One year since auto-enrolment started in earnest, there are some valuable lessons that SMEs could pick up from large employers who have already met their staging dates, finds Marek Handzel
Auto-enrolment’s detractors have had to swallow some big numbers in recent weeks. Official government statistics have shown that fewer than one in 10 employees auto-enrolled into a scheme have opted out of it, leading to over a million people becoming pension savers. And with more than 1,000 employers having successfully completed their registration with The Pensions Regulator, nobody batted an eyelid when Pensions Minister Steve Webb declared auto-enrolment’s first few months as the start of a “quiet revolution” in retirement provision.
Whether this fairytale start leads on to a happy ending, however, depends of course on a less predictable cohort of workers; those employed by smaller and medium-sized employers (SMEs).
In the main, the large 250-plus employee companies that have experienced their staging dates so far have been able to draw on expert advice and absorb the administrative burden of auto-enrolment through their substantial HR and payroll departments. Added to that, some have spent extra on communication and higher than minimal contribution rates, ensuring that many workers have been more than happy to join their company’s scheme.
The story for SMEs is a different one though. A good chunk of them won’t be able to throw as many resources at trying to make auto-enrolment a success and even those who have spare cash at their disposal might not see it as much of a priority – if they’ve even started planning for it, that is.
IFA Almary Green managing director Carl Lamb says that many smaller employers have kept their heads in the sand over auto-enrolment.
“We’re dealing with several firms at the moment trying to get the FD and the MD to wake up to their responsibilities,” he says.
“It’s only when they’ve had the letter come in from The Pensions Regulator, telling them when their implementation date is, that they start to take it seriously.”
This reluctance to deal with auto-enrolment could, says Lamb, lead to serious ramifications, as some larger schemes have already discovered. The regulator has already sent out 38 informal warning letters to companies as part of its enforcement strategy, and has even has issued its first compliance notice to an employer that failed to meet its auto-enrolment duties.
With high potential daily fines (ranging between £50-£10,000), companies may literally not be able to afford to treat their duties lightly.
Delay could have other detrimental consequences. Employers with 50 to 249 workers will have to start the ball rolling from April 2014. Given the high number of companies that fall into this bracket, there is a serious danger that those leaving it late will not be able to get the advice - or even the provider they want.
As State Street Global Advisors head of UK defined contribution Nigel Aston points out, around this time next year there will be some 100,000 employers who need to go through staging in the space of a mere couple of months and many of the commercial providers will pick and choose who they work with.
“They’re already doing that and quite rightly,” says Aston. “They have got a duty to their shareholders.
“I just wonder how much choice some of these SMEs will actually end up having.”
Lorica Employee Benefits head of auto-enrolment Clare Abraham says that as the number of businesses meeting their staging dates from next year will tip the scales significantly, consultants will also have to start turning companies away.
“We give a discount if employers come in before a certain time, because it allows us to plan our resourcing,” says Abraham.
“It’s feasible to [meet a staging date] within five months to go for smaller companies, as long as people can dedicate their time to it and plan everything out.
“But there’s always going to be one or two employers where that’s not the case, regardless of their size.”
So far, an 18 month run-in to a staging date has been the norm for the larger organisations that have already auto-enrolled. Given the anomalies that Abraham refers to, and the fact that companies rarely have the luxury of being able to throw everything at any aspect of their benefit packages, most advisers recommend that SME HR and finance directors look to give themselves a year to plan their enrolment.
Even worse than missing out on a preferred scheme or adviser, a company that ignores to prepare properly may have to rush through exercises such as data cleansing and payroll software implementation, running the risk of incurring further cost.
This only emphasises the importance of getting advice early, says Abraham, despite Steve Webb’s recent questioning of the need for companies to take on an adviser.
“The legislation is very complex and detailed. There are pages and pages of booklets on what you can and can’t do and it would be easy to be non-compliant if someone was to take it on by themselves. [Companies] need to understand that and figure out early if they need advice and who they’re going to take that advice from,” she says.
A chance to take stock
F&C Investments head of UK institutional and global head of consultants Julian Lyne says that this awareness of the planning needed to meet auto-enrolment’s requirements has led some of the larger companies to deal with the process in a segmented manner.
“What we’ve seen is schemes taking two approaches,” he says. “Either reviewing everything in one go - so the admin piece, payroll, scheme design and investment - or deciding to look at say, the latter, in isolation.”
Aston agrees with Lyne’s assessment, saying that SMEs would do well to replicate the good habits of the first camp, regardless of whether or not they have a scheme in place that is appropriate for their whole workforce.
“The first group have been better prepared, better resourced and have given themselves more time and taken the opportunity to not only make sure they have the flow of information right and that they sit within the boundaries of the legislation, but that they’ve also taken the opportunity to review their whole plan.”
This has led to a comprehensive examination of possible new set of providers, communications, and administration, as well as an appraisal of the funds that their workforce is invested in.
The second camp, who have perhaps not given themselves enough time and found the rigours of auto-enrolment more onerous than they expected, have done enough to make sure that they comply with legislation, but not much else.
But the second group are missing a trick, says Lyne, which SMEs would do well to heed.
“We’ve seen quite a lot of innovation out there around investment, and all the debates we’ve had over the years have been brought into real focus by auto-enrolment,” he says.
“It’s been a good chance for companies to review and ask, ‘is this doing what we want it to do’? Questions have been asked about whether DC investments should be driven by consideration for fees or by what is appropriate for members – either those auto-enrolled or those in current arrangements.”
Going this extra step could prove fruitful, particularly when it comes to the default fund, which as the DWP has stated, over 90 per cent of people opt to join.
Firstly, there will be more thought put into managing members’ expectations over their pension savings and secondly, there could be significantly less volatility for individuals to endure if companies look at adopting some of the newer target date funds – assuming they live up to the hype and do what they are supposed to.
Not only could this help keep employees happy with their benefits packages and therefore potentially their employers, but it could also encourage them to stay in a pension and even raise their contributions.
Which, as we all know, is the whole point.
Written by Marek Handzel, a freelance journalist