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3 ways the cost of living crisis impacts AE and how to protect your clients

6th Dec 2022
Brought to you by
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PensionSync is the UK’s only one-stop shop for payroll-to-pension administration, working alongside...
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The rising cost of living is a major challenge facing all pension savers. Here, we assess the risks and look at how you can protect your clients.

According to Retirement Saving in the UK 2022, a large-scale annual study conducted by Nest Insight, Auto Enrolment participation remained stable during the pandemic. Of employees auto enrolled into a workplace pension, only around 8% were exercising their right to opt out, with no significant increase compared to pre-Covid times. 

The report acknowledges that the cost of living crisis poses a significant challenge to AE participation, with savers’ wallets squeezed and many people needing to make financial compromises.

There are likely to be 3 major impacts on UK Auto Enrolment: 

1) More opt outs - less saving for retirement

It stands to reason that if employees are under increasing financial pressure, they are likely to be looking for ways to make their pay go further. Opting out of the workplace pension, unfortunately, is an obvious way for an employee to increase the money in their pocket. 

Inflation is making essential purchases more expensive. Mortgage repayments are going up. Energy bills too. And paying bills today is a more immediate worry than saving for retirement. 

Some industry sources are suggesting that opt out rates could soar to around 25% because of the cost of living crisis. If this gloomy prediction is accurate, it would be the first major downturn in UK pension savings since AE was introduced in 2012, and a blow to the inroads that have been made towards ensuring better retirement outcomes for UK workers. 

2) More enrolments - more work for payroll

Why would the cost of living crisis create more enrolments? 

Whenever an employee chooses to come out of an AE scheme, the employer is obliged to re-enrol them every 3 years. But, remember, that’s not 3 years from the date the employee comes out of the scheme. It’s every 3rd anniversary of when the employer’s staging / duties date. 

Weirdly, an employee could stop their pension contributions one month and, by quirk of timing, be re-enrolled as quickly as the following month if that happens to be when their employer’s anniversary date is. 

Anyone cyclically re-enrolled has the right to opt out again, potentially creating a pension hokey-cokey scenario, but with more admin and less song and dance. 

Every enrolment, opt out, re-enrolment and re-opt out is another task for payroll to complete. 

3) More scrutiny of processes and record-keeping

Auto Enrolment was phased in from 2012 to 2018, so all employers who were given “staging dates” during that time will have already had at least one 3 year cyclical re-enrolment date already. Many new employers founded since 2018 will have already had their first first one, and others will have them rapidly approaching. 

But are these cyclical re-enrolment dates being acted on properly? Has the employer assumed that because all their employees are in the scheme they don’t have anything to do at their anniversary date? Has the payroll software got the re-enrolment date built into it? Does it automatically assess and re-enrol staff and issue all the relevant communications?

If the cost of living crisis is going to create an uptick in opt outs, re-enrolments and re-opt outs, record-keeping and automation of the processes is going to be absolutely key in making it manageable for payroll.  

How can I help my clients?

If you process payroll and pensions for your clients, you may wish to talk to them about AE. Are they comfortable that they are on top of their Employer Duties? Is there any more you can do to help them? 

For example, would implementing salary sacrifice for pension contributions help? Salary sacrifice means that both the employee and employer pay less national insurance, encouraging the employee to stay in the scheme and reducing the cost to both parties of them doing so.

As well as talking to the client, you may want to review your own AE processes. Does your payroll software automate as much of it as you would like it to? Are you still manually processing tasks like enrolments and opt outs, and can you continue to do so if the volumes sharply increase?

Phone a friend?

If Auto Enrolment isn’t your specialist subject, you are far from alone. 

Accountants, bookkeepers and payroll bureaus didn’t choose to become AE masterminds. That they have taken on the Herculean task of supporting their clients through AE, and smashed it, is testament to the famous resolve of payroll professionals.

But if you’re still spending hours on manual file uploads and data entry, or logging into umpteen different pension websites, or trawling through your emails to get opt out notifications, you need to stop. The right software can automate the basic tasks for you, freeing up your time to spend on delivering real value to your clients.

If you’re not sure where to start, reach out to the PensionSync team and we’ll be happy to chat through your requirements and point you in the right direction.

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