AUTO-ENROLMENT - HOW HARD CAN IT REALLY BE? - Why have so many companies still not established a plan for how they will deal with the impact of auto-enrolment?
By Ian Luck
The legislation was enacted in 2008 and all the steps to ensure its successful roll out have been put in place, thousands of companies have already reached their staging date, established a qualifying workplace pension scheme and auto-enrolled their staff. All employers with as few as 50 staff will already have been issued with notices from TPR confirming when their staging dates are. There is no doubt that at some point in the near future you will be required to do the same.
Another IT project
Auto-enrolment realistically is not a pensions' issue. Of course the contributions will end up being paid into a pension scheme but the processes would hardly be different at all if the receiving vehicle were the member's salary, an ISA account, or something entirely new, introduced for the purpose. Pensions auto-enrolment is really another IT project and will make the recent Real Time Information requirements seem easy in comparison.
Have you budgeted for it?
Perhaps the belief is that the payroll systems will do all the work. However, we have yet to come across any payroll system that provides a complete solution, nor one that comes without additional cost.
The data output from some payroll systems may not be in the format required by the pension provider. You need to ensure that you have built enough time into your project plan to test this process. You would not expect to 'go live' with any other IT project without testing the data transfer. Last minute adjustments to processes or the need to include additional data-mapping programs will be costly.
If your payroll provider does undertake all the data processing that you need to carry out, will they also undertake the extensive communications exercise that is required? Even if they do, is that really their forte?
Manual intervention within the payroll process might be possible for smaller organisations but carries risks. There is nothing more emotive or crucial to the running of a business than to ensure the payroll function runs smoothly. If you do include manual intervention to cope with the auto-enrolment requirements, please make sure that it is only temporary.
Existing pension plans may not be right
The point is often made that as there is an existing pension plan, the company is well placed for auto-enrolment. Possibly, but do the contributions meet the minimum criteria? Does it have a default fund? Do the correct levels of governance exist? Are new joiners required to complete an application form? If the scheme has been up and running for a while will the provider support the plan for auto-enrolment purposes? We have come across a number of examples of policies that are not supported – forcing the employer to change the pension scheme, sometimes within a short timescale. In the post RDR world, help to ensure those changes happen smoothly will not be covered by commission payments. Have you allowed for that potential cost?
Make a choice
Employers may well face an inability to secure their preferred provider. With over a million new schemes required, the providers do not have to accept any schemes that they are not entirely happy with, whether that is because of low contribution levels, or lack of commitment being shown by the employer. Providers are now refusing to offer terms in every case. Yes there is always National Employment Savings Trust but that is 'Hobson's choice' and who can actually guarantee that NEST will be able to cope with the vast numbers of schemes that will be placed with it? That is not to say that NEST is a bad choice, but do make it a choice rather than just being swept with the flow.
Do you only pay your employees basic salary, or other payments, including commissions, bonuses, and overtime? If you are using 'qualifying earnings' as your basis for making contributions, you probably already know that these have to be taken into account. However, what about meal allowances, shift payments, or relocation settlements? Do you treat payments to someone who takes cash in lieu of a car the same as someone who is in receipt of company car? There is no definitive list yet and this is something that will probably be developed in the courts over time, but are you going to take the risk of falling foul of the regulations?
TPR has confirmed that between October 2012 and the end of January 2014, it had investigated some 134 breaches of duty. If the larger organisations, those that had the earliest staging dates, are finding it difficult to comply, then how are smaller employers going to cope?
However, all is not lost. We have an answer to the problem. It is effectively a packaged solution that we have negotiated with a leading pension provider. We have undertaken the due diligence and maintain close watch over them. All the employer has to do is follow a few simple steps to ensure they have in place a recognised qualifying workplace pension scheme into which they can auto-enrol their staff via the online portal. It deals with employee assessment, issues the right communication at the right time to the right people, and handles the opt-out process. It ensures that HR departments can concentrate on employment and not pensions and ultimately lets employers run their businesses.
AUTO-ENROLMET AND PROTECTION – BEWARE! Auto-enrolment will continue to be rolled out to all UK employers and their staff ('eligible jobholders') over the next few years.
by Julia Ridger
The definition of eligible jobholders captures directors and other senior staff who have a contract of employment with the company.
Employers are required to automatically enrol all eligible jobholders into a workplace pension scheme. Once enrolled, eligible jobholders can then choose to opt out within one month if they do not want any contributions to be paid on their behalf.
Anyone with enhanced protection, fixed protection 2012 or fixed protection 2014, must be aware of protection being breached as a result of the employer complying with auto-enrolment duties.
If you fail to 'opt-out' in time, you will automatically lose what protection you have.
THE VALUE OF A PROFESSIONAL INDEPENDENT TRUSTEE - Providing value to defined benefit members
By Julia Ridger
Neither the corporate sponsor nor those involved in the pension scheme should consider the apppointment of a professional independent trustee to a defined benefit pension scheme as just an added expense. A professional independent trustee can provide significant value for the scheme members through working with the existing trustees and even the scheme sponsor.
Supporting existing trustees
The existing trustees may need support to create and maintain an integrated funding and risk management plan, or they may just not have enough time or experience to deal with the pension scheme. They may also need to keep their trustee knowledge and understanding up to date, particularly in relation to investment.
A wider perspective on performance and cost
The scheme may have existing adviser performance and cost issues that need managing. With knowledge of the industry, the adviser market and service providers, a professional independent trustee will be able to review the existing advisers and if need be, align more appropriate advisers to the type and size of scheme providing cost savings.
Finding a way through
A professional independent trustee can lead negotiations and ensure there are no conflict issues. Conflicts of interest are a particular issue for employer-nominated trustees during pension scheme funding and recovery plan negotiations, or during a corporate deal that might impact the strength of the employer covenant. It is important that the company does not have undue influence on the trustees' decisions in these circumstances or when there are fundamental changes to the pension scheme benefits.
A positive investment
Sponsors of small to medium size defined benefit schemes may be particularly sensitive to paying fees for a professional independent trustee to support the existing trustees and trustee boards. However, making such an appointment can offer both the employer and lay trustees peace of mind to the existing trustees and trustee board that they are fulfilling their duties and for the employer as the sponsor that the scheme is being managed responsibly by the trustees. It can be a positive investment both emotionally and financially for all.
Smith & Williamson Trust Corporation Ltd provides independent professional trustee services particularly to small to medium sized defined benefit schemes with up to 1000 members, and under £50m in assets.
How we can help
We are appointed to assist existing trustees and trustee boards to ensure the efficient running and administration of their defined benefit pension schemes, while offering support in establishing good governance procedures. We work as a team with the existing trustees, bringing our professional knowledge and expertise while at the same time recognising the most valuable role the existing trustees have to play, their knowledge and history of the scheme and their relationship with the current members.
We can also be appointed as sole professional trustee to the pension scheme, if the trust deed and rules allow, where the existing trustees wish to resign or retire from the scheme.
We have experience and knowledge within the financial services industry in general, which helps us to make informed decisions in conjunction with other professional advisers. This enables us to ensure that we are acting in the best interest of all members under a scheme.
INDIVIDUAL PROTECTION 2014 - Securing your personal lifetime pension allowance
By Julia Ridger
Following the reduction of the lifetime allowance from £1.5m to £1.25m, anyone with total pension savings in excess of £1.25m as at 5 April 2014 has until 5 April 2017 to elect for individual protection 2014 to secure their personal lifetime allowance.
Securing individual protection 2014 will give the individual a personal lifetime allowance equal to their fund value at 5 April 2014, subject to a maximum of £1.5m.
Unlike fixed protection 2014, which closed to applications on 5 April 2014, further contributions will be permitted. Individual protection 2014 could, therefore, be appropriate to those who decided to remain active members of final salary schemes or who continue to receive contributions to money purchase arrangements.
An individual protection 2014 application can be made alongside some existing forms of protection including enhanced protection, fixed protection 2012 and 2014. However, those with primary protection or enhanced protection with (dormant) primary cannot apply.
The application for individual protection 2014 can be complex, particularly for those with multiple pensions or those who have staggered drawing their benefits over time, as the value of all plans at 5 April 2014 must be calculated in a prescribed manner.
Pensions savers are encouraged to seek early advice on this issue.
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We have taken great care to ensure the accuracy of this newsletter. However, the newsletter is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. © Smith & Williamson Holdings Limited 2014. code: 14/989 expiry: 28/02/15
