Pension Reform is coming – it's inching ever nearer with the first firms staging dates in autumn of this year and some choosing to bring them forward to the summer. Many firms are planning their response to auto-enrolment and many are taking steps right now. Financial Advisers are uniquely positioned to help employers fulfil their duties and below we set out some of the ways an adviser can help.
We have identified a number of questions which are key for employers considering how to fulfil their responsibilities in this market.
- When do I have to have my scheme in place?
- Who do I have to enrol into the scheme?
- How much it is going to cost?
- What are my options in terms of providing an eligible scheme?
- Is there anything I can do to reduce the costs?
The great thing is advisers can help an employer answer all these questions right now
When do I have to have my scheme in place?
There are a range of 'staging dates' spread over the next few years. The first firms have their staging dates in October 2012. Between October 2012 and April 2017 all existing employers will have their staging dates, you can find out the most up-to-date information at the following website www.scottishwidows.co.uk/pensionsreform or try the interactive tool available from the pension regulator at www.pensionsregulator.co.uk – to find out the staging date you will need to know the number of employees and the PAYE reference from the employer.
Who do I have to enrol into the scheme?
There are a number of different employee categories but the employer has a duty to automatically enrol all employees age 22 to state pension age into the scheme where they earn above the Personal Allowance limit. Outside of this category all other members of staff will need to be categorised and receive appropriate communications about their rights to join the scheme on a non-automatic enrolment basis.
How much it is going to cost?
There are 4 different ways that an employer can satisfy the rules of automatic enrolment, from looking at a percentage of band earnings to looking at a percentage of basic earnings only. It can be a complicated process to work out which option will best suit the profile of an employers workforce however there are a number of calculation tools which have been developed that allow an adviser to import a payroll file into a calculator and which will asses the costs to the employer of meeting his pensions reform duties. The tools work for employers who have current schemes and employers who have no schemes and you can access one that will produce a report which can be used with employers to illustrate the costs of complying with the new rules at www.scottishwidows.co.uk/pensionsreform
What are my options in terms of providing an eligible scheme?
Many different types of pension scheme can be used from Defined Benefit schemes to Stakeholder pensions plans. As a rule of thumb Life Office schemes are most likely to be available where there are at least 5 members and an average contribution per member of more than £100 per month – anything smaller than that – and there are an estimated 800,000 employers who employ 5 people or less – are likely to be best suited to Nest, Peoples Pension or Now Pension who have designed plans to meet the small premium high turnover element of the market. Whatever provider is selected the scheme must meet the minimum contribution levels, enable automatic enrolment and have a suitable default investment strategy. All existing schemes should be tested against the pension regulator guidance on eligible schemes to ensure they are suitable to meet the employer's requirements. Remember that for many Employers the final strategy may be a multi-scheme solution with the workforce segmented into different schemes – for more details on segmentation see the may edition of techtalk www.scottishwidows.co.uk/extranet/literature/doc/techtalk-2012-05
Is there anything I can do to reduce the costs?
Employers should look to salary exchange (sacrifice) as a way to meeting the contribution requirements – this will allow some national insurance savings to form part of the overall contribution. The 2011 NI rises have just made salary exchange an even more cost effective way of contributing to pension schemes. The Pensions Regulator has produced a detailed guide on the interaction of salary exchange and auto-enrolment and you can also download a bulk salary exchange tool at www.scottishwidows.co.uk/extranet/tools – the calculator will help with the end to end process of salary exchange – from calculating employer and employee NI savings en masse to producing letters for individuals to agree to salary exchange.
One of the most common questions advisers ask is why should employer's act now, rather than waiting until the staging date comes around?
The starting point here is that the market is already seeing a huge uptake in group pension business – many employers are reviewing whether their existing provider is the right provider to use as their automatic enrolment provider of choice. Some providers are no longer in the market and every existing scheme should have an audit as to the suitability of the current provider to be the automatic-enrolment provider. In some cases where the workforce is diverse and the scheme profile would radically change by enrolling the workforce not currently in the scheme the incumbent provider may not accept the rest of the workforce into the scheme on current terms or any terms. It's as well employers start to discuss the options available to them with their existing providers so they can plan for the change.
Other Employers consider they want to get their house well in order before their staging date comes around, to avoid the last minute rush to get schemes in place and the risk of fines for non compliance within the timescales set. Remember staging dates are not the point to start the process but the point at which the process should be more or less complete.
Alongside the deadline above we also have the RDR changes. Post 2012 commission will not be available on new schemes written, we move to a world where employers will have to pay fees or use consultancy charging. At this point consultancy charging is in the embryonic stages but the fact of the matter is with automatic enrolment schemes the bulk of the business will be regular premiums. If an employer does not agree to pay a fee it becomes more difficult for an adviser to get paid upfront for the work undertaken. Where an agreement is made that the adviser is paid from fees extracted over say the first year of the plan for example, those fees will be coming out of the money invested. This could lead to variable allocations for different members of the scheme. Whatever shape it takes it is likely to be a lot more complicated than the current simple approach where advisers are paid for their services from the plan, the clients get all their money invested and the scheme annual management charge includes a payment for advice within it.
For schemes set up prior to RDR the FSA have clarified in paper PS12/3 that new members and increments can continue to come into the scheme on a commission basis.
Post RDR it is likely to be a lot more difficult for employers to share the costs of scheme set up with employees and the incidence of Employers paying fees to advisers in the corporate pension market will rise. This is one of the commercial reasons employers might choose to deal with the Pensions Reform now rather than wait until their staging dates become minutes away.
Advisers can answer most of the questions employers are asking right now and there is plenty more to discuss well before the staging dates come around so let's all take advantage of the opportunity to prepare now – rather than leave it to the last minute.