From 1 October 2012, all employers will be required by law to enrol eligible employees into a qualifying pension scheme.
Auto-enrolment duties are being phased, based on the size of employer – starting with those with more than 120,000 employees on 1 October 2012.
The company will need to pay minimum contribution levels (starting at 1%, increasing to 3% by 2017), and there are fines for non-compliance.
Gurmukh Hayre, Head of DC Solutions at KPMG, says:
“Companies need to start thinking about auto-enrolment at least 18 months before their staging date. They should be putting together an internal team, made up of people from finance, HR, IT and payroll, to work out what needs to be done.
“Employers with existing pension schemes in place need to look at their duties with regard to auto-enrolment – what they currently pay, and what they will be required to pay – and carry out a gap analysis to assess whether the scheme in its current guise would be compliant.
“Then employers need to think about the consequences of auto-enrolment, such as how many people are not in the scheme and the impact will be in terms of operational costs when they are brought in.
“Essentially you need to ask: is this the right scheme to use in the next five, 10 or 15 years, or should I be looking to revamp it to make it better able to cope with auto-enrolment?
“If you’re an employer, you need to make sure your payroll and HR systems are fully integrated into whatever pension scheme is being used.”
Minister for Pensions, Steve Webb said:
“It is entirely legitimate in a time when the economy is in sluggish growth that government looks at all the things it does that have an impact on business.
“But I am absolutely committed [to auto-enrolment]… With auto-enrolment we’ve got a chance, we’ve got an example, of where the basic architecture has been talked about for years, legislation was passed years ago – we’ve refined it but I think the principles have stayed the same.”
Bill Galvin, Chief Executive of the Pensions Regulator, said:
“Workplace pensions law is changing and every employer will have to act. Automatic enrolment will not affect the bulk of small businesses until 2015 or 16. We nevertheless urge all employers to take some time right now to look up their automatic enrolment duty date so that they know when the new law will apply to them – and make a note in the diary to take action in plenty of time.
“The regulator will also write to all UK employers at least twice in the lead up to their duty date.”
Phasing in from 2012, employers must take responsibility for enrolling all eligible UK employees into a qualifying pension scheme, and pay a minimum contribution. This will inevitably lead to increases in costs and administrative burden, but if you do not comply, you will be liable for fines. Implementation challenges include:
- Financial impact – understanding all associated costs, including set-up, ongoing administration and escalating contribution levels (both employer and employee) and the impact these have on your business.
- Current pension plan design – reviewing this to make sure it fits with your short and long term business and HR objectives.
- HR & Payroll systems – capability to meet demands of both initial implementation and ongoing compliance.
- Communication – rolling auto-enrolment out to your employees will require a robust communication plan to ensure compliance and employee understanding.
- Timescales – sufficient time to plan and identify changes required to ensure compliance ahead of the fast approaching deadlines.
What does KPMG recommend?
If you haven’t put auto-enrolment on the agenda yet because you think you still have time, you need to be aware that planning and preparing can take at least nine months.
KPMG has developed a checklist, which has been designed to help start the process:
- How many of your employees are currently not enrolled in a pension scheme?
- Will your existing pension arrangements satisfy the statutory minimum?
- Should you provide the same scheme and contribution rates to all members, or do you need to have alternative structures/contribution tiers?
- What are your peers/competitors offering?
- What proportion of opt-outs might be expected?
- What ongoing administrative/management burden may this create?
- Are your IT/Payroll/HR systems joined up and ‘fit for purpose’?
- What is the impact on high earners?
- Should you have an alternative approach?
- How can you mitigate the increase in cost?
It is important to consider all of the above questions, and to ensure that your business is prepared for the imminent changes. We have also developed a four-stage process, which can help businesses to identify, evaluate and implement an auto-enrolment strategy that works.
How can KPMG help?
KPMG’s pensions team has developed a clear approach to help clients plan for and manage the impact of auto-enrolment. We pride ourselves on giving clear direction regarding plan design investment strategy, governance and cost efficiency, all of which is underpinned by our auto-enrolment technology solutions.
We are also able to offer specific sector expertise, to ensure that your approach meets all of the challenges that are unique to your sector.
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