A poll of over 500 attendees at a series of pensions conferences in major UK cities during April and May found 40% of pension schemes had not yet conducted preparatory work. Furthermore, schemes have yet to agree key logistics ahead of implementation.
When pushed for more detail, half of the respondents said they were still to decide whether they would hold employee contributions within the company or transfer them to administrators. Gail Philippart, principal consultant at Aon Hewitt, said: "New employer duties are fast approaching, but despite this, schemes seem to be ill-prepared, with many which still haven't even modelled the cost impact. One explanation might be that the work has indeed started, but communication between trustees and companies is limited.
If that is the case, companies need to start working more closely with trustees. "While October 2012 seems a long way off - and many companies will have an even later implementation date - there is no simple 'plug and play' option. Auto-enrolment cannot be implemented in isolation and there are a number of issues for employers to consider that will have a knock-on-effect, such as increases in life insurance premiums and IT capacity constraints," said Philippart.
The majority of UK companies offer life insurance cover as part of the pension scheme provided to new members. Given the increasing number of new joiners due to auto-enrol in October 2012, there will be a corresponding increase in premium costs. The same may be true for other insured benefits.
Companies should carry out an analysis to assess the impact of auto-enrolment on other benefit costs, as part of an impact assessment for the company. Similar to their experiences around A-Day in 2006 and pension tax simplification, companies will start to make changes simultaneously and, as a result, may experience capacity constraints with their third party providers. To avoid this and to ensure the efficient and smooth integration of auto-enrolment, scheme managers must inform their systems administration teams (payroll and pensions admin systems) as well as their IT teams, well ahead of the changes. With this also coinciding with the Real Time Information requirements from HMRC, the payroll function will be a particular resource on which to focus.
One important area of investigation will be the interplay between pensions and flexible benefits plans. A particular concern relates to the requirements, being introduced in 2012, as result of the Safeguarding Individuals requirements.
The guidance note issued by the Pensions Regulator does not clarify definitively what would constitute an inducement when considering pension choices embedded within flex plans. While it is clear that the introduction of the new employer duties is not a threat to the continued viability of flexible benefits, a full review of the pensions components will be needed once greater clarity is obtained.
Similarly, a full review of the processes supporting a flex plan will be needed to ensure they support the requirements of the new employer duties. Indeed, there may well be a role for flexible plans to play in the process of automating the auto-enrolment process.
Philippart continued: "It is important to stress that this isn't just a pensions problem. It has a number of ramifications which will involve a lot of subsequent organisational changes, as it will impact on system administrators, external suppliers, flex schemes and life insurance. Consequently, this is a broader issue which means the majority of the work will involve much wider work streams than purely pensions."
