As an introduction to our guide, we asked Capita Hartshead, widely acknowledged as one of the UK's leading specialists, to share their view of the forthcoming changes in terms of opportunity for advisers. They agreed that advisers have a key role, especially where employers are looking at schemes of under 200 'eligible jobholders'.
Auto enrolment is almost upon us. From October 2012 up to 8 million people will find themselves automatically enrolled by their employer into a pension scheme over the next 5 years. In the run up to commencement what has surprised many people are the complexities involved, not just those imposed by the legislation, (identifying and categorising the workforce, band earnings, deciding upon a contribution structure and qualifying scheme), but also the interaction within businesses (management, HR, payroll and IT systems). Employers have discovered that the information required to comply with their new duties is not always held in one place, and that increased responsibilities will now rest on people who are managing, or advising on, the pension scheme.
In addition to this, most people involved with pensions presumed (in many cases incorrectly) that it would be easy to amend existing schemes and enrol employees. The assumption was that the criteria would be very simple and that existing payroll and HR systems would be able to cope with the changes and existing pensions would accept new joiners without question. They have found that this is not the case.
The reasons for these assumptions are embedded within the regulations, which, to recap, are as follows;
The definition of 'eligible jobholders', (those employees who must be auto enrolled) is based on earnings and age. Firstly they have to be aged between 22 and the state pension age. Identifying this criteria might appear to be easy, however many employers have found that this information may not be readily available on their payroll system, which means it has to be obtained from another source – HR for example. Given this scenario, how will employers arrange for the information to be collated and who should they assign the responsibility to for ensuring it is kept up to date? In addition , they need to factor in that this is going to be a continual process, as younger employees get older and become eligible for auto enrolment.
Secondly, earnings must exceed the earnings trigger, (£8105 for the year) for the worker to be eligible for auto enrolment. Sounds easy, but earnings are related to the employees pay reference period, which could be weekly, four weekly, monthly or another variation. Therefore, a weekly paid employee only has to earn £155.87 in the week to be eligible for auto enrolment (monthly is £675.42). In many cases employers have a combination of pay periods, so that's numerous different checks.
The definition of earnings covers more than just basic pay. Therefore if contributions are to be based on the minimum requirements, pay items such as bonuses and commissions need to be taken into account.
This will lead to some employees becoming eligible where the employer didn't expect it. Why, because whilst an individual's annual income may be below (or close) to the earnings trigger, their pay in a particular period may exceed this level. There are various examples of where spikes in pay could occur, such as extra hours worked, a bonus or commission payment. This could happen at any time in the year, so employers (and their payroll systems) need to be able to identify when this occurs and the auto enrolment process started.
In addition to eligible jobholders, there are non eligible and entitled workers. The non eligible jobholder (those outside the qualifying age range or with earnings below the earnings trigger) can opt in to the scheme. If they do this, the employer has to calculate and pay contributions. Entitled workers (those outside the qualifying age range and with earnings below the lower threshold) can decide to join, but don't have to benefit from an employer contribution.
Minimum contributions under auto enrolment are based on a qualifying band of earnings. Many employers looking at capping their costs have to ensure that their payroll systems are able to identify qualifying earnings, calculate the relevant contributions and be flexible enough to cope with changes. We already know that minimum contribution rates will change during the phasing period, but it is also likely that some other factors such as the earnings trigger and pay thresholds will change over time. What if the employee, or employer, wants to pay more than the minimum? Can systems cope with this degree of flexibility?
Whilst using the band of earnings to calculate contributions caps employers liabilities, it also means lower average contributions payable to pension providers. In some cases contributions may be infrequent (as employees earnings dip below the lower threshold). Because of these factors many traditional pension providers have had to look closely at the future membership and assess closely the terms offered. Will they offer terms which are not as good as the existing scheme, or even decline to offer terms or accept new entrants? Advisers and employers must actively consider the new players in the market, such as NEST and the People's Pension, to provide solutions.
Advisers should therefore approach clients in plenty of time before their staging date to give themselves, and the client, enough time to prepare for the changes. Failure to do so could lead to many employers and advisers finding it difficult to provide a satisfactory solution and having to deal with the consequences.
Since 1974, Capita Hartshead have been looking after the needs of our clients and their employees, working together to help build a future and a retirement – a future which we would all want to share.
Operating in 15 locations throughout the UK and Ireland, some 2,000 staff deliver pensions administration, consultancy and specialist delivery solutions to 650 clients, touching the lives of over 4 million people.
Both within the public and private sector, whether we're implementing, transforming, delivering or supporting your company pensions schemes, you can be confident that we are 100% committed to delivering solutions that make a difference.
At Capita Hartshead your success equals our success. By listening, learning, responding and adapting to your needs we can help you solve issues and explore the best way forward to meet your entire needs.
As part of Capita PLC, a FTSE100 organisation, Capita Hartshead offers the strength and stability of a national organisation but with the flexibility of a local partner. And our promise goes beyond just business, we bring new ways of working to create a permanent pensions legacy for all your employees.
Through excellence, partnership, progress and trust we aim to make a difference to millions of lives, without them ever knowing it.