pensions 23 Hidden costs of auto-enrolment
Auto-enrolment legislation will soon become a requirement for many businesses. While employers clearly need to consider their pension strategy and how they will fulfil these new requirements, it is also important to consider the impact auto-enrolment will have on other employee benefits, particularly any group risk policies such as group life assurance, group income protection and group critical illness.
With policies such as the above, membership or benefits are often linked to the company pension arrangement. For example, some schemes only allow employees to be covered for benefits if they have joined the company pension arrangement. Others will provide a higher benefits for pension members than for non-pension members, for example, a multiple of salary of four times salary for pension members and two times salary for non-pension members. Any businesses which structure benefits in this way will need to consider the implications auto-enrolment will have on the cost of providing these benefits.
Undoubtedly, auto-enrolment legislation will increase the number of pension scheme members a company has and if other benefits are linked to pension scheme membership it follows that these costs will increase also.
There are a number of options that could be considered to help mitigate or minimise the financial impact of this:
1. Close membership
With this option, the current membership would be ring-fenced so that only pension members who joined prior to auto-enrolment would be entitled to receive the benefit (or higher benefit if applicable). However, this course of action may cause issues in the future, particularly if, for example, a senior employee joined the company for whom these benefits would be required.
2. Restrict membership
This option may be used if, for example, a company was considering a two-tier pension strategy. This might involve offering a more
generous company pension arrangement to one sector of employees and a lower contribution basis (perhaps to NEST or another low cost multi-employer scheme) to others. With this example, eligibility for life assurance or income protection might be re-defined so that only those in the company pension arrangement were eligible.
3. Change eligibility
It may be that it is appropriate to break the link with pension scheme membership for these benefits going forward. Instead, you could consider an alternative basis on which to define entitlement, for example, by grade or job description.
4. Alter benefit basis
Finally if none of the above are possible, it may be that in order to contain costs, the benefit structure itself needs to be reconsidered. This is most likely to be applicable to an income protection scheme where options such as an increased deferred period, limited payment
What pension options do employers
have for auto-enrolling? After establishing their ‘staging date’ employers need to decide on suitable pension schemes to use for automatic enrolment (AE), writes Dion Prideaux-Reynolds of Griffins
Different schemes can be used for different categories of employees, for example senior staff enrolled into an in-house workplace pension and other employees enrolled into a master trust.
It is important that employers allocate sufficient time to select an appropriate qualifying scheme. The research and selection process can be lengthy and likely to involve statutory consultation, which has to be factored into the process.
There are a number of routes that can be pursued depending on the existing arrangements, the type of business and staff demographics such as age profile, casual workers and staff turnover.
If the scheme is defined benefit (DB) it will need to meet the specific DB qualifying criteria.
However, it is likely that new arrangements established for non-pension members will be defined contribution (DC).
Existing DC arrangements, such as group personal pension plans may be certified subject to the qualifying rules. There are five options for qualifying for pensionable earnings.
Schemes need reviewing to ensure that they meet the requirements. Most schemes will require amending or replacing. Agreements will also have to be in place between the pension provider and the employer and between the provider and the jobholder.
If there are no suitable existing schemes one will have to be established or one or more of the master trusts used. The following are some of the DC options available to employers:
THE BUSINESS MAGAZINE – THAMES VALLEY – APRIL 2013
period or less generous definition of disability could all be considered as ways to reduce the overall costs.
Where risk benefits are linked to pension scheme membership, the above options should be explored and the implications fully considered. When considering alterations to any benefit it is important to consider any promises made to employees, particularly if these are contractual. Clear communication will be required if benefits are to be altered in order to ensure that employees are both aware of the cover they have in place and that the employer‘s liability is clearly defined.
Details:
Sarah Walker, 0118-9734434
sarah.walker@onepc.co.uk
Sarah Munro, 0118-9734435
sarah.munro@
onepc.co.uk www.onepc.co.uk
As there are a number of factors to consider when selecting a provider such as financial strength, charges and default investment funds, employers should take professional advice leaving plenty of time to decide on and test the arrangements.
Details: Dion Prideaux-Reynolds
dion@griffins.co.uk www.griffins.co.uk 01635-551333
www.businessmag.co.uk
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