It is impossible to overstate the transformative effect auto-enrolment has had upon the pensions landscape since the first companies reached their staging dates two years ago.
In fact, the fast-tracked evolution of workplace pension implementation, management and employee communications represents the biggest change the market has seen in decades.
It therefore goes without saying that the learning curve for HR professionals, employers, pensions specialists and the industry as a whole, has been long and steep.
Overall, the market has so far met this massive challenge head on and somewhat successfully. However, and to use an old cliché, the bad news is that ‘this is only the tip of the iceberg’.
Auto-enrolment continues to throw up a lot of new challenges to HR and pensions professionals. And as more and more medium and small businesses approach their staging dates, the strain on the industry will be pushed to new limits, particularly for those businesses which do not have an internal HR, benefits or pensions resource.
Between April 2015 and January 2017, approximately 598,000 UK businesses will stage, representing the largest group of companies to auto-enrol to date.
Unsurprisingly then, after the first two years, some have voiced concern about the industry’s ability to cope, not only with the sheer amount of auto-enrollers, but with re-enrollers and those reviewing their schemes.
Many companies have turned to IFAs and accountants for support, and while they can often provide assistance in aspects such as sourcing a scheme and conducting assessments, they are unlikely to be able to help with the day-to-day scheme administration and communication.
It’s clear that the experience of auto-enrolment has been a unique challenge for almost every company and it goes without saying that HR professionals will have noticed that auto-enrolment can take over your day, your job role and even your life.
Much still needs to be done to standardise the process, especially in anticipation of far greater numbers. So looking back at the last two years, what have been the key learnings from companies on the ground?
It has become evident that more Government support is needed to ensure companies fully understand the rules of auto-enrolment and are kept up-to-date with changes in such a fast-paced sector.
On the other hand, it is also true that individual firms need to place far more emphasis on ensuring their allocated teams take responsibility for staging.
A number of large firms have been caught out by a simple lack of understanding of key detail such as when contribution levels need to change or knowing who is eligible for the scheme and who isn’t.
In addition there has been confusion over the use of qualifying earnings, the opt-out process and especially employee communications.
Feedback has highlighted that many employers were not aware of their responsibilities in relation to staff communication, or the related legislation. It is important to remember it is the employer’s responsibility to write to each member of staff to inform them of auto-enrolment and any impact of contributions. You cannot, under any circumstances, actively encourage your staff to opt out.
Company structures have also presented employers with a major challenge, especially in those cases where a firm has been acquired or has merged. It’s absolutely fundamental to understand your company structure, and how that will affect your staging date and contracts of employment.
If these challenges have been an issue for larger firms, it could present a worrying trend as smaller firms approach their staging date.
Payroll and data
One consequence of auto-enrolment has been the blurring of lines between payroll and pensions professionals. This process has seen many payroll employees overstretched in terms of time and knowledge, often resulting in a solution that is not effectively meeting their business needs.
Arguably, each professional should focus on what they are experts in, so for payroll, they should remain concentrated on assessments and deductions, rather than pensions.
It sounds simple but it’s vital to spend time with the department to help them understand the importance of key changes.
Another notable problem witnessed by pensions teams is that data from payroll professionals and their pension provider often arrive in a number of different forms, creating confusion.
Feedback from companies has shown that having all of your data from payroll, HR and your provider in one specific format and validating it before it is input into a system, will help ensure it is fit for purpose.
For many HR and pension professionals the last two years have all been about getting through their auto-enrolment staging date successfully.
But, as the Regulator starts to bare its teeth and the changes to defined contribution (DC) pensions mentioned in the Budget and Queens Speech start to come in to force, it is now more important than ever to fully understand whether your scheme and the processes you have put in place to manage it remain compliant.
So how does the future look in the pensions landscape and what are the upcoming changes that UK employers need to be aware of to ensure they are prepared?
Charge capping of Annual Management Charges (AMCs)
In April 2015, all AMCs will be capped at 0.75 percent. For businesses and employers, this means that if your current scheme has annual charges above this, it will no longer qualify as an auto-enrolment pension.
Importantly, the average AMC in the UK is currently 0.8 percent, so many businesses will need to review the schemes they have in place, even if they have been specifically selected for auto-enrolment.
Removal of Active Member Discounts (AMDs)
A year later, in April 2016, AMDs will be completely removed. While historically, these have been heavily used, the decision has been taken to scrap them altogether.
Again, businesses will need to explore their current auto-enrolment scheme, and if AMD is a feature of their workplace pension, then it will need to change to remain compliant. For many, this will mean a new pricing structure which will be written into their contract with their provider.
However, employers should check whether this contract includes a change in law provision which will allow them to renegotiate, or an option to end the contract early should a provider refuse to change terms.
Removal of member borne commission
From April 2015, no qualifying scheme can contain a consultancy charge structure and by April 2016, this restriction will extend to member borne commission elements.
Previously, the Retail Distribution Review had introduced a ban on providers paying commission to advisers on new Group Personal Pensions and Group Stakeholder Pensions, however, this announcement goes a step further by removing every aspect of consultancy charging or commission remuneration from any auto-enrolment qualifying scheme.
For businesses, the impact of this could be substantial. Firstly, employers will need to review their existing schemes and if this is a feature, change is a prerequisite. Secondly, firms will now be required to pay an upfront fee for services which had previously been covered by the commission.
Although an April 2016 deadline seems quite distant, businesses should be aware that many providers will look to implement this change ahead of this date.
The start of re-enrolment
For larger businesses, auto-enrolment began in October 2012, and with re-enrolment occurring every three years, these companies will need to look at this now.
The significant change that auto-enrolment presented two years ago meant that many companies scrambled just to get a qualifying auto-enrolment scheme in place to meet their staging date. For some, it’s fair to say that not much thought was given to the implications and ongoing management of the selected scheme, the priority at that point being, just to stage without penalty from The Pensions Regulator.
Two years on, those support options may not be proving sufficient so now is the time to look at this process.
The auto-enrolment landscape is most certainly going to continue to change but, from the past two years’ experience, it is clear that foresight remains one of the most important considerations.
As soon as a firm begins the process of preparing for their auto-enrolment staging date, they need to be focusing even further ahead on how they will ensure their schemes remain compliant and well audited post staging and indefinitely.