Firms unprepared for pension auto-enrolment

Only a small proportion of businesses have taken steps to prepare for 2012 pension reforms, despite the considerable preparations and potential cost required to implement auto-enrolment.

Less than a third of employers say they are progressing well with their preparations for the pensions changes, while more than two-thirds have either not yet begun or have only just begun, according to a survey of trustees, pensions managers and pension administrators conducted by human capital consultancy Mercer.

“The problem is that many employers are unaware of the complexity and detailed implications of the changes that lie ahead,” said Geraldine Brassett, principal in Mercer’s outsourcing business. “2012 may still sound like a long way off, but unless they start to prepare soon, many companies may find themselves repeating the experience of A-Day and rushing to meet their deadline.”

The main reasons cited by employers for stalling are that they have not yet agreed their pension strategy or they believe they have no action to take as they already operate auto-enrolment under their existing pension arrangements.

Some companies said they were awaiting the outcome of the election in case circumstances change. However Brassett warned that NEST, auto-enrolment and other requirements are already in legislation through the Pensions Act 2008, and that the final regulations for these “cannot just be swept aside”.

Brassett also recommended that those employers who are still undecided about their pension strategy and future pension arrangements should plan for these in tandem with the new requirements for auto-enrolment, in order to meet the deadline.

“The legislation will require changes in current systems, processes and member communications, even for those companies that propose to continue with their current scheme and auto-enrolment process,” she said.

Ian Luck, director of Smith & Williamson Employee Benefit Consultants warned that every one of the 1.1m employers that exist in the UK will have to at least look at what pension arrangements they are going to provide for their employees. “The indication is that some 100,000 workplace pension schemes exist at the moment - that means there are potentially a million plans that will need to be established by 2015.

"Many of those employers might opt for the government's NEST but a large number will want to offer their own arrangement designed for the company and specific to their employees. Either way, between 2012 and 2016 employers will have to automatically enrol the vast majority of their employees into a pension plan and commence making contributions for them; starting at 1% of their qualifying earnings and rising to 3%. That is an added cost to the business, pure and simple,” Luck said.

He agreed that the emergency Budget, on 22 June, was unlikely to change the situation because there is every indication that the new regime is at least as keen on auto-enrolment as the last.

"Good companies are run on rolling three or five year business plans, which should already be taking into account this increase in cost base. I would suggest that each employer would be well served by having an audit of their pension arrangements undertaken now. That will at least highlight the potential work required and future costs to be incorporated into the plans," Luck added.

Early on, employers will need to identify those sections of their workforce that need to be auto-enrolled, determine whether employer contributions will need to be paid, and agree their future pension arrangements under the new regulations. Employers will also need to identify how the changes will be implemented and by whom.

Currently, there is divided opinion on who should take responsibility for managing the auto-enrolment process, with a third of Mercer’s survey participants indicating they expect their scheme administrator to be responsible. Another third will look to their HR dept, while most of the remainder believe management responsibility should be shared between their payroll team, HR and scheme administrator.

The estimated costs of implementing the new processes and communications for auto-enrolment vary widely amongst those companies polled by Mercer, with one in three believing the costs will be £5,000 - £20,000 and a similar number estimating them at £20,000 - £50,000.

“At this stage, most companies are only guessing about the cost of implementing auto-enrolment. A clearer picture will emerge once they begin to analyse the practical steps they need to take,” said Brassett.

“In the light of current feedback from employers, the government and the Pensions Regulator clearly have much to do to increase awareness of the actions to be taken. They will need to pay particular attention to small enterprises which still remain largely in the dark about the changes and what they will mean for them,” Brassett added.