Pensions have become a major topic of conversation over the past few years, with varying opinions as to what is the best solution.
The first genuine, Government-led attempt at over-hauling personal pension saving was the introduction of the stakeholder provision in 2001. This was a well inten-tioned but rather ambitious concept, which was not as successful as the Government hoped it would be.
Despite last week’s announcement of the delay in its implementation, auto-enrolment is now the policy of choice for bringing about radical change in the pension-saving habits of the nation.
So what role does an IFA play in all these workplace changes? Employers have many new responsibilities to consider and decisions to make to fulfil their legal requirement to auto-enrol eligible staff into a qualifying workplace pension scheme.
These changes inevitably have cost implications, not just in terms of ongoing contributions but also the cost of administering the scheme.
No employer will want to pay more than they have to but those who are serious about employee relations will want to provide the best scheme they can for that cost to attract and retain quality staff.
Auto-enrolment will raise the profile of workplace pensions, making the scheme on offer a key differentiator between potential employers in the future.
Auto-enrolment is no stakeholder and paying lip service is not an option. A recent survey by the Association of Consulting Actuaries found that “at least two-thirds of companies presently offering no pension scheme say they are unlikely to auto-enrol employees into either Nest or an employer’s scheme”. But if these companies ignore this legislation, they will face substantially rising fines.
Employers will be monitored closely to ensure they are not offering inducements to employees to opt out, or screening employees at the recruitment stage based on their potential pension scheme membership.
Individuals discouraging employees in this way may be found guilty of an offence under Section 45 (2) of the Pensions Act 2008 and subject to up to two years’ imprisonment in the most severe cases.
The reality is that it may be tough for some employers to implement this legislation but failure to act will lead to the hardest road of all while good strategy will make things as easy as they can possibly be.
There are three stages involved in integrating pension reform into a business: pre-automatic enrolment strategy, at-automatic-enrolment implementation and post-implementation maintenance.
The stages can be broken down into tasks, with which an IFA will be able to help.
Pre-automatic enrolment strategy
- Establish the staging date from which each business is required to commence auto-enrolling its staff.
- Assess the workforce to classify employees as eligible jobholders, non-eligible jobholders or entitled workers.
- Compare the cost implications of contributing as per the default percentage of band earnings against the three self-certification options.
- Audit any existing scheme to establish whether it meets the criteria for a qualifying workplace pension scheme.
- Select the most appropriate qualifying workplace pension scheme or combination of schemes.
- Analyse the potential national insurance saving and effect on take-home pay of introducing contributions via salary exchange.
Understanding the implications of these variables will allow for the accurate forecasting of costs, which, once known, can be included in wider business planning.
Implementation of automatic enrolment
- Provide eligible jobholder information to the appropriate pension scheme and pension scheme information to the eligible jobholder within the one-month joining window.
- Enrol the eligible jobholder into the scheme to achieve active membership and begin contributions, effective from their auto-enrolment date.
- If contribution via salary exchange is being offered, employees must be given the choice of whether or not to select this option.
- Receive and process but do not assist or encourage employee opt-out notices.
The employer is responsible for a certain amount of mandatory reporting, which must be completed correctly and on time. This work can be carried out by an agent, such as an IFA, but it remains the employer’s ultimate responsibility.
- Enrol new employees into the appropriate scheme and complete the accompanying mandatory reporting.
- Re-enrol opted-out employees every three years.
- Administer ad-hoc employee opt-ins, opt-outs and leavers.
- Periodically assess the selected qualifying workplace pension scheme and self-certification options for continued suitability.
Involving an IFA should bring benefits to both the employer and the employees.
The advice process begins with the employer and a pre-automatic enrolment strategy assessment. There are facts to find, such as the staging date and the workforce categorisation, and there are the employer’s needs and preferences to establish, which will shape the decisions that follow.
A key decision to be made here is whether to contribute based on the band earnings or to measure contributions against one of the three self-cert options. There could be a sizeable difference between the minimum contribution requirements of these options.
Another key decision is which qualifying workplace pension scheme to select. The Government has launched Nest and employers have a choice whether to contribute into this or an alternative qualifying workplace pension scheme such as a group personal pension scheme.
A GPP could be viewed as a more sophisticated option and perhaps more suited to longer-term staff but Nest may be the better option for more transient employees.
Meeting auto-enrolment obligations by using two schemes will be possible and in some cases preferable and, with the co-operation of pension providers, simple to administer.
Making contributions via salary exchange can be an easy win for employers, who will see their NI bill reduced, and for employees, who will see their take-home pay increased.
During the strategy stage any advice given will be on a scheme level and weighted to the employer but at imp-lementation the focus will switch to individual workers.
Using an IFA at this stage means employees can benefit from explanatory presentations, initial meetings and personalised investment strategies. The employer also benefits as the adviser handles the auto-enrolment process, including taking care of the mandatory reporting.
The employer continues to benefit after initial implementation, as periodic scheme reviews are completed to ensure suitability and value are maintained. Ongoing services for employees are also provided, inc luding annual reviews, drop-in sessions and at-retirement advice, potentially forming a key component of your employee benefits package.
Good advice does not come for free. The cost of advice can currently be funded directly out of the scheme charges, meaning there is no additional cost for the employer, but this is changing imminently.
For schemes set up after January 1, 2013, the cost of advice can only be met by an additional fee over and above the contribution or by the contributions providing a reduced allocation, which is not compatible with Nest. In real terms, the difference between the two is the fee being met by the employer or the employees and this decision is made by the employer on a scheme level.
The fundamental role of the financial adviser is to help employees secure a bigger income in retirement than they may have otherwise had and to help employers comply with relevant legislation in the easiest and most cost-effective way. Achieving these goals creates a win-win situation for all parties.