Making auto-enrolment work

  


Fast food giant McDonalds announced today that they will use the National Employment Savings Trust (NEST) for 35,000 hourly-paid workers as part of a two-tier auto-enrolment solution.

Any eligible hourly-paid workers at the burger chain will be auto-enrolled into the National Employment Savings Trust, but salaried workers (around 2,000 employees) will be placed in its existing Friends Life stakeholder scheme.

There seems to be a trend emerging amongst those employers with different workforce segments (such as large groups of low-paid or part-time employees) adopting two tier auto-enrolment solutions – using NEST for the lower paid and alternative arrangements for higher salaried employees. Consultants such as First Actuarial are creating models to advise which groups of employees should be offered NEST, so as to get best value annual management charges from the provider of the second tier of the solution.

McDonalds will begin auto-enrolment for salaried staff on 1 January 2013 and will use postponement to delay auto-enrolling hourly-paid staff until 13 January to fit in with the pay period.

McDonalds will not be alone in delaying auto-enrolment for a number of days or a couple of months and a few days (companies are able to postpone for up to 3 months) for payroll reasons. It is not until we went through a detailed timetable of payroll dates, contribution payment dates and what is required in the auto-enrolment regulations that we at CSC came to a similar decision.

The key high level requirements are:

• If an employee opts out then a refund needs to be paid to the employee within 1 month of receiving the opt out notice.
• If the employee does not opt out then the contributions need to be paid over to the pension provider by the last day of the second month following the month in which auto-enrolment falls.

To avoid the payment of contributions to a provider where an employee decides to opt out we will hold any contributions deducted from payroll until the end of the opt-out period and then either refund these within 1 month of receiving the opt out notice or pay to the provider in the following pension payment processing period.

Taking an example of an employee joining the Company on 15^th August 2013 and, because the Company is operating a postponement period of 3 months, their auto-enrolment date is 15^th November 2013 - they have a month in which to opt out. If the employee does not opt out the contributions need to be paid over to the pension provider by end of January 2014 (the last day of the second month following the month in which auto-enrolment falls). However due to payroll processing dates we would not pay the with-held contributions to the Provider until 9^th February 2014 – too late!

To resolve this if we only postpone to the 1^st day of the 3^rd month (so by 2 months and a number of days) then we will be able to process within the timescales set out in the legislation.

All employers need to review the detail of their payroll and pension payment processes before making a decision in relation to any postponement period they may apply.

Does the Government actually want people to save for their retirement?

I do not often get emotive about a particular issue – I leave that up to those whom I follow on Twitter. However I am planning on handing a letter to Steve Webb at the NAPF conference in Liverpool this week which I crafted jointly today with the Unite union on the topic of retrospective tax legislation (namely the Finance Act 2004 as amended by the Finance Act 2011).

One would assume that it was not the intention of Government to penalise individuals who have made prudent and proper provision for their future retirement and now find themselves subject to retrospective and punitive tax.

I know of examples from pension schemes in the private sector who have taken on generous redundancy liabilities from the public sector and whose employees are now finding themselves adversely impacted by two areas of tax legislation. These employees are earning in the region of £30,000 to £45,000 – not exactly high-earners trying to avoid income tax.

To increase awareness I summarise the main facts in the rest of this article.

It is not uncommon for there to be collective agreements in place ensuring that employees who are outsourced retain their contractual entitlements to enhanced pension benefits in redundancy situations, often including additional service enhancements. In many instances these public sector outsourcing contracts have been in place for a number of years before the introduction of the relevant tax legislation.

From 6^th April 2011, the annual allowance was reduced by the Government from £225,00 to £50,000 per annum, although any unused tax allowance from the previous three years can be used to offset any liability in the current tax year.  This is a change to the employee's personal tax position and is administered via self-assessment.

The increase in the value of defined benefit pensions on redundancy means that some employees will be subject to an annual allowance tax charge of 40% on any amount above the £50,000. This additional tax is calculated by HMRC based on a notional value of the increase in benefits over the last 12 months even if the employer has not made any additional contributions and requires the tax to be paid up front.

I have seen circumstances where this tax bill is greater than the tax free cash sum the member is receiving on retirement and about the same level as a year’s Salary. The tax man wants more than the employee has actually received!

Sometimes due to differences between a pension scheme’s pension input period and the tax year, this tax liability is not calculated nor due for some time – in one example an employee leaving at the end of July 2012 is not due to pay the tax until January 2015. The tax charge and the timing of its payment could therefore act as a disincentive for an individual to look for further employment due to being subject to a higher personal rate of tax in the following year.

Plus has anyone thought about the impact of auto-enrolment for an individual who has already exceeded the annual allowance, not in the year of being auto-enrolled, but in a subsequent tax year, due to the impact of being made redundant?

As a result of the likely increase in annual allowance charges the government has introduced legislation to allow individuals to ask their scheme to pay the tax on their behalf with their benefits being reduced correspondingly (“the Scheme pays” facility). However it is not completely clear how the Trustees can implement such a facility when the amount of tax falling due will not be known by the scheme member at the time they need to make such an election (ie before the benefits become payable). This in itself could be problematic if the Trustees reduce the pension at some future date once the tax charge is known as this becomes an unauthorised payment.

The Finance Act 2004 categorises pension payments that are permitted as “authorised payments” and any payments that fall outside the requirements are “unauthorised payments” which carry penal tax charges for both the member and the pension scheme. One of HMRC’s requirements for a pension payment to be authorised is that the amount of pension paid should not reduce year on year unless the reduction is expressly permitted under the Act (in very limited circumstances).

I know of several final salary pension schemes in the private sector where a temporary pension is paid on redundancy until such time as the individual can claim their pension from the previous scheme, again based on collective agreements originating from public sector outsourcing.

 If the employer chooses to pay this temporary pension from cash flow and via payroll then fine, but if it is a pension scheme that makes these payments then a tax charge arises at the time the temporary pension ceases and the pension in payment is reduced. This tax charge is made up of the following: a retrospective tax charge of either 40% or 55% (see the HMRC manual to work out which – if you can) on any tax free lump sum which has already been taken at retirement, plus the future pension payments have an ongoing tax liability (for-ever) of 40% (which again could be increased up to 55% on the first 12 months pension payments) as opposed to perhaps a marginal income tax rate of 20%. 

In my example mentioned earlier of the guy who had to pay more income tax as an annual allowance charge than he had received from the scheme as a cash lump sum – he then had to pay tax at 55% on the same cash lump sum when his temporary pension ceased to be paid 5 years later!

This was originally recognised by HMRC as being an issue and transitional arrangements were passed in legislation in 2009 but the exemptions given only applied to employees who left service before July 2007, so it is still an issue for anyone in that situation today.

You may say that we can no longer afford these generous public sector redundancy terms – and I agree - but where does it leave those employees who have been moved to the private sector and are now seeing their valued redundancy rights more than eaten away by retrospective taxation.

What can we learn from Private Equity?

Historically, there has been the misperception that Private Equity makes its money by cost-cutting and asset stripping, not investing in the business and having a short-term focus. However the recent downturn in the economy has made it apparent that to survive private equity firms need to do more than concentrate on transactions but they need to focus on the running of the businesses in which they have invested to ensure good returns, especially as they are likely to hold these companies for a longer period of time.

So what are the more successful private equity firms doing and how can businesses learn from these successes. The following key practices were discussed at a recent meeting of the PARC (Performance and Reward Centre) led by Lisa Stone of HgCapital.

·         Focus on growth

·         Medium to long-term focus

·         Plans and priorities

·         Focus on people

·         Effective Boards

·         Alignment of incentives

In this blog I am going to highlight how reward strategies can support Private Equity businesses with their turnaround agenda.

HgCapital data has shown how for every pound invested twice as much value comes from revenue growth than from margin (ie reducing costs). With Private Equity the time horizon to drive more growth is likely to be around the five-year mark. Where growth is required revenue would normally be the highest weighting in the short term incentive plans (50% based on Revenue, 25% on profit and 25% on other targets would be quite common).

Strategic metrics which align to the business plan and are cascaded and owned by the management team are also important to ensure that the strategy is clear, accountable and measurable. Therefore key indicators such as Net Promoter Score (Customer Satisfaction) or sales conversion rates could also be included in the incentive plans.

In times of change the incentive measures are often changed annually to react more tactically to the new strategy and business plan.

Private Equity firms normally appoint non-executive directors but they are entirely dependent upon the management team and continued engagement of the staff. This requires a particular focus on people and in particular employee engagement. If your business has implemented metrics to monitor employee engagement then consider included these metrics in the management incentive plans.

As with most companies the remuneration packages of the Private Equity boards will comprise of base salary at the market rate for the industry and bonuses of around 100% for the CEO and 60-70% for the CFO. As mentioned above the bonus plans are likely to be tactical and linked to the critical criteria of the business plan for that particular year.

Equity plans will most likely be two-fold; plans which receive the executives own investment (usually at about 1 x salary) and those which are provided by the Company. For a CEO the equity provided by the Company is likely to vest over the planned investment period and pay out only where there is a successful exit from Private Equity status. The value of the equity provided to the CEO at the end of the investment period will vary considerably but is generally distributed to the top 20 executives with the CEO perhaps receiving 5% of the value of the business and the CFO receiving 2%. Of course Private Equity deals are generally highly leveraged and therefore there is the risk of the Executives losing their own investments as well as the potential upside.

The two biggest contrasts between Private Equity and PLCs are with the short-term and long-term incentive plans and using these to support delivery against the business plan.

The focus on the bonus plan being tactically used with a few measures which change each year – rather than the desire within PLC for a balance of financial measures and continuity in their bonus design.

With the equity plans it would be very difficult to persuade the Rem Co and the shareholders that a single event should be the criteria for vesting rather than market related performance criteria such as EPS.

So although there is much to learn from the success stories within the Private Equity arena there must also be a recognition that Corporate PLC needs to align to shareholder interests which are much different to those of the senior executive team.

Interview with Mike Lawrie, new CEO of CSC

Week 2 at CSC and is the interview below with a reporter on the Wahington Post a snapshot into Mike Lawrie's 100 day plan? I await with interest to see what unfolds in relation to the changes he will make in the organisation sturcture and how he will align the Board and the senior leadership team. I will play my part in what I can do to align the compensation strategy and systems to enable the business strategy to be executed and to role model the values which will be expected of the senior executive team.


What leadership skills does it require to do a major turnaround?
The starting point is trying to determine with your team what do you want to be the best at and how you want to differentiate yourself in the marketplace. The second step is to get a strategy together that allows you to achieve that vision. The next step is to get an organizational structure in place that allows you to organize your most important assets — your people, your human resources, intellectual capital — so you can execute the strategy. Once you decide on the organization, you need to recruit the right leaders to actually run that organization. Then you need to get your compensation systems, measurement system and management system to monitor the progress that you make and then make adjustments as you go along. I have used that basic formula for 15 years. To a large extent, that’s the process I am beginning here at CSC.
Your first stint as chief executive was at Siebel Systems. What would you have done differently?
I would have tried to get more conviction and buy-in from the board as to what needed to be accomplished and the threats to the existing business model. I don’t think I did a good job in clearly articulating that. I also think I was slower than I should’ve been in bringing a team in that could execute against that changing business model.
You are known for improving client satisfaction at Misys. How did you do it?
The first thing we did was ask our customers how we were doing. Up until that point we had never done that. I hired a third-party firm to do that. It turned out we were not doing very well. It wasn’t hard to see the four or five things that we needed to improve on. So we put a game plan in place. We listened and acted.
Do businesses do that enough?
I think it’s spotty. Even at CSC, we don’t have a uniform approach to customer satisfaction. That’s one of the things I’ve uncovered in the first few days I was here. We do not have a consistent approach to how we go about soliciting feedback from our clients. As a result we don’t have a laser-focused action plan to address some of their needs.
In a turnaround situation, you mentioned the importance of hiring the right leadership. What is the best way to do that?
The more difficult part is identifying someone’s values. That’s where I spend most of my time is getting a handle on the values that make them who they are. I’m very strong on values. If you don’t get the right values in senior executives, you won’t be able to get the right values in the corporation and that will impede your ability to be a highly successful enterprise.
—Interview with Vanessa Small - Washington Post

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!

Why have Corporate ISAs not taken off?

As we reach the end of the tax year the papers are full of articles on why we should be saving in Isas. There is a wealth management ISA special in the City A.M. this morning which shows from those surveyed about 70% have taken out an Isa during each of the last two tax years 2011 and 2012. Of this number about 25%had cash Isas with the remaining three-quarters being a fund selection or self-select. Positively, about 60% of the respondents also stated they had a good (positive) investment outlook over the next 5 years.

"Saving for retirement" is the top reasons given for investing in an Isa (40% of those surveyed - up 12% from last year) so one would have thought it would be right for an employer to include this as an employee savings option alongside the company pension scheme.

So why since we launched our equity Isa before Christmas have we had zero take up? Has all the due-diligence and communication been a waste of time and effort?

The City paper goes on to quote that the most common method of payment is by a lump sum with about 70% of investors paying in this way. Only 10% are paying by monthly contributions alone (20% pay by a combination of both lump sum and monthly amounts). So may be payroll deductions into an Isa are not the method by which our employees want to save - perhaps rather than paying each month as they do into their pension they would rather see how much spare savings they have at the end of the tax year and then pay in one go.

The survey goes on to show that 50% of investors buy their Isa on line and I would imagine that this would mean via a supermarket (moneysupermarket.com) to see which provider is offering the best terms at that time. Only 4% in 2012 purchased an Isa direct from the fund manager. Equally only 6% bought via an IFA (which is interesting) and the survey did not ask how many purchased via their employer! I guess this means that employees are wanting to look at "whole of market" rather than one nominated provider.

As the discussions on "wealth platforms" and "employee savings portals" escalate I suggest we need to step back for a minute and ask our employees what they really want the company to offer them by way of benefits and savings vehicles.

Comments welcome.

Life’s Rewarding Experiences

 

I have just finished reading a book which it has taken my Uncle-in-law ,Mr Leslie Davidson, (pictured above) 40 years to write and what a hilarious and deeply moving account of his early days at Unilever it is. The book is a personal record of some of the events which occurred when he was sent by Unilever in 1960 with his young family to set up one of the first oil palm plantations in Borneo. When Leslie returned to London in 1974 to become the Chairman of Unilever’s Plantation division he found in the archive every monthly report and every letter exchange between himself and Unilever’s London office and he used these records to help pull together the various stories in his book.

When I met him at his nephew’s 50^th birthday party last week we were comparing the mobility requirements of the young management of today (perhaps at Unilever but true of any large corporate) with his own experiences as a 30 year old on assignment in the 60’s.  Management today expect business travel, top class accommodation and private schooling for their children – it was “much different in his day”. He amusingly quoted from his book the aftermath of the 1963 monsoon (in his December report he predicted the monsoon would be ‘comparatively mild’ which in fact turned out to be the worst weather forecast since Noah’s wife told him it was only a passing shower!):

“As I watched our house disappearing into the darkness, I reflected sadly that although I had often stood on my verandah and waved goodbye to a boat going off down the river, it was the first time I had stood on a boat and waved goodbye to my house going down the river.”

But his stories do not reflect at all on the hardship of his living circumstances they are instead (as he states in his Preface) a tribute to some of his oldest friends who were involved in the oil palm plantation projects from his neighbours, the workers, the officials he had to entertain to the medicine-man. The people Rudyard Kipling refers to as:

Not the great nor well-bespoke,

But the mere uncounted folk.

What has happened to those young corporate executives and their sense of adventure and challenge – international assignments appear to now be all about financial reward due to sacrificing current lifestyles rather than about the rewarding life experiences of working in differing environments and cultures and having amazing stories to tell at dinner parties in years to come.

This book demonstrates Leslie's leadership not amongst Unilevlers London management team but in creating a harmonious estate community out of a truly disparate range of races and religions.

If you have any connections with Unilever today you may find it an interesting read but although it has been published you will not find it any Waterstones book store (unless in Signapore) you will need to ask me to lend you my personal copy.