If it’s been said once, it’s been said a hundred times. Automatic enrolment is not really about pensions; it’s about business planning.
Many changes may have to be made to processes and contracts of employment. Getting this done takes time and will invariably require consultation with workers, financial advice and professional legal advice. So the sooner employers start the better.
There are so many issues that might have to be tackled, it’s impossible to list them all. But here’s a starter for five, based on genuine discussions with employers:
1 – Identifying who is, and who isn’t, a worker.
The problem is there are no hard and fast rules, only guidance from the Pensions Regulator. This makes a distinction between a contract for services(generally, self employed) and a contract of services (generally employed). It is important to know the difference as employers have to identify what type of contracts their workers have. Advisers can help employers to start identifying worker types but if there are any doubts or grey areas, legal advice will be needed.
2 – Contractual enrolment.
Some employers already enrol workers into their GPP scheme using the contract of employment. This can still be done with automatic enrolment but employers need to make sure that the contractual route does not clash with the automatic enrolment rules. For example, employers might have to operate two processes, one for contractual enrolment, and one for automatic enrolment. Contracts of employment may have to be changed to cater for this, and that needs legal advice.
3 – Salary exchange.
Employers who use salary exchange might want to modify any agreements (both those already in place and those going forward) to take advantage of the recent relaxation from HMRC. This relaxation means that lifestyle events and fixed periods for the exchange are no longer required for registered pension schemes. Depending on how the salary exchange has been set up, this might require financial or legal advice.
4 – Employers who let people choose their own scheme.
Some employers allow their workers to choose any pension scheme they want, into which employer contributions will be paid. Employers who want to continue to operate this process will have to ensure that it does not clash with the AE rules. Employers may want to stop operating this model completely or amend it. This could be difficult, depending on how the contract is worded, so financial and legal advice may be needed.
5 – Default investments.
Regardless of the provider being used, automatic enrolment means that jobholders will be invested in a default fund. Employers might be concerned about workers who have particular religious or ethical investment preferences. With mass market providers, there may be a limited choice of investments available. While the risk of a worker being invested in a fund that isn’t suitable for them cannot be completely eliminated, it can be reduced. Financial advisers can help employers by choosing the right provider to minimise this risk.
These five issues highlight the importance of advisers and solicitors working together through their professional connections to deliver a more holistic automatic enrolment solution for their clients. It is not really about pensions!
Jamie Clark is business development manager at Scottish Life