Are some employers off the pace when it comes to preparing for 'soft' compulsion? Duncan Jefferies takes a look

Apathy is a word commonly used to describe the public's attitude to politics. But often people are often just as apathetic about their pension plan, with many workers failing to take advantage of the scheme provided by their employer.

The risks of this are obvious: a generation of people could find themselves in serious financial difficulty when they come to retire. Auto-enrolment, or ‘soft’ compulsion as some like to call it, aims to tackle this head-on by entering employees into their employer's qualifying pension scheme, without the need for any effort on their part.

Employers will have to choose which schemes they are going to adopt in order to fulfil this duty, and make a minimum three per cent contribution towards a defined contribution scheme or NEST (the National Employment Savings Trust). Alternatively, they could offer membership of a defined benefit scheme or certain hybrid schemes, providing they meet the necessary standards and conditions.

Former Pensions Secretary Yvette Cooper called auto-enrolment "the most radical change to workplace entitlements since the introduction of the national minimum wage", and Matthew Swynnerton, an employment, pensions and benefits partner at DLA Piper, agrees: "For small employers who've previously been exempt from providing a stakeholder scheme, of which there'll be a lot, this is completely new territory. It's a landmark reform of pensions."

Implementing auto-enrolment therefore, requires preparation now. But according to Mercer, many employers have yet to take any action.

In a survey of trustees, pensions managers and administrators, less than a third said they were progressing well with their preparations for 2012, the remainder having not yet begun or only just begun.

Nigel Howarth, chairman of the administration committee of the Society of Pensions Consultants (SPC), says employers are lagging behind.

"There's been so much happening in the economy, and also a change in government, so employers have really been focused elsewhere. Many of the small and medium sized employers may actually still be unaware that there are significant changes ahead," he says.

Difficult preparations
Some companies already operate an auto-enrolment system under their existing pension arrangements. Nevertheless, the new regulations will still require them to make changes to their systems and member communication policies.

In future, employers will need to identify who needs to be auto-enrolled, determine whether employer contributions will need to be paid, and agree their future arrangements in accordance with the new regulations.
"The onus is very much on the employer with auto-enrolment," says Cathryn Everest an employment, pensions and benefits solicitor at DLA Piper. "There aren't many schemes that operate in that way at the moment. Most are along the lines of ‘The member needs to fill out a form and provide their details’ whereas now the employee won't be required to do anything to become a member of the scheme."

The lack of concrete detail on what will be required under auto-enrolment has made it difficult for employers to prepare. "It's really been a case of 'Where do we start?'" says Steve Charlton, principal within the retirement business at Mercer.

"We only had the framework filled in by the secondary legislation back in January. So really it's only been the first half of this year that firms have known what they will need to contend with, and been able to start their compliance process."

For companies that have a large workforce the main issues will be complex ones like auto-enrolling agency workers, migrant workers, and high earners. This will affect some sectors more than others. But all employers with less than 100 per cent take-up of their current scheme will need to budget for a possibly large increase in contributions.

"I remember talking to a company last year that had about ten thousand employees," says Michael Whitfield, CEO of Thomsons Online Benefits, "and they only had about a thousand employees in their scheme. They are going to face a massive increase in costs as a result of auto-enrolment. That is a primary example of a company that just doesn't know what to do in terms of funding pension schemes going forward."

Assigning responsibility
Opinion on who will ultimately be responsible for overseeing auto-enrolment seems divided. A third of Mercer's survey participants indicated that they expect their scheme administrator to be responsible. Another third will look to their HR department, while most of the remainder believe management responsibility should be shared between their payroll team, HR and the scheme administrator.

Some trustees will undoubtedly see auto-enrolment as an employer-led project. As Howarth says, "Clearly you can only finalise everything when the employer fully understands what their duties are, makes certain decisions, and then talks with the administration staff and payroll to make sure there are appropriate processes in place."
It is worth remembering that employers do not have to fulfil their new obligations through their existing pension schemes, so trustees ought not to assume that this will happen, although as Swynnerton says, "in many cases it will."

Aside from the increased financial burden from hundreds or even thousands of employees suddenly joining the pension scheme, the estimated costs of implementing the new processes and systems for auto-enrolment will also need to be prepared for.

Expectations of what these costs will be vary widely among those companies polled by Mercer, with one in three believing the costs will be between £5,000 to £20,000 and a similar number estimating them at the £20,000 to £50,000 mark. Other responses ranged between less than £5,000, over £50,000 and "don't know".

Additionally, many of Britain's low-income earners may well opt out, adding to the administrative burden.

"The employer has first of all got to give the employees' information," says John Lawson, head of pensions policy at Standard Life.

"It has then got to take opt out notices from the employees and communicate those back into the system. It's got to register the pension schemes with the pension regulator. And it's got to reconcile contributions every pay period." In other words, there's a lot that needs doing.

First in line
The new responsibilities are due to come into force from 1 October 2012 after trials next year, with the largest employers targeted first, followed by small and medium employers over the following four years. But is starting with large employers really the best strategy when the majority of people who auto-enrolment is aimed at work for SMEs?

Howarth says it is easier to bring the larger employers on-board first. "You get a significant number of employees but you're only dealing with a limited number of employers."

The original roll-out timetable had all employers – around 1.1 million companies – going through the auto-enrolment process in a single year.

"That left quite a lot of operational risk not only for the employers themselves, but also for the pensions and investment industries," says Mercer’s Charlton.

A sample of small employers (with less than 50 employees) will be involved in trials next year. "The Pensions Regulator is very keen to make sure its auto-enrolment website works for small employers," Howarth says. "It will be a good indicator both for the regulator and for NEST of how systems will cope with the smaller employers, but also how well engaged smaller employers are and how they deal with any complexities, given that most will not be able to afford professional advice."

Political problems
Uncertainty over the government's plans for auto-enrolment and NEST, has undoubtedly sapped some momentum from employer and trustee preparations. It now appears that the coalition broadly supports auto-enrolment. However, it has also said recently that it wants to simplify the rules to encourage firms to offer high-quality pensions to all employees.
Alongside that, ministers have pledged to work with business and the industry to support auto-enrolment.

But work and pensions secretary Iain Duncan Smith and Steve Webb, pensions minister, are expected to review the NEST scheme, which comes with an administration contract that will cost an estimated £600million over the next decade.

Despite this, Lawson believes the only way the Government could contemplate removing NEST altogether is by moving the goalposts over who is auto-enrolled.

"Rather than enrolling people who earn more than £5,000 as the current rules say, you could enrol people earning more than £15,000. Only then you wouldn't need NEST because the private sector could cover the whole market. There's almost an attraction for the government in doing that, because they don’t necessarily want to have their own pension scheme. It exposes them to political risk."

But regardless of what changes are made, Whitfield is confident that auto-enrolment, a minimum compulsory amount of contribution, and some form of default fund strategy will go ahead. "It's not an ‘if scenario’," he says. "It is going to happen, and employers need to start preparing for that."

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