HR reward special 6/7: the impact of pensions auto-enrolment on other employee benefits
Pensions auto-enrolment will inevitably have implications for employee benefits and reward systems, and there has already been considerable activity in this respect from employers facing the more immediate staging dates.
Nevertheless, factors such as company culture, industry sector and existing levels of benefit provision ensure that different organisations are being affected in different ways.
At one extreme, employers are actually getting rid of existing group risk or health insurance schemes, or at least significantly reducing their benefit levels, to help meet auto-enrolment costs.
Matthew Gregson, managing consultant at Thomsons Online Benefits, says: "Some are stripping out costs elsewhere to save 1.5% to 2.5% of payroll. They may, for example, remove dependants' pensions, reduce multiples of life cover, cap payment terms on income protection, or replace private medical insurance (PMI) with cash plans. Because they are having to consult with their workforce anyway, they can make these fundamental changes."
At the other extreme, Darren Hockaday, HR director at London Overground Rail Operations (LOROL), is able to state there "has been no knock-on effect to other benefits" - largely because LOROL is unusual in still offering a defined benefit scheme to new members, and all but 200 of its 1,200 employees are already members of it.
The bulk of employer cost-cutting, however, is focusing on diluting benefits without actually transgressing contracts of employment by, for example, trimming features on PMI and removing little-used 'nice to haves', eg concierge benefits. There is also a distinct trend towards attaining previously overlooked tax and NI savings through salary sacrifice.
Tobin Murphy-Coles, commercial director at Lorica Employee Benefits, says: "Salary sacrifice is increasingly being extended to health screening purchase and to life and PMI top-ups, but pensions and cars are the really big ones. There has been a definite increase in salary sacrifice on pensions during the past two years and, although cars were previously thought of as too complex, they have become much easier to do over the past year or so because of new software."
Conversely, by encouraging re-appraisal of the benefits package as a whole, auto-enrolment has led to some firms increasing their provision of other benefits. For example, retail services/field marketing firm Blueprint Group, which needs to auto-enrol 700 employees by November 2013, has already introduced an executive PMI scheme this January as a direct result and is aiming to introduce life and income protection cover next year - probably starting with senior staff and eventually extending them to the whole workforce.
Suzi Walker, HRD at Blueprint Group, says: "Because we haven't had many benefits, auto-enrolment has made us pull our finger out and realise just having a basic pension scheme is not attractive enough. It is stimulating us to look at the area of benefits as a whole, because the board recognises the importance of an attractive recruitment and retention package. The war for talent is back on, particularly in our industry of field marketing."
The increased engagement with retirement planning is also boosting demand for corporate ISAs, even though they cannot currently be offered as part of pension auto- enrolment, because employers realise certain employees place great value on having savings that are accessible.
Business process solutions provider Equiniti, which has 3,000 employees and a staging date of September 2013, made a corporate ISA available to all staff in December 2011.
Clancy Murphy, group HRD at Equiniti, says: "Auto- enrolment has made us think about what's important about pensions and talk to employees about what they value.
"This made us decide to offer them a corporate ISA at a discounted rate, and the feedback on it has been positive. A dozen employees are contributing through payroll and around 20 contribute outside payroll, without making regular contributions."
There is no trend towards removing pensions from flex schemes to avoid perceived potential administrative problems with linking to auto-enrolment. Thomsons Online Benefits' Gregson says: "All flex and pension providers should have the capability to link to auto-enrolment, but some are better prepared than others."
Because some pensions allow you to flex up, leaving them within flex can have the beneficial effect of encouraging contributions at above the auto-enrolment minimum requirement. Nevertheless, a small minority of pensions also allow you to trade down and it is essential these are not allowed to enable people to flex below the auto-enrolment minimum. Failure to change them could result in falling foul of rules introduced on 1 July this year, prohibiting employers from offering incentives to their staff or prospective employees to abandon retirement saving.
But, with penalties for repeat offenders reaching as high as £10,000 a day and with a robust policing mechanism from The Pensions Regulator very much in evidence, few problems with non-compliance to this rule generally are envisaged in the near future.
Paul Sturgess, client strategic director at Capita Hartshead, says: "The early staging dates are for larger employers, which are least likely to consider abusing the system. There are some practical tools in the pensions regulations designed to reduce the risk of employers manipulating the system, such as the opt-out process requiring the pension scheme rather than the employer to keep the appropriate records. Once we get down to the SMEs, there will be a greater risk and there will always be the odd one that breaks the law, but frankly they are far more likely to suppress salaries."
Tom McGuiness, HR director at Premier Choice Group, a healthcare intermediary with 70 employees, says: "Without a doubt, we will be taking auto-enrolment into consideration when doing salary reviews. It could result in smaller than average pay rises or even pay freezes. The fact of the matter is that even a successful company such as ourselves can't grow money on trees, and so what we pay out has to come from somewhere."
Research published by the Chartered Institute of Payroll Professionals (CIPP) this July found 15% of employers as a whole think the impact of automatic enrolment will mean their employees will have to endure pay freezes or even pay cuts in the foreseeable future. But a survey conducted this January by the Institute of Directors (IoD) showed less cause for concern. When asked how they would cope with the increased costs, 80% of employers said from profit, 8% from pay freezes and 4% from redundancies.
Malcolm Small, senior adviser on pensions policy at the IoD, says: "We had expected around 30% to say they would fund the costs from pay freezes, and the result doesn't reflect the Australian experiences with compulsory pensions, when there were widespread pay freezes around all sizes of business. But attitudes may change nearer the time."
KFC flexes its muscles
On 1 April 2013, fast food restaurant chain KFC UK will be auto-enrolling around 4,000 staff in its pension scheme, and the exercise has had profound implications for its other benefits and reward systems.
After engaging Lorica Employee Benefits to conduct an optimisation exercise involving all its benefits and providers, KFC decided to introduce a flex scheme for salaried employees, to switch from hard copy to online reward statements and to introduce financial modelling tools for pensions.
As the flex scheme does not go live until next April, new product options are still under consideration. The initial intention is to offer more choice on existing benefits and to increase the choice of group risk products. At the moment, KFC offers life and income protection cover, but it is thinking of adding critical illness and personal accident cover and allowing employees to flex between them.
But most decisions regarding the pension, which will sit within the flex scheme and offer the option of salary sacrifice, have already been taken.
Craig Truter, total reward manager at KFC, says: "The choices around pensions are simply whether to be in or out and what level of contribution. But if we didn't have the anti-inducement regulations, we might have given the inducement to flex down and go to a corporate ISA.