The Pensions Regulator estimates that 38,000 medium-sized employers will be staged in to their automatic enrolment duties next year.
These employers need to start planning for their new duties as early as possible because if they do not, there is a high probability they will be left struggling for the help and support they will need.
That could lead to breaches of the auto-enrolment rules and ultimately fines from The Pensions Regulator.
Just how long employers should prepare in advance will depend on many factors.
Some might have the resources available to run all their preparations concurrently, giving them a bit more breathing space. Some might not. But all of them will need help.
Here are just some of the things employers might need to consider and some of the timescales we have experienced so far.
New pension schemes
Employers who do not have an existing pension arrangement will have to get one in place for their staging date. Even without automatic enrolment to consider, it can take months to set up a workplace pension scheme. One of the first things advisers will need to do is get workforce data from the employer.
This can be problematic, as the information may not be readily available and it might not even be clear how to treat certain workers, such as contractors or agency workers.
In these circumstances, employers might need to seek legal advice.
Once the data is available, advisers can use it to get terms from providers. For certain employers, some providers might not be willing to give terms for the whole of the workforce. Advisers might have to look further afield to secure terms, or perhaps segment the workforce and look at a hybrid solution. The hybrid approach involves the employer using a group personal pension for part of the workforce, with the remainder going to a master trust provider. It can take some time to work through all of the available options.
- Estimated time required – up to three months.
Existing pension schemes
Where an employer has an existing pension scheme, some changes will probably have to be made to that scheme to make it auto-enrolment friendly. For trust-based schemes, this might involve a change to the scheme rules, for example amending the definition of pensionable salary. Checking whether the scheme rules need to be changed and making any changes might require legal advice, which takes time.
For contract-based schemes, certain agreements must be in place so they can be used as auto-enrolment schemes. The first is an agreement from the pension provider that it is happy that the scheme can be serviced properly as an auto-enrolment scheme. In the case of some types of legacy contract, this agreement might not be forthcoming. So the employer will need to shop around with the help of a financial adviser.
Second, there must be an agreement from the employer to pay its share of the contribution to the provider. And third, there must be an agreement from the worker to pay their share of the contribution.
These agreements do not exist in pre-automatic enrolment schemes, so policy endorsements might have to be prepared and issued in advance of the staging date.
There are also consultation requirements to consider. If an employer makes certain changes to a scheme’s contribution structure and more than 50 employees are affected by it, the employer is required by law to undertake a consultation exercise.
Even if the employer has fewer than 50 employees, The Pensions Regulator recommends that employers should undertake the consultation anyway. This consultation does not only involve existing scheme members, it must also include any employees who have or have had access to the scheme, even if they never joined it.
The consultation process itself must last no less than 60 days. More time will be needed to seek out any legal advice needed; to identify which workers need to be contacted; to prepare and deliver the communication material; and for the employer to consider any responses received. Staff associations or trade unions might also need to be consulted, either as part of this exercise or separately.
Senior staff may have their own executive pension plan or Sipp. A separate discussion, perhaps with each one individually, might have to take place to work out whether they want to keep their existing arrangement or whether they are happy to be automatically enrolled into their employer’s chosen automatic enrolment scheme.
- Estimated time – up to four months.
Most pension providers will operate an auto-enrolment system that relies on payroll extracts. But often the employer payroll systems will need to be updated for auto-enrolment. It can frequently be the case that the existing payroll data has to be cleansed of errors and omissions.
Our experience is that it can frequently be the case that the existing payroll data has to be cleansed of errors and omissions.
Then the format and structure of the data needs to be agreed. Next, whoever is responsible for handling the data will need to be trained on the process of extracting the correct data from payroll and passing it to the pension provider.
Payroll providers might come under increased pressure as more employers ask for help as they approach their staging date. Some payroll providers might already be stretched as they settle into HMRC’s ‘Real Time Information’ regime, so getting payroll on board well before an employer’s staging date will be crucial.
- Estimated time – up to six months.
Choosing the automatic enrolment system
There are now a plethora of providers of auto-enrolment systems vying for a piece of the market. Traditional providers, master trusts, payroll providers and middleware providers have all launched auto-enrolment systems that promise to take care of some or all of the auto-enrolment duties for employers.
It may be that one provider for both the pension scheme and the auto-enrolment services may be the best option. However, employers may be looking to use their current payroll provider for at least some of the auto-enrolment services.
Where multiple providers are being considered, it is essential to get to the bottom of who does what in terms of auto-enrolment systems, communication, employer/worker support and ongoing governance.
In-depth research will be vital to make sure that a comprehensive set of services can be delivered. If multiple providers are used, it is important that they all fit together properly.
- Estimated time – up to six months.
More to think about
There are other things to consider too.
Does the employer want to introduce salary exchange and, if so, how should this be communicated?
Are there other changes to the contract of employment that need to be made and will this need legal advice?
All the above leads to three clear conclusions:
- Employers need to be aware there is a lot of work to do before their staging date.
- Employers who leave it too late will struggle to get everything ready and could end up in breach of the rules.
- Employers will almost invariably need a minimum six-month lead in time and many will need considerably longer.
Jamie Clark is business development manager at Scottish Life