more secure retirement.
But implementing the most
radical pensions reform for a
decade will not be easy. Employers
will have to pay more towards
their employees’ pensions and
they’ll have to grapple with
additional admin. Last year,
the Department for Work and
Pensions’ (DWP’s) Making Auto
Enrolment Work Review estimated
that employers will pay an
additional £3,240m in contributions once auto-enrolment
is fully implemented in 2017. And the administrative costs
of setting up and maintaining auto-enrolment will also be
£444m in 2012 and £127m in each year following.
The NAPF has consistently argued that, because the costs
of auto-enrolment are so burdensome for businesses, the
process of auto-enrolment needs to be as flexible as possible.
There is a risk that, in the current economic climate, many
businesses may choose to level down their pension provision
to the statutory minimum in order to contain their costs.
“For the millions of
people currently not
saving in a pension,
auto-enrolment will
be the route to a more
secure retirement”
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Pensions Insight/Engaged Investor
As we draw closer to the finish line, the emphasis has to
be on increasing saving into good quality existing schemes.
The NAPF’s latest Annual Survey shows the average
contributions going into an existing DC scheme run by NAPF
members is 12% which is well above the new statutory
minimum of 8% required under auto-enrolment.
Of course, not all employers will be able to cope with the
extra burden of running their own pension scheme. That’s why
NEST is so important. As a large scale, low cost alternative it
will serve the needs of both employers and employees
who have little or no experience in pensions.
Of course there are elements of the auto-enrolment
process which could be made less costly and bureaucratic.
But October 2012 is fast approaching and we need to get
people saving in pensions as soon as possible.
Looking into the future, it is clear that auto- enrolment isn’t the
end of the story. As the final report of the Workplace
Retirement Income Commission (WRIC) pointed out (www.
wricommission.org.uk), we also need to think about the kind
of pensions people are being auto-enrolled into. We need
to come up with creative ways to encourage people to
save more than just the minimum into their pension and
to give people more bang for their buck.
Part of the solution will be in changing the way we talk
about pensions. Auto-enrolment presents us with a major
opportunity to change the way the nation thinks about saving
for retirement. But to ensure the success of the reforms, the DWP
needs to lead a comprehensive and coordinated communications
campaign aimed at individuals to get people thinking
about when and how they save for their own retirement.
Although the countdown to 2012 has begun, we can’t sit
back and relax. There is a lot of work still to come. But the
first step is always the hardest – and by October next year
we’ll be well on our way to a better pensions system. n
EXPERT VIEW
Quality and quantity
Good quality data is essential to autoenrolment success, says Chris Rattenburry
Email: info@ftb-ltd.com
Weblink: www.ftb-ltd.com
The last two years have seen a huge upsurge in data
cleansing activity by Pension Funds. This is being
driven by the Pensions Regulator, who, in 2009
discovered that only 19% of Pension Fund members belonged
to schemes that had checked that they had all their fundamental
common data and over half of all schemes had more than one data
item completely missing.
The Regulator has so far issued guidelines and provided education
to help schemes to correct this state of affairs, and has given the
schemes until the end of 2012 to comply. The guidance provides
specific targets for items of common data which must be met and
which incorporate regulatory powers of enforcement, to be used if
necessary. Responsibility lies with trustees.
The reasons for this pressure are obvious – if schemes hold poor
data they run considerable risks, which vary from simple
overpayment of benefits, fraud and inefficiency to having a highly
negative impact on actuarial calculations and funding.
Many DB schemes have been around for decades and their data
will have been held in various forms through that period. It may have
been originally held on cards or paper, then microfiche, then various
computer systems and probably will have been transcribed manually
from each system to the next. Mistakes can easily be made at any of
these stages and may never have been noticed or corrected.
At Faraday we have seen that most pension schemes have problems
with their data and until now there has never really been any pressure
to put things right – especially with deferred members. They may
just be left dormant until at retirement age the administrator suddenly
finds that there is a problem. Only then do they realise that they
may have no contribution or salary records to refer to, let alone
knowledge of where the member currently lives – or even in many
cases whether they are still alive. Their original employer may have
gone out of business or been taken over and the trail may have
gone cold long ago, since 10% of the population moves every year.
However, it does seem as though the Regulator’s pressure may be
starting to motivate schemes to correct this situation.
We at Faraday suggest that the very first step in putting data
right is to check whether the member is still alive. You can do this
accurately even if you only have name and date of birth, using data
available from the GRO. The next step is to find them.
If they are deceased you may have to find their dependents. Of
course if you can locate them then you can actually ask them for
anything you need to know to put your records right. If you are
unable to find any record of them or their family then whatever
other information may be present or missing becomes moot.
Ian de Souza, Managing Director of Faraday Tracing Bureau says
“There’s a misconception that putting it right is too hard, but there
are ways and means of tackling some of these difficult problems. The
starting point for any scheme looking to get on top of their data would
be to undertake a thorough audit of every single data item they
hold. Trustees will often say they just need to look at the Regulator’s
guidance but our view is they need to go further than that. They
have an ideal opportunity now to address things that could have an
impact on the running of their scheme for years into the future.
“The data plan needs to be aligned to their objectives for the
pension scheme. If their overall aim is to do a liability-reduction
exercise they need to build getting their data right into the plan at the
very beginning.”
Once schemes have assessed the data that they currently hold the
next step is to try and contact all the members who for whatever
reason have been’ mislaid’. Faraday normally expects to trace
“The data plan needs to be aligned
to their objectives for the pension
scheme. If their overall aim is to do
a liability-reduction exercise they
need to build getting their data right
into the plan at the very beginning”
between 75% and 85% of members, depending on the age and
quality of existing data. Once individuals have been traced you
can usually elicit further information such as spouse’s details, email
addresses and NI numbers. So tracing is not just a matter of where a
member lives but also of filling in the blanks in a client’s data to the
Regulator’s satisfaction.
Coupled with modern mortality screening processes, regular
tracing exercises will help schemes to set up and maintain accurate
databases of their members.
Trends within the industry, such as de-risking and the introduction
of auto-enrolment in 2012 will only increase pressure on schemes
to ensure that their record keeping is as good as it can be.
The carrot will be increased efficiency and potentially a lot of
money saved and to this end the Regulator has so far advised and
guided. The stick will be enforcement, the severity of which is as yet
unspecified……..
Chris Rattenbury,
Faraday Tracing Bureau
Pensions Insight/Engaged Investor
5
The Pensions Regulator
Playing
by the
rules
Pensions Insight/Eng
The Pensions Regulator
gives a guide to the tools and
checklists available to help
schemes and employers deal
with auto-enrolment.
B
etween October 2012 and
September 2016 all of the UK’s
employers, over a million
businesses, will be required to
automatically enrol eligible staff
into a pension scheme.
The Pensions Regulator has been given the
objective of ensuring that all employers comply
with those new duties. We believe that the best
way to do that is to make it as easy possible to
comply. This includes building up a support
network to help employers understand what
they have to do and when.
Know your staging date
All employers will be assigned a staging date.
This is the date from which the automatic
enrolment duty will apply to them.
Before employers can take any action and
before trustees can get ready to support their
employer, or their members, they need to know
when the duties will come into effect for them.
We strongly encourage every employer and
every trustee board to look up their staging
date now.
The easiest way to find out your, or your
employer’s, staging date is to check our website.
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Pensions Insight/Engaged Investor
All you need is your PAYE reference number
(or the number for the largest PAYE scheme if
there is more than one).
An employer’s staging date will be based on
the number of employees. Small employers
will not have staging dates until 2015/16. Whilst
for many of these employers it may not be
necessary to make detailed plans now, it is still
very important that this date is in the calendar
– for both employer and pension scheme.
Contact from The Pensions Regulator
Every employer will receive a letter from us 18
months before their staging date, reminding
them when they need to act and that they need
to consider what preparations are required.
These letters have already gone out to the biggest
companies that will be the first to auto-enrol.
All companies will receive at least two communications from us prior to their staging date.
There are now a range of tools available on
our website that provide checklists for employers
and trustees preparing for auto-enrolment,
including instructions on how to auto-enrol
staff and work out your minimum contributions.
http://www.thepensionsregulator.gov.uk/
tools.aspx
The Pensions Regulator
Useful guidance documents
There are in total nine guidance
documents from The Pensions
Regulator
Automatic enrolment and
existing pension schemes
Employers with existing pension
provision will face some big
decisions about their automatic
enrolment arrangements.
Do they automatically enrol
new members into their existing
scheme?
n
n Do they set up a new scheme
for new members?
n Do they set up a new scheme
and move all the existing members
to that new scheme too?
These decisions will have long-term
implications for both the employer
and members.
Whilst it is the employer’s role to
make that decision it is important
that trustees of any existing scheme
understand the implications of that
decision on them and their scheme.
The employer’s decision may be
based on a number of factors
including how many individuals
will need to be automatically enrolled.
This in turn will influence factors
such as the cost of additional
contributions, or the impact on
administration processes.
It is helpful for trustee boards to
understand these implications
when they discuss the use of an
existing scheme and any changes
that need to be made to that
scheme. However, from our contact
with trustees to date we have found
that automatic enrolment is still a
long way down the agenda for some
boards. This will need to change.
You can find out both how many
individuals are likely to be
automatically enrolled and get an
idea of the cost implications by
using our interactive online tools.
If an employer is planning to use
an existing scheme for the purpose
of automatic enrolment, changes may
need to be made to it. Where a
trustee board exists, trustees will
need to engage with the sponsor
to ascertain what changes are required.
The types of changes that may need
to be considered are outlined in our
detailed ‘Pension Schemes’ guidance.
employer duties
Automatic enrolment
An explanation of the automatic
enrolment process
Employer duties and defining the
workforce
Opting in and joining
An introduction to the new employer duties How to process pension scheme membership
outside of the automatic enrolment process
Getting ready
First steps to prepare for the new
Opting out
employer duties
How to process ‘opt-outs’ from workers
who want to leave a scheme
Assessing the workforce
How to identify the different categories
Safeguarding individuals
of workers
The new safeguards for workers
Pension schemes
Pension schemes under the new
Keeping records
Records that must be kept by law under
Ongoing support
In the coming year we intend to provide
more support for employers and trustees.
We have published check-lists for trustees
and employees which will help schemes
to get ready for automatic enrolment. We
are also continuing to consider what other
tools might be helpful. These could include
additions to our online learning programmes
and other practical resources to help trustees
to prepare for automatic enrolment.
To view our check-lists, our interactive
tools (from the end of July) and for
more information about the employer
duties and pensions reform visit www.
thepensionsregulator.gov.uk/
pensions-reform n
www.thepensionsregulator.gov.uk/
pensions-reform/detailed-guidance.
Pensions Insight/Engaged Investor
7
Pensions Management Institute
Survey...HOW
prepared are
you?
Q scheme’s employer done in respect of
How much preparatory work has your
its obligations concerning auto-enrolment?
No preparation
4.2%
Cannot say
6.3%
The Pensions Management Institute
carried out research with trustees on
auto-enrolment. Tim Middleton
shares some results
Intensive preparation
29.2%
E
Little preparation
31.3%
Some preparation
29.2%
do you believe is the more practical governance
Q
Q What
model for schemes established solely for the
purpose of aut-enrolment?
Contract-based
Trust-based
41.5%
58.5%
Why might your scheme be considered
suitable for auto-enrolment?
DC scheme whose contribution structure
easily complies with minimum
contribution requirements
74.4%
Existing eligibility requirements
30.2% are close to those that apply
to eligible jobholders
Employer has no desire to
41.9% establish a new scheme solely
Yes to comply
in order
55.6%
20.9% Low rate of staff turnover
37.2% High percentage of workforce
already active members
20.9% DC scheme whose charging structure
is more competitive than NEST
0%
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Pensions Insight/Engaged Investor
10%
20%
30%
40%
50%
60%
70%
80%
arlier this year, PMI surveyed its Trustee Group
members about auto-enrolment. We were
mindful that, as members tended to be associated
with larger employers, their schemes (and
sponsors) were more likely to be affected at
the start of auto-enrolment’s implementation. We wanted
to learn about the approaches to be adopted by employers
in order to comply with their new statutory obligations.
We wanted to know how much preparatory work had
already been done by employers, the extent to which they
were aware of the changes that they would have to make,
and how prepared they were to ensure that necessary
changes were implemented in a timely fashion.
Furthermore, we wondered if employers understood the
changes that would need to be made to payroll systems
and staff induction procedures.
Secondly, we were interested in establishing what strategies
were to be adopted by employers and to learn their reasons
for adopting their chosen approach. Would an existing scheme
be adopted as a qualifying scheme, and, if so, what
changes would be required in order to achieve compliant
status? Would employers close an existing scheme and
establish a replacement to serve the entire workforce?
Alternatively, would employers segment their employees?
We also asked members for their views on governance.
Given that schemes’ members will not have given explicit
consent to join their scheme, the new regime will generate
new and distinct governance challenges. We were keen to
see how these might most effectively be addressed. n
EXPERT VIEW
No magic bullet
Preparing for auto-enrolment is a complex
process – and the work doesn’t stop once
it has been implemented, says Rich Tuff
Auto enrolment is the UK Government’s “magic bullet” to
deal with a legacy of years of employees and employers
avoiding occupational pension saving. There has been no
shortage of predictions of the costs for preparing for the huge changes
that this “magic bullet” will cause to employers in 2012, not least the
contributions for an estimated 7.5 million employees entering occupational
pensions. Little has been written about the ongoing effort that employers
must undertake in complying with the auto enrolment process after
staging dates have been met. The ongoing process costs and complexity
may very well dwarf the initial enrolment issues.
The ongoing cost and complexity of complying with auto enrolment
should not be lost in preparing for initial enrolment; without a strong
ongoing process companies will hit a number of “bumps in the road”
in continuing to enrol employees into their approved scheme. UK auto
enrolment is very similar to other countries “solutions” to chronic under
funding in occupational retirement and reliance on state provision. In Norway,
Mercer has 5 years of experience in assisting clients with auto
enrolment regulations that were introduced to alleviate the country’s
pension issue. Many of the ongoing issues that organisations in Norway
have faced can be viewed as a “crystal ball” to the issues that UK
companies may face after their auto enrolment staging dates are met
and the ongoing process begins.
Norway introduced OTP (Obligatorisk
tjenestepensjon) or mandatory occupational
pensions in 2006. This was introduced to cover
employees who were not already covered by
work based pension schemes, and enrolled all
eligible employees into an eligible pension product
much like auto enrolment in the UK is designed
to do. Mercer in Norway was involved from the
beginning in advising organisations through
the staging and the ongoing process of OTP,
and many of the lessons learnt there in the
introduction and ongoing management of
OTP can be applied to the UK.
Hallvard Müller, a principal at Mercer in
Norway has been involved in assisting many
organisations through the trials of OTP. He
points out, “The Norway and UK legislation
were introduced to do the same, shift the
employee from state to self reliance in
retirement”. He continues; “The experience
we have gained in Norway is directly
comparable to what you will face in the UK.”
In the UK, one of the issues that employers
face is the unintended complexity of the legislation.
Rich Tuff
Email: rich.tuff@mercer.com
Weblink: http://uk.mercer.com/outsourcingsolutions
Employers need to track employees’ status on a continual basis in order
to “catch them” as they become eligible and assign them a category. Each
of these categories of worker has their own distinct entitlements under
the legislation and must be treated differently. This makes the refund
process extremely complicated, as the employer cannot hold onto
contributions for a number of workforce categories, such as noneligible jobholders and entitled workers. Legislation and definitions
also caused problems in Norway, with confusion over what defined a
worker as many of Norway’s workforce work in flexible shifts, without
any set pattern. In Norway the legislation tells you what to do, not how,
and that’s where the complexity lies with these kinds of employees.
In addition to tracking the complex “rules” and multitude of data that
OTP required, Mercer and other providers decided that the best
method of controlling the process was through a hub where multiple
data providers and functions could be coordinated.
Ongoing data management for auto enrolment is a key issue; with
multiple processes needing to be built between the various payroll, HR
and pensions service providers. In Norway, Mercer built a system for
aggregating employee data from various data holders. At implementation,
defining who held what data was a major task with many payroll holders
either not holding the data or passing provision to HR who also did
not hold, and did not want, to hold the essential data needed for OTP.
The UK is already facing this issue with many data providers; “passing the
buck” or not preparing adequately to facilitate auto enrolment. Also,
many providers in Norway faced OTP as a “one off” task not building the
necessary processes for the ongoing management of enrolling employees
or mapping out exceptions. Hallvard notes, “Data management for OTP
was never a “fly by itself” process, many suppliers built free portals but
relied on simple rules and automation. Without looking at data quality
at the source each of these services has faced exceptions that have
frozen organisations capacity to enrol employees who “break the rules”.”
This will be an issue that UK employers face in ongoing auto enrolment
processing, Mercer in Norway’s first credo is data quality and exception
management, but many other providers services rely on automatic
processing, ignoring exceptions and using “bad data”. As staging dates
rush towards UK employers the focus on data quality and ongoing
management may be ignored. Without ongoing focus and processes
to deal with exceptions and the complexities of worker status, where
data is held and most importantly quality, the initial enrolment could
go smoothly and the “poison pill” of ongoing data management will
then bite, month after month. The need for a data hub that can
collate and track rules and data is one way for employers to manage
the auto enrol process, but the first rule of data management must be
applied, quality is king.
Rich Tuff, Senior Client Relationship Manager, Mercer
Pensions Insight/Engaged Investor
9
EXPERT VIEW
An opportunity for
greater engagement
Auto-enrolment is the perfect opprtunity to
get members more engaged with pensions,
says Hannah Clarke
Auto-enrolment is now clearly going to happen. There
may still be some wrinkles to be ironed out, but the idea
– that the majority of employees will be automatically
put into a pension scheme to help combat the increasing problem
of poverty in retirement – will start to become a reality from autumn
2012. However, unless there is a major shift in the way that pensions are
communicated, there is a credible risk that large numbers of employees
will simply opt out again, thwarting the admirable purpose of the regime,
creating an increasing administrative burden for employers as they
go through the opt-in/opt-out cycle, and contributing to the further
discrediting of pensions in general.
The problem is not necessarily that employees don’t understand the
need for saving for retirement, but rather that economic circumstances
are such that many simply feel they cannot afford to save anything
at all. Those that do consider saving seem no longer convinced about
the wisdom of saving into a pension scheme – locking up hard-earned
savings for an increasingly distant time, and trusting that they will be
there when needed. Employees no longer trust the concept – fearing
that employers will not be there to support the fund, or that their
investments will be badly managed.
Auto-enrolment gives us, as an industry,
the chance to make having a pension
the norm. Part of this, in our view, is
recognising that pensions are a
product competing for a share
of an employee’s spare income,
if they have any. We need to
communicate the idea of a
pension in such a way that the
idea of saving for a pension
for retirement can be judged
fairly against, say, the desire
Name: Hannah Clarke
Email: hannah.clarke@ferrier-pearce.co.uk
Weblink: www.ferrierpearce.com
to save for a holiday or to go on a shopping spree.
We find that, by treating a pension as simply another product, and by
marketing it in a similar way to other products, employees do engage
with pensions and do change their behaviour. Putting across the
pension message clearly and simply, using language the employee
will understand, supported by imagery that resonates with the employee,
is at the heart of this approach and begins to get the employee engaged.
But engagement can be greatly improved by adopting some of the
techniques more commonly seen in the marketing industry – in
particular personalisation.
The more you know about your audience or are able to find out, the
more finely-tuned you are able to make your communications for
particular groups of employees, with the result that more employees
engage with the communication.
It is especially important, as we move to auto-enrolment, that the
communication conveys the employer’s support of the scheme – that the
employee can recognise the scheme as being in some way connected
to the employer, forming part of the employee benefit package.
Getting the messages and material correct is vital, but equally important
is the delivery of the material. Making sure that the material is delivered
using channels which not only fit in with how the employee is used to
receiving messages from their employer but also, where possible, with
their preferred delivery mechanisms, removes another subtle barrier
to engagement. In the wider world, we can increasingly choose whether
to be contacted by post, email, text or phone call or not at all. Although
in the pensions world, the last option is not really available (and
shouldn’t be sought, if we are doing our job right), we should consider
whether we can allow employees more choice over how they receive
the message (bearing in mind any disclosure issues, of course).
As an industry, we have a challenge on our hands – that of rebuilding
the trust and engagement of employees with pensions and helping
those for whom auto-enrolment offers their first chance to think
about saving for retirement. There will be a window of opportunity
where employees may be ready to engage – to understand why it is
they have been automatically entered into a pension scheme and,
in most cases, are having contributions taken away. If we get it right,
we can help everybody benefit. If we get it wrong, we will be
helping to further discredit the whole pensions concept.
Hannah Clarke, Senior Pensions Communications
Consultant, Ferrier Pearce
10
Pensions Insight/Engaged Investor
EXPERT VIEW
Ensuring best value
David Pascoe responds to topical questions
on employee benefits and how they relate
to auto-enrolment requirements
How can employers ensure that they get best value out of
providing a pension, given it will be a legal requirement?
A good starting point will be making sure an employer’s
understanding of its employees is correct. There will be
legal minimum requirements but there are many scheme
design options an employer can consider and implement
which would enhance the value of the core proposition. For example,
an analysis of workforce demographics will assist the employer in
understanding the needs and requirements of its employees and
employee surveys can fine tune an employers understanding.
Given auto-enrolment is arriving along with other legislative changes
such as the abolition of the default retirement age (DRA), now is the time
that many employers are looking to undertake full benefits intelligence
audits. Once complete, that information can be used to implement a
refreshed benefits and communications programme to ensure optimum
value for the arrangements put in place.
In terms of designing a scheme, flexibility around contribution structure
(subject to minimums) will be important. Using alternative savings
vehicles, such as corporate ISAs and SIPPs, to accommodate extra
contributions should be considered to promote a savings culture.
Investment options and recognition that a majority of employees will
go into the default fund is key, requiring robust governance which
will also provide employee comfort.
Regular communications with members to update them on the progress
of the pension plan will be paramount and this can be combined with
the use of online tools, workshops and presentations. Employee
‘auto-enrolment education’ both during employment - on what it
means and the impact on them in terms of costs will be vital, whilst
pre-retirement counselling will continue to be valued.
Simply opting for NEST, with no supporting communications program,
will probably be of least value to the employer, although NEST may
well be the most appropriate provider in a number of circumstances.
When you look at the potentially significant additional costs of auto
enrolment it would seem sensible for employers to want to get the best
value achievable through a relatively low increase in the overall cost.
What are the major problems you foresee for employers
in amending benefits and HR systems to accommodate
auto-enrolment?
Payroll providers do not appear prepared and a lot of
work needs to be done there. Employers need to engage
with their payroll providers, whether bureaus or
software suppliers, to find out what they’re planning to
do and potentially other payroll suppliers will come into the market.
Segmentation will be key - dividing employees into groups of
jobholders who are entitled to join the pension scheme, and those who
Name: David Pascoe
Email: dpascoe@heathlambert.com
Weblink: www.gallagherheath.com
are not. It will be a difficult job and some of the benefits consultants
and providers will be able to take on the responsibility - sorting and
recording data for the employer, so that the right contributions are
sent to the right place at the right time.
Employers with a broad spread of employee earning profiles will need
different communications programmes for each of those employee
categories, with tight legal timescales.
Redesign of pension scheme contribution structures (if needed) may
mean that formal consultation is required, adding to time and costs.
Overall, it will be a significant task for most if not all employers to
undertake a major redesign of HR and payroll processes. Even
medium-sized employers will be looking at a start to finish project
time at least 18 months to get all the systems and processes in place.
How will auto-enrolment affect other forms of benefit and will
there be levelling down effect?
It’s difficult to say how auto-enrolment will impact on existing
schemes and we think it will depend on employers’ existing
programmes and take-up rates. For example, employers
with low take-up rates are going to see significant
increased costs when auto-enrolment comes in and
then I think there is a very real potential for levelling
down, especially when combined with the current economic climate.
Where flex is concerned, the core proposition can be adjusted to
meet the minimum requirements of auto-enrolment so the overall
cost won’t change, just a redistribution. But there are some potential
issues around flex designs and whether members can opt out. If the
pension scheme isn’t a core proposition and employees opt out with
that spend used elsewhere, there may be regulatory complications.
Auto-enrolment could be a driver towards flex where it is not already
in place as a mechanism to control costs. Where there is a fixed
amount of spend on benefits for employees, legal minimum
contributions would mean redistributed rather than increased costs.
A lot of companies have legacy benefits programmes in place that
probably aren’t right for today’s environment. With auto-enrolment
and the abolition of the DRA, now would seem to be the right time
for companies to look at their whole benefits programme and get as
much of the spend as possible in the right place.
We think we will see more moves to give employees options in terms savings
and wealth creation. Money that in the past has been used for pensions
could be used for ISAs, medium-term saving or clearing student debt.
Designing programmes that incorporate all those types of things are
going to be more likely and appreciated going forward.
David Pascoe, Director – Client Services,
Gallagher Employee Benefits
Pensions Insight/Engaged Investor
11