With the UK facing a bleak future when it comes to an ageing population, the government has moved to create a pension system which will support the British as they move out of work and into a retirement situation.
Sean McSweeney, auto-enrolment specialist at Chase de Vere, says that if nothing is done, by 2050 we’ll be spending 100 per cent on all we earn on an ageing country.
‘We have an unprecedented change in terms of society and the government has woken up to this,’ he adds.
The 2001 stakeholders pensions, a type of flexible pension designed for individuals without access to employer sponsored pension arrangements, were an ‘unmitigated disaster’, McSweeney believes.
The government’s new auto-enrolment policy is its first serious attempt to solve the problem, he adds – a problem which is not going to go away.
Under the framework of the scheme, every employer who hires at least one person will have to deal with it by the end off 2015. This will mark the first time that everyone will be required to have a pension scheme, and will come with not just logistical implications, but also financial ones.
All of those employees who are eligible – which is anyone aged between 22 and the pension age – will have part of their wages placed into the scheme set up by the government for this purpose, and will have to make the decision to opt out themselves. Furthermore, employers will be required to contribute a minimum of 3 per cent of the 8 per cent minimum qualified earnings amount that must be put in for each employee.
Getting prepared
The first things businesses need to do, McSweeney urges, is to understand the timeline involved. It has been in place for the largest of UK businesses since 2012, with others following suit after.
In January 2012, the government announced that businesses would be given more time to adhere to the new act, meaning that those with 250 or more staff were given a new automatic enrolment duty date of 1 February 2014. Companies with 50 to 249 staff now have a date of 1 April 2015 and a test tranche for those with less than 30 members is set for 30 June 2015.
McSweeney urges companies of all sizes to begin getting something in place, even if the dates for compliance seem a long time away.
‘We see auto enrolment as 10 per cent a pension issue, but 90 per cent a business services issue,’ he says.
‘For instance, you have to access your workforce and treat different people differently. It’s unlikely that can be done manually on a spreadsheet, so you’re going to need a piece of technology.’
There are a number of places this can be sourced, he says, but the process takes planning and will incur a bit of a cost.
Maximum capacity
One of the challenges Chase de Vere is seeing centres on the fact that 38,000 or so businesses will be engaging this year with as few as 58 staff. The firm is finding that a lot didn’t, and don’t, appreciate how much work is involved. This leads to options being limited, and businesses ending up with a more expensive service – or even one that doesn’t fit.
Amongst the big changes associated with auto-enrolment will be the need for businesses to actively declare that they are complying. Within four months of the relevant staging date, companies will have to notify the Pensions Regulator that all is in order.
‘In April 2012, the Pensions Regulator was given data by HMRC which showed annual PAYE returns for every company in the UK, so a huge list with over one million employers on it,’ McSweeney says.
‘They know what the staging date for each one is, and if employers have not told them how they’ve complied then they will get a phone call.’
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If a business is not complying, they will receive a notice time to sort it out. A warning letter follows ahead of a fine of £400. If a company still does not comply then the fines are levied daily and can go right up to £2,500 every 24 hours based on firm size.
McSweeney’s point is that if a distressed employer comes to a firm like Chase de Vere then problems cannot be sorted inside a day.
Communications so far informing the business world has been one-way, he says, focused on employees rather than the employers. The pensions regulator is sending out ‘bland letters’ a year before staging, but Chase de Vere has found that this looks like anything else a business would get from government and is easily missed or ignored.
‘The absolutely key thing is even if the staging date is far away, they need to start planning. We advocate a staged approach: at an early stage understand when you have to comply, what you have to do and budget how much it will cost. Those that don’t take responsibility early haven’t budgeted how it will impact.’
One size doesn’t fit all
The next stage is to understand how it will interact with what a business has – will it fit with an existing pensions system, will it work with payment systems and is there likely to be a massive problem with capacity crunch.
‘If you want anything other than NEST [a National Employment Savings Trust – an automatic enrolment pensions scheme for UK employers of all sizes] then you are going to be limited in choice as pre-enrolment the pensions authority had ability to set up 2,000 a month.
‘So we’ve actually reached the capacity of the market in May 2013, when you had a relatively small amount with a tranched staging date.’
With so much potential new business, firms providing auto enrolment services can afford to be choosy, and even if existing relationships exist that may not be enough.
Chase de Vere likes to start early to get the best outcome, and find out what they are facing. Its second stage is to design the right scheme – how it will look and what is the most cost effective way.
Examining internal business processes can then help to determine whether any cash savings can be achieved. Once the right fit has been found, the task of scouring the market for the correct one can begin.
Employers, McSweeney adds, will have a statutory responsibility to ensure that default investment funds remain appropriate on an ongoing basis.
McSweeney points to the example of an HR director at Tesco as a good example of what businesses must realise when it comes to auto enrolment.
‘She was asked, having gone through the process what would you change? Her reply: she and the team were fixated with the date of staging and didn’t realise that the Monday after it was still there and lots to do,’ he says.
