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
Auto-enrolment rules not being met
Thousands of employers in the south do not meet the new pensions auto-enrolment rules which are being phased in, it has emerged.
”Many employers think that, because they already operate a pension scheme, they will automatically meet the new requirements. But this is not the case,” explained Chris Murray, an employee benefits specialist and director at Smith & Williamson, the accountancy and investment management group, within the south coast office in Southampton.
”We expect that employers with 50-250 staff are those who are most likely to unexpectedly fall foul of the new rules. They will have to, at least, review their scheme and employers who, for example, do not make contributions on behalf of qualifying staff could end up being fined.
”Similarly, those who do not explain the implications of
until this year or possibly later, it typically takes a year or longer to get these things up and running with minimum disruption to the business.”
‘We expect that employers with 50- 250 staff are those who are most likely to unexpectedly fall foul of the new rules‘
Chris Murray
auto-enrolment to employees or make the scheme available to all staff could be in trouble. We anticipate that one of the main issues facing employers will be which pension scheme or schemes to use. NEST (the National Employment Savings Trust) will be available to all employers, but this may not be the most appropriate option.
”While smaller firms do not need to have their systems set up
THE BUSINESS MAGAZINE – SOLENT & SOUTH CENTRAL – APRIL 2013
The Government is bringing in auto-enrolment in order to target employers who are not offering a qualifying workplace pension scheme and employees who are not saving for retirement. It is intended that everyone aged at least 22 and under pensionable age earning more than £8,105 will be eligible for automatic enrolment, although contributions will then be based on earnings between £5,564 and £42,484.
According to the Department for Work and Pensions, only
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
11.6 million out of 30.4 million working age people are saving for their retirement.
In response to the myriad decisions facing employers, Smith & Williamson‘s pension experts have launched an online tool which uses basic information about an employer‘s scheme. It enables Smith & Williamson to assess what an employer needs to do, and by when, in order to meet the new rules. Applicants will receive a bespoke report free of charge.
‘NEST (the National Employment Savings Trust) will be available to all employers, but this may not be the most appropriate option‘
Under the new pension regime, employers who do not have a pension scheme will need to set one up which will mean selecting an appropriate scheme and making sure all the necessary criteria are met.
www.businessmag.co.uk
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