SCOTTISH employers, like those throughout the UK, are being given no choice but to implement pension auto enrolment for their workforce.
This means providing a suitable company pension scheme, auto enrolling eligible employees and contributing to the pensions of every one of them.
As auto enrolment affects smaller firms, we are seeing pension providers being selective about the companies they will run schemes for. This is because companies with fewer or lower-paid employees aren’t profitable for providers, so providers don’t want their business.
It has been estimated that mainstream providers can support the setting up of around 2,100 new pension schemes each month, although providers are looking to ramp up capacity during 2014. However it is suggested that, at its peak, capacity for around 70 times this amount might be needed.
Auto enrolment creates a number of other potential risks for companies. As well as the actual pension contribution costs, there’s the costs of implementing and running auto enrolment, resources being taken from other duties in the company, recruitment and staff retention risks if other employers “level up” their benefits packages and possible financial penalties and reputational risk if they get it wrong.
We have already seen The Pensions Regulator launch a number of investigations into possible non-compliance from large employers. If large employers, which are likely to have greater resources, access to experts and deeper pockets are struggling to comply, what hope is there for small firms?
With limited options available, many companies could be forced to use NEST (National Employment Savings Trust) as their pension scheme provider, even if it isn’t the best choice. NEST is the government-sponsored pension scheme which has a public service obligation to accept any employer which wants to use it. There is nothing inherently wrong with NEST. However, unlike other providers, it provides no administrative support to employers.
This means that employers using NEST will have to self serve online and receive no support regarding compliance. NEST cannot help an employer budget for the costs of auto enrolment or advise on the right pension contribution structure. It also has no functionality to produce the communications required except for offering standard templates and a huge manual. This creates a problem as many employers will need the support of their provider to ensure they comply with the complexities of their new duties.
Using NEST could also create problems for employees. They aren’t even given a phone number so they can speak to someone if they have any problems or concerns. This approach is unlikely to help employees become engaged with their pension arrangements or value the contributions made by their employers.
A double whammy for firms is that the availability of independent financial advice will also be scarce. Like product providers, independent financial advisers will be severely stretched trying to meet demand and so will need to be selective about who they work with.
The best solution for employers is to plan ahead. The Pensions Regulator suggests this should be at least six months before a company’s staging date. However, some providers argue that 12 or even 15 months is more sensible. Even then, there are no guarantees of a company getting access to a choice of product providers or to independent financial advice, although the sooner they start the better their chances.
Many employers will, understandably, be focused on the day-to-day running of their business, so delaying as long as possible might seem like a sensible solution. However, this approach could prove a false economy. Many employers are still sitting on their hands, when they need to be taking action now.