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Pensions auto-enrolment: should HR or finance take the lead?

One of the biggest shake-ups in employee benefits provision is forcing companies to question which department should manage the process of auto-enrolling all members into an occupational pension scheme.

Given that the finance function has to work out how to pay for the additional long-term costs for benefits that the HR team is meant to administer, there is a growing sense that finance directors may need to take a more hands-on approach - potentially treading on HR's toes and invading its territory in the process.

According to Mark Bingham, partner at employee benefits consultancy, Secondsight, "there is real evidence of finance directors taking a closer interest in company pension provision and this has been a trend for a number of years. Their focus is on costs - but that is not really surprising, is it?"

Starting in October 2012, UK companies will be compelled to offer their workers a company pension scheme to which both employer and employee contribute. This can be as part of the company's own pension scheme, or as part of the National Employment Savings Trust (NEST), a simplified, defined-contribution occupational pension scheme set up by the Government.

Initially, the compulsory legislation will only apply to employers with more than 800 UK-based employees. However, from 2013, the law will be rolled out to employers with between 799 and 250 staff, and by 2016 it will be mandatory for all employers to have a pension scheme in place. The legislation will bring some seven million people in the UK into employer schemes in less than a decade.

There are approximately 1.2 million companies without pension schemes in place and, according to a joint survey called Pension Reform - Will you be compliant?, released in July by accountants Chantrey Vellacott DFK and financial services provider Q&A People Matter, 88% of finance directors do not understand how to mitigate the additional costs associated with implementing and administering a compliant pension scheme.

In fact, according to Alljays Benefits Solutions, a pensions IT solutions provider, over the next 48 months, approximately 1,000 company pension schemes will need to be established per day, to comply with the legislation.

"The pension regulator is predicting that the cost of dealing with the administration alone is going to work out at about £7 per employee per month. This is on top of the money companies are going have to put in, so it will have a big impact on budgets," says Stephen Corrall, head of pensions at Chantrey Vellacott DFK.

Many experts believe as the auto-enrolment deadline looms, HR should manage the implementation and running of company pension schemes in much the same way as it already does.

"HR departments are responsible for managing the benefits that staff are contracted with and so it seems sensible that a pension, which is a benefit, is also included," says Andrew Melbourne, partner at independent financial advisors, Square One Financial Planning. David Ogilvy, employment law partner with solicitors Turcan Connell, agrees, saying "finance would have a role to play only in so far as ensuring contributions are available for payment".

John Rourke, director at Alljays Benefits Solutions, says: "As auto-enrolment is such an administration-led issue, it makes more sense that the HR department takes charge of it, rather than the finance department - which would make better use of its time considering strategic risks to the business".

Rourke's co-director John Relf adds: "It makes no sense for the finance department to lead the process, though it will need to be involved, if only to bankroll the project."

But many concede that taking the lead on auto-enrolment is not going to be an easy task. Square One's Melbourne believes HR departments could "be deluged with questions" because "many employees will not remember when they are due to enter a scheme or when new categorisations affect them", leading to "a vast increase in communications with employees at an individual level".

HR departments also need to be clear about how they 'sell' the pension schemes to employees, says Sok Wah Lee, director of compensation and benefits at G4S, a security solutions group. "Companies need to ask: is auto-enrolment merely a hygiene factor that needs to be complied with? Or is it part of a value-added reward package to recruit and retain key employees, as well as to maintain and enhance the brand image as one of the top employers? Employers need to be clear," says Lee.

Yet other experts believe the finance function is more likely to be heavily involved in the company's preparations to comply with the auto-enrolment deadline - if only in the initial stages until the programme goes live - and that there is good reason for this.

Tom McPhail, head of pensions research at financial adviser Hargreaves Lansdown, says FDs are going to take an increasing interest in workplace pensions, for the simple reason that auto-enrolment has the potential to have a significant impact on the company's profits. McPhail explains: "Currently, just 34% of private sector employees are members of a workplace pension, but it is expected that between four million and eight million new savers will be in pensions by the time auto-enrolment is in steady state from 2017 onwards".

James Biggs, head of corporate pensions for workplace savings at consultancy Lorica, believes part of the reason the finance function wants to take control of auto-enrolment and control of the pension scheme is because it has had to deal with legacy pension issues, such as pension 'black holes', in the recent past. "If finance directors own the legacy issues of the company pension scheme, then they feel they should own its future issues, but these are very different points," he explains.

Evidently, both functions have an interest in how the organisation is going to comply with the legislation and prepare for it, as well as the more long-term strategic issue of how the pension scheme can still attract and retain talent and key staff. Professional membership body the Institution of Civil Engineers (ICE), for example, decided in 2002 the heads of HR and finance needed to work together from the outset for its pension scheme review.

"We recognised that both departments had clear issues about how ICE used pensions as part of a benefits package," says Ethan Kelly-Wilson, group head of HR at ICE.

The organisation's director of finance, Brian Murkin, adds: "It quickly became apparent that there were cost issues about how the pension scheme was going to be financed in the long term, particularly since a significant number of our employees were not members of it. We therefore needed to work together to address the issue properly."

Maureen Laurie, partner at HR consultancy Altaia Partners, believes the two functions need to work together, as the project requires both sets of skills to complete properly. "There is no doubt auto-enrolment will require the HR function to get ahead with the adaptation of employee records and payroll interfaces to ensure compliance," she says. "Equally, the finance function has a significant role to play in determining how best to ensure these schemes are run as cost-effectively as possible."

Laurie also suggests finance departments will need to be involved in the initial stages of employee enrolment to ensure HR follows 'best practice' in communicating to employees the pros and cons of the scheme on offer, particularly if some workers are offered the company's own scheme, while others are offered only NEST - seen by many employers as the cheaper scheme to refer staff to and the less generous option.

Laurie says: "A decade or two on, if staff are over-optimistically 'sold' the likely benefits of the employer scheme or passively pointed towards NEST, employees may bite back, saying they were advised badly, given insufficient information and/or choices to make an informed decision suitable for their own needs."

"As if that isn't enough to make HR directors fret, when the costs start to emerge - especially in the set-up stage - the cry may go up from finance that reverting to NEST might be the best choice, which is understandable, especially for companies with no history of operating a pension plan for all employees," she adds.

As a result, effective financial modelling becomes essential, which means finance has to be in on the implementation from the start, as well as sign off the HR pension strategy by the deadline date. Melbourne says the finance department also needs to consider the impact changes in the size of the workforce in the future will have on the organisation's long-term finances.

"If companies wish to use the pension scheme as part of a recruitment and retention package, they are likely to offer incentives," says Melbourne. "These may be higher contributions for longer service or a higher status. When all is going well, this won't be an issue, but when your company is affected by recession and you need to make cutbacks, how will the choices you make affect employees and the business in the future? Pensions are still a cost-effective tool for rewarding employees at senior and junior level, but the finance department must use realistic models to avoid future problems," he adds.

Laurie believes the debate about which function should take the lead is academic: they both need to be involved from the start. "There is nothing new about arguing whether finance or HR should be responsible for running financial benefits plans for employees, but the truth has to be that both provide the necessary checks and balances," says Laurie.

"HR has to ensure whatever is offered is appropriate, compliant and properly communicated; finance has to ensure the flows of funds are properly controlled, reported and audited. If we spend too much time arguing about where the buck stops, we might just forget that we need each other," Laurie concludes.

How I see it

Dev Raval, director of reward at broadcaster BSkyB

"Many of those not enrolled in the company pension plan have made a conscious decision not to sacrifice that part of their income, so we see it as important to take a phased approach towards auto-enrolment. We have already begun implementing an internal communications strategy and have introduced the new design for new-starters, to ease the transition.

"At Sky, we are keen on cross-departmental collaboration, so we recognise the importance of close co-operation with finance. Our CFO, Andrew Griffith, has been involved in all aspects of our pensions redesign and is in regular contact with our HR team.

"Implementation will be driven by HR: 60% of Sky people are enrolled in the company pension plan, so the changes will affect the remaining 40%, as well as non-permanent people.

"Have finance involved at the earliest stage. The sooner a company is confident about managing changes from a financial perspective, the better it will be able to prepare employees.

"Getting an internal communications strategy in place early on is key. Many people are not aware of how auto-enrolment will affect them, or even that it is being introduced by government and not employers, so it is crucial to get the messaging right. We have already started to put information on our website and to engage with the Sky Employee Forum, and we will provide increasingly detailed information as the deadline approaches."

How I see it

Dominic Ceraldi, head of HR at UK independent plumbing firm, Pimlico Plumbers

"For us, HR has historically always been the department that our employees have come to when dealing with pensions, so it seems natural to carry on in that direction. Our employees know HR is responsible for providing a professional and effective service for them when dealing with all pension membership scheme matters, and on the whole see pensions as part of their overall benefits package - an area HR deals with within our organisation.

"Our finance director is clearly of the mindset that the new rules impose a financial requirement on our business and wants to know what the overall cost will be and how we will cope with that. I believe treating the reform as a strictly business matter is a mistake: employers should look at the positives the new legislation brings with it in relation to people matters.

"I know it may be difficult to do so, but I believe we should try and think of the reform in a positive light. I have always been a firm believer that a quality pension scheme can be incorporated into a package of benefits that helps retain and attract employees. You can have a tier system within your pension scheme for various job roles or length of service, and it can even be used as a motivational tool for reward in annual appraisals or reviews."