Auto Enrolment – Are you ready?
Last week, Davidson Asset Management in conjunction with EP hosted a dinner and round table discussion on the factors afflecting companies going through auto-enrolment. Many companies are hitting their staging date (when their employees have to be enrolled in a pension scheme) this year with little to no preparation. Other companies that have gone through the process have been surprised at how few employees are opting out with the large majority choosing to stay within the scheme their company provides. This has shaken many operations that had budgeted for far less contributions than their actual obligation. “I’m in”, are two words that have been difficult to miss in the last 2 years, with them taking up prime advertising space at bill boards, bus stops and on TV featuring the likes of Karen Brady and Theo Paphitis. These have been people’s first point of contact with the concept of auto enrolment. From October 2012, the larger companies across the UK are required by law to offer their workers a workplace pension. But what has been the effect of this on the businesses?The dinner was held at the fascinating, history-clad Churchill War Rooms, the bunker that sheltered Churchill and his government during the Blitz. It set the tone for an evening of discussing strategy, finance and industry experience.
The event was attended by a number of different people from Industry, across various disciplines; HR, Operations and Finance, and Pensions Providers. Some of the guests had staged (the point when auto enrolment duties come into force), some of whom were in the process of staging and some of whom were yet to stage. The evening provided a platform for individuals to share their experiences and ask questions.
Russell Davidson, MD and founder of Davidson Asset Management, a firm of employee benefit consultants, commenced the discussion by talking about the importance of effective planning and how many companies have underestimated this, which has led to a number of issues and a sour taste in peoples’ minds. A discussion followed from two different companies that have successfully staged sharing their experiences. The first, who has 700 employees across 9 sites, ran a number of workshops during various stages to communicate the information to their staff, this resulted in a low opt out rate of 5% and a smooth transient. The second company, who has 10,000 workers across multi-national sites had to adopt a different approach. From a cost and time perspective, workshops were not a feasible option for them. They instead hired a dedicated project manager, who in worked with HR to communicate this information to all its employees in a manner that was appropriate for their organisation and business model. They too had a low opt out rate of 7% and a very smooth roll out. Two very distinctly different routes, but advantageous in their own right. Both agree that planning plays a huge role in successful staging.
“The opt out rate has been surprising low”Statistics have shown that opt out rates have been a lot lower than expected, 10% is a figure that has been quoted recently in the press. Most agreed that this was due to the fact that the minimum contribution of 1% is not a significant amount for many workers and when the minimum increases to 5%, we will witness higher opt out rates. The guests were divided on this, as some believed that if the rates are increased gradually, then employees will not see it as such a large deduction in their pay each period. Others felt that this rate was skewed, as it wasn’t representative of all businesses, as only the larger businesses have staged and once the smaller businesses, the single employee businesses are required to stage, we will witness a higher opt out rate.
The demographics of individuals opting out has been interesting, with a higher proportion of older employees deciding to opt out. The opt out rate for the over 50s was 50%, compared to 5% for the 25 year olds. Reasons for this being that the older employees felt it was “too late” to make a sizeable difference to their pension pot. For the 25 year olds, a mixture of them being “pushed” to contribute by their parents and them witnessing first hand existing pensioners struggle on the state pension, have been the drivers encouraging them not to opt out. The high rate of opt ins (workers who are between 16 and 75, but earn between £5,668 and £9,440,not automatically eligible for auto enrolment, but have the option to be enrolled) have shocked many businesses.
“Compulsion will come”
The majority of the attendees were in agreement the natural progression was compulsory contributions, similar to other countries. In Australia it is compulsory for workers to contribute 10% of salaries to a pension scheme and in Iceland, everyone in employment, even students working part time, are legally required to contribute to a pension scheme.The evening provided much food for thought and thoroughly had the guests engaged. The main conclusions were:
- Don’t underestimate the importance of proper planning
- The importance of payroll system capability
- Don’t underestimate the resource required
- Communication is key
- Budget accurately for Opt Outs and Opt Ins
Due to the success of the evening, Davidson Asset Management will be hosting another dinner in May to aid companies coming up to their staging date. If you would like to learn more about the evening in May, please contact
Arlene McCaffrey at EP.