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Understanding the cost impact of auto-enrolment

For the UK’s biggest pensions shake-up in over a hundred years, organisations’ understanding of the impact of auto-enrolment remains worryingly low and research by Vebnet found that two thirds of employers are yet to understand its cost impact.

With thousands of businesses required to join the programme in the coming months, it is vital that HR professionals get to grips with the scheme and prepare their organisation for such a major change.

Savvy organisations are able to recognise where gaps in their knowledge lie, and act accordingly. With that in mind, employers must address the challenge auto-enrolment presents as part of its on-going reward strategy, rather than just seeking one-off advice. There may well be an over-reliance on providers, as recent research has suggested, but the simple truth is that some payroll and HR outsourcing providers, like ADP, will help fill this knowledge gap and guide their client through the auto-enrolment process, helping the employer avoid any nasty surprises whilst easing the administrative burden in the process.

A crucial part of auto-enrolment preparation lies in understanding the two key costs the scheme will bring: the cost deriving from the considerable administrative burden auto-enrolment represents, and the pension contributions themselves. The scale of administrative costs will vary, and should become clear once employers have familiarised themselves with the legislation and reviewed whether the organisation's existing pension plans are compliant. Following this, the initial implementation requires a significant amount of data analysis to determine which staff members are already enrolled in a pension scheme and identify who, of the employees that are not, are eligible. The team can subsequently determine who will need to be enrolled and the costs that this will represent. If no scheme is currently in place, or it is necessary to select an alternative pension provider, this will also add to the financial burden and extend the time it will take to be ready.

As the HR function of a business, clearly it is important to effectively communicate the changes to all their employees, irrespective of status. However, with the reforms, there is now a legal obligation for organisations to do so in order that employees not only understand the scheme details, but they also recognise their right to opt out should they wish to do so.

It is important to keep in mind that the second key cost - employer contributions - will be phased in from now until 2018. For most organisations, they will need to contribute a minimum of 1% of employees 'band earnings', with their employees topping this up to 2%. From October 2017, employers will be required to contribute a minimum of 2% and ultimately 3% with the employee's contribution making it 8%. Depending on the existing count of employees in a compliant pension scheme, these contributions could amount to tens of thousands of pounds annually and should be factored in the firm's financial planning well in advance.

It should always be kept in mind that, like any new government scheme, auto-enrolment is still very much a living and breathing entity, subject to changes as government responds to the kind of problems any such radical scheme is bound to encounter in the early days of implementation. Indeed, only time will tell whether the government's new consultation to 'simplify' auto-enrolment improves the scheme, or causes further disruption to organisations which have already spent time and money on ensuring compliance with the existing legislation. Whatever happens, what will hold true is that employers must plan well ahead for auto-enrolment, communicate the changes to employees, and prepare the business for the costs it will incur.

Jes Turner, senior product manager ADP