The cost of workplace pension reform

WITH THE government’s Workplace Pension Reforms looming, UK businesses of all size should ensure they are adequately prepared to adhere to the responsibilities and requirements being placed upon them.

For the largest businesses – those employing more than 120,000 employees – there is less than a year to go until they are required to comply with these duties. While these businesses will have been carefully planning a compliance strategy for some time, the process will have been complicated by the lack of clarity surrounding the reforms’ finer details, which remain under consultation.

Although for smaller businesses the timescale is longer, it is important they begin planning to ensure they are fully prepared by their implementation deadline (known as their ‘staging date’ in auto-enrolment terminology).

The wide-ranging impact and complexity of the Workplace Pension Reforms will mean that, for many businesses, the responsibility for ensuring compliance will fall across a number of departments – be that finance, HR or payroll. It is therefore key that these departments work closely to determine an appropriate course of action.

Apart from the need for building suitable systems and processes that are essential for businesses to comply with the reforms, the most significant impact is the financial implications the new requirement will have and how best to manage these.

When considering cost, it is important to make a distinction between the direct cost of auto-enrolment (the potential increase in pension contributions) and the indirect costs (the operational costs).

Direct costs
By now, most businesses will be aware that, under defined contribution pension schemes, the total minimum required contribution required by auto-enrolment will be 8% of qualifying earnings (£5,035 to £33,540 in 2006/2007). Of this 8%, employers must contribute at least 3% of qualifying earnings, with the requirements being phased in from each business’s staging date. This means the full burden will hit all businesses from 1 October 2017.

However, these minimum requirements become more complicated where businesses elect not to use qualifying earnings to calculate pension contributions. In these instances, the total minimum required contribution will be determined by the definition of pensionable salary used, and it will be up to the business to self-certify that their pension scheme meets one of the right requirements.

While this complicates the process, cost modelling of the various contribution options will allow businesses to identify the cheapest solution available. Where businesses do not wish to simply offer the cheapest option, this modelling will allow them to test the resilience of the existing structure.

Indirect costs
Perhaps a more significant hurdle to overcome during the planning process is to accurately define the workforce and the responsibility the business will have in relation to each employee.

From a financial planning point of view, the main category of worker that businesses will need to consider is the Eligible Jobholder, as they will be eligible for automatic enrolment and employer contributions. This does not, however, mean the other categories should be ignored.

First, Non-eligible Jobholders have the ability to opt into a scheme should they wish, in which case the employer will have a duty to pay contributions in line with the minimum requirements. The same is not true of Entitled Workers, who can opt into a scheme but the employer has no duty to pay contributions.

Second, a change in circumstances could see a worker move from one category to another, which would change the responsibilities of the employer in relation to that worker. This could be as a result of a birthday or, as is common across many businesses, as a result of fluctuating pay pushing earnings above the threshold and/or trigger point.

While these elements do bring complexities to financial planning for auto-enrolment, they are at least quantifiable. Perhaps a more difficult issue to consider is the inevitable impact these reforms will have on the operational side of business, which will likely require significant additional resources.

Both the internal administration processes and the payroll procedures will need to be streamlined to ensure that businesses comply with the strict timescales specified in the reforms. Existing benefits will have to be reviewed and a significant planning exercise to ensure all the relevant producers are in place will be required.

These issues not only apply to the initial launch of auto-enrolment, but will also need to consider the ongoing responsibilities that businesses will have towards their employees to fulfil their duties; for example, monitoring earnings.

These undertakings will all come at a cost and it is important for business to be aware that failure to comply will result in financial penalties. A Fixed Penalty Notice of £400 will initially be issued, and where this is ignored an Escalating Penalty Notice ranging from £50 to £10,000 per day, depending on employer size, will be issued.

Nick Griggs is head of corporate consulting at Barnett Waddingham