Auto-enrolment;- the story so far

 Although the number of employers staging over the next quarter is small, their experience is of great value as they are pioneering the solutions that will be adopted over the next five years .

Employers staging this year are pioneering the solutions that smaller payrolls will adopt as standard over the next five years.

Many of these large employers, including Tesco, Marks & Spencers, Morrisons and Centrica have gone public on their plans. They have openly shared the issues they are facing in order comply with the complicated regulations and guidance for auto-enrolment.

What is already clear from studying the ways the “early-stagers” are adopting pensions is that there will not be a “one size fits all” solution.

Nor is it clear whether their solutions will be replicated by smaller employers. Companies will need to factor in their capacity to take pension risk, fund pension cash flows and ensure that the pension plans they use are right for the members and the strategic aims of the businesses. So expect a proliferation of approaches!

Many early commentators thought that auto-enrolment would drive a “race to the bottom” – that employers would seek to mitigate the extra cost of contributing to all eligible employers by minimising contributions and transferring all pension risk to staff.

This has not turned out to be the case. Morrisons will be offering almost all staff, prior to enrolment , entry to a “cash balance” defined benefit pension plan. This will give staff a guaranteed amount with which to buy a pension based on service and salary. Tesco have gone further and will be changing employees’ contracts so that, unless they choose otherwise, they will become members of a career average pension scheme. Tesco will  guarantee the pension eligible members  will receive for however long they live in retirement. John Lewis are more generous still and will offer all “partners” membership of a final salary pension plan once they have completed three years with the company (during which time they will be in a defined contribution feeder scheme).

These large employers are contributing well above the bare minimum required, not just to provide staff with proper pensions but also to ease the burden on payroll. Payroll managers are playing an increasingly important role in the formation of their business’ pension strategies.

Indeed the dialogue between a company’s pension, HR and payroll functions is seen as critical in establishing a solution that works for each function. Large employers report that their projects took off when these  functions started working together rather than in their traditional silos.

An example of such joined up thinking can be found at Centrica.  Centrica’s payroll  has come up with a work around that allows the HR function to communicate to those being enrolled on a “month and a day” basis. This elegant idea has been created to ensure that HR’s communications to members are compliant without payroll being disrupted. Centrica is a shining example of a company where payroll, HR and pension teams are working together to make auto-enrolment work.

Another pragmatic solution has been created through the sensible use of pension and employment legislation. Companies such as Marks & Spencer and Tesco are avoiding the issue of auto-enrolment by “contractually” enrolling staff. This means amending staff contracts (and Tesco have 300,000 staff) and returning to the joining procedures that were last seen in 1987! In this “contractual regime”, members do not opt-out- they “cease membership “and many of the more arduous processes in the auto-enrolment guidance notes are by-passed . For payroll the advantages are obvious.

But whether such solutions work with smaller workforces, remains to be seen.  Re-writing contracts and re-engineering processes  is not easy and requires external and internal resource. The planning cycle that has created such seemingly  smooth transition to auto-enrolment  began in these cases more than three years ago.

While smaller companies are likely to profit from the behemoth’s  thought  leadership, they should not expect auto-enrolment to be a synch or for solutions to be delivered on a plate.

Similarly, payroll software providers may well be getting something of a “free-ride” as they look to develop mid-market solutions. But they are playing catch-up from the RDI ordeal and it’s far from clear whether companies enrolling in 2013 and 2014will  be getting a fully functional software solution to suit their pension whims!

One of the most urgent questions being discussed by pension consultants, payroll managers and software developers is how and when middleware will become effective.  The early signs suggest that  unless there’s regulatory change, the misalignment of pension payroll periods with national insurance and taxation periods will overwhelm many third-party compliance systems. If this proves to be the case, middleware will not be the “sliver bullet” for smaller companies that  some would have us believe

Perhaps the most important lesson for payroll managers is to get involved and get involved early. Reliance on Providers, middleware solutions and even existing software providers may prove a risky strategy. In the new world created by pension reform, payroll managers may not have the luxury of “being told what to do”. They may have to  take control and drive the process.

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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