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UK auto-enrolment duty could cost up to 10% of company payroll, says Eversheds

From October 2012, legal requirements are being introduced that will ultimately place a duty on UK employers to automatically enrol eligible workers into a qualifying pension scheme and pay minimum employer contributions, or provide a minimum level of benefits, according to survey of 245 employers by law firm Eversheds.

The study also revealed the majority of respondents are confident they will be ready for automatic enrolment by their staging date (the date the duty applies to them).

Over half of the respondents admitted that their organisation had not, as yet, prepared for the new worker protection provisions, which came into effect from 1 July 2012.

More than a third (36%) of respondents have not yet estimated the cost of automatic enrolment for their organisation and 57% of respondents said their organisation did not anticipate recouping the extra costs associated with automatic enrolment from workers – for example, by limiting future pay rises. Eversheds revealed 41% of respondents want the duty to be changed to allow workers to opt-out in advance, rather than requiring employers to enrol reluctant workers, despite their opposition.

Teresa Dolan, partner at Eversheds, said: “Just over half of our respondents estimate that the cost of complying with the new automatic enrolment regime will cost their organisations up to an additional 10% of payroll. A surprising 36% did not yet know how much automatic enrolment was likely to cost their organisation. “Some 54% of respondents said they do not anticipate recouping these costs from workers, for example, by limiting future pay increases, or reducing other benefits or headcount, while 16% indicated that their organisations would consider such measures.

“While the Government's aim with the introduction of automatic enrolment is to encourage more people to save for their retirement, there will be an inevitable source of friction in workplaces when employers explain to eligible workers that they cannot opt out in advance of being automatically enrolled. As a result, an employer will still need to enrol such workers, even if they have previously asked not to join a pension scheme, leading to possible complaints from workers.

"In addition, where an eligible worker opts out, he/she will need to be re-enrolled into a qualifying pension scheme approximately every three years from the employer's staging date, whether or not they continue to object. These and other administrative burdens associated with automatic enrolment mean it is unsurprising that most respondents identified administration as their greatest challenge. It also underlines the degree of detailed planning, and changes to IT, payroll and HR systems, required to ensure compliance."

The study identified the two most difficult challenges in terms of worker communication were problems with conveying key messages in easy-to-understand language and getting workers to understand the reasons behind automatic enrolment.

In addition, around a third of respondents cited a general lack of engagement among workers and the need to communicate different messages to different categories of workers as being their most difficult challenges.

Dolan added:??"Complying with the duty to provide information to workers is likely to pose a significant challenge for many employers, due to the strict time limits and the different obligations that apply, depending on the category of worker.

"While the Pensions Regulator has issued guidance as well as template letters, we recommend that employers invest time in devising easy-to-understand and engaging communications that comply with the various statutory requirements. Employers may find NEST's Golden Rules for Communication useful in this respect.

"However, it is heartening to see that 93% of respondents are confident they will ready to comply with their automatic enrolment duties from their staging date.

"Employers must prepare for automatic enrolment and take sensible steps to find out when the new automatic enrolment duties apply to their organisation – and put in place the correct administrative systems, payroll processes and record-keeping to ensure they do not fall foul of the law. This will require a coordinated approach and input from HR, payroll, pensions and IT teams. Compliance should not be viewed as a purely HR task."