How can we mitigate auto-enrolment costs?

There is much talk in the industry about how auto-enrolment will encourage more employees to join either NEST or their company nominated pension arrangements for a much more financially sound retirement. Surely that is a good think for the workforce at large, but is this a good thing for the employers?

The increased cost burden on employers (especially smaller ones who have not offered a “good” company pension scheme to date) is not only in relation to the increased cost of contributions as employees join the pension scheme for the first time, but also the implementation costs of system changes, communication, advice on design, to name but a few.

So where can we look for ideas on how to reduce the cost of both implementation and on-going compliance with these requirements?

This was the focus of a recent workshop I attended with Bluefin where we were trying to play the part of the uncaring, cost-cutting employer (not too difficult for some).

Summarised below is some of the output from that session.

Systems

·         Investigate the capability and costs of your existing providers to comply with the requirements and negotiate that they will comply without passing on additional costs

·         Renegotiate your contracts with existing payroll, HR system and pension system providers to investigate any potential areas for cost reductions to offset any additional costs for auto-enrolment

·         Act in good time so you can review your options fully – if you need to make changes to systems at the last minute the cost is likely to be inflated

·         Ensure you are not paying for an overlap in any system capability

Processes

·         Consider how you can make it easy for employees to opt out without falling foul of the inducement rules

·         Design data feeds so that employees have time to opt out before payroll takes effect to reduce administration costs

·         Get providers to commit to what process changes they will deliver within their current cost models

·         Map your current and required processes to identify any gaps which could cause some unexpected administration costs to resolve

Communications

·         Segment your audience and tailor communications so you are only communicating relevant messages to those who need to take some action – there could be many groups of employees you do not need to communicate with at all.

·         If you have groups of employees for whom it does not make sense to join – then help them with that decision-making process by offering financial planning

·         Communicate badly to deter take up! (The communication specialists will hate that one.)

·         Don’t push employees to join – the NEST experience shows you can keep your take up rate 20% lower if you communicate but do not promote the arrangements

·         Integrate into your existing communications and channels – don’t make this a new costly communications campaign

Implementation ideas

·         Consider Salary Sacrifice to reduce employer NI costs

·         Speak to the Pensions Regulator if you are unsure whether you comply to see if you can continue without any change

·         What can be done from resource in house to reduce consultancy costs – can you pool resource with other groups or associated companies?

·         Good planning and project management to avoid any unforeseen issues and therefore costs

·         Can you restructure your organisation (or parts of it) to defer your staging date (well at least until 2017)

Design ideas

·         Consider levelling down to the minimum contribution requirements – at least for those employees who are not already members of your scheme

·         Reassess your contractual arrangements for agency and overseas employees to reduce the number of employees you need to auto-enrol

·         Use qualifying earnings instead of base salary as the pensionable earnings definition

·         Consider offering alternatives to pensions (but not inducements to opt out) or flexible benefits

·         Review your overall benefits to staff to ensure no cost savings in these areas (eg overlap of provision in different contracts)

·         Introduce matching contributions from the employees if you have a current non-contributory pension scheme

·         Consider different arrangements for different segments eg NEST for some and GPP for others to keep your annual management charges low

Pension Costs

·         Introduce a waiting period and align to the minimum age requirements

·         Phase the increasing of contributions to align with the minimum requirements – so start with the minimum and increase contributions each year as the minimum level rises

·         Require higher contributions from the employees

For more information contact your adviser or are these the ideas the consultants are not telling us about!