New figures have indicated that latest pension reform could add as much as 3% to company wage bills. This is as a result of the new auto-enrolment pension regime, bringing both compulsory employer contributions and an associated increase in administration time and costs in order to meet legal obligations. But whilst employers cannot contract out, limit or exclude any of their duties under the new regime, there are a number of steps they can take to help mitigate some of the associated costs – we explore some of these in more detail below.
The new regime
It is a simple fact of life that we are living longer and saving too little to support ourselves in retirement. Auto-enrolment is the Government’s attempt to encourage better private pension provision, especially for people in the lower and middle earning bands, by requiring all employers to be legally required to automatically enrol eligible staff into a qualifying pension scheme and pay minimum employer contributions. Whilst it is only the biggest employers who must now provide a scheme (starting from October 2012), the roll out of the regime is staged, depending on size, with the smallest of employers needing to have a scheme in place by 2017.
The new regime, in summary, requires eligible jobholders to be automatically enrolled into a qualifying pension – provided they are at least 22 years old, under state pension age, fall within the qualifying earnings band and work in the UK. Eligible staff may opt-out if they wish but employers will have a duty to re-enrol those who have opted-out every 3 years.
A challenging time
There is no doubt that auto-enrolment will present a range of challenges for employers in the hospitality industry. Apart from the cost of employer contributions, time and money will have to be invested in planning for new administration systems, communicating with staff and maintaining appropriate records.
Varying eligibility
This is a particular nightmare given the number of part time employees staffing pubs, clubs, restaurants and hotels; eligibility for automatic enrolment may fluctuate depending on variable working hours and overtime, according to seasonable peaks and troughs. For example, you may have waiting or bar staff who generally fall below the qualifying earnings because they only work a few nights a week, but over the Christmas period put in substantially more hours for a month to help you cope with increased demand for parties etc. This could then take them over the qualifying earning threshold and the requirement for auto enrolment kicks in. Administration of the scheme could pose a huge headache, possibly necessitating changes in HR and payroll systems to support the administration of contributions.
Uncertainty over take up
All of this is made more difficult by not being able to fully anticipate the take up by staff and the potential administration and costs involved. According to a survey by Legal & General, it is anticipated that about one third of eligible staff will choose to opt out of the new regime. This is particularly likely amongst lower paid bar workers and the like, who rely on taking home all of their pay instead of saving for their retirement.
Mitigating the costs of auto-enrolment
Calculating likely take up: Carry out an analysis of your workforce to establish eligibility and possible levels of administration and contribution. This will enable you to plan better and decide whether to invest in a new payroll system and guide decisions on the scheme you will provide.
Reducing other benefits: Some employers are choosing to seek economies in their benefits budget to cover the cost of auto-enrolment, for example by scaling back defined benefit schemes or curtailing other benefits. However these steps should be weighed carefully against the risk of losing valuable members of your workforce.
Salary sacrifice arrangements: On a more positive note, salary sacrifice arrangements for pension contributions can produce savings for employers via reduced national insurance payments, thereby mitigating some of the cost of auto-enrolment.
Review your pension scheme: Large variations in the charging structures abound from one pension scheme provider to another. The entry of new providers into the market may mean there are opportunities for employers to negotiate better deals on schemes.
Engagement: Although employers cannot save costs by inducing staff to opt out of auto-enrolment, employers do have a choice about the extent to which they actively encourage staff to join a scheme. However, remember that an attractive pension scheme can be a powerful recruitment and retention tool. Engaged staff who are satisfied with the package on offer from their employer are likely to be more productive – so effectively communicating the scheme and looking at the level of contributions you are willing to make could save overall recruitment costs by retaining good staff.
Harness technology: There are many payroll systems that are able to monitor trigger points for eligibility for staff where their pay is variable and dips above and below qualifying earnings thresholds. Investment in these systems may save costs in the longer term, as they will save time in manual calculations as well as eliminating potential mistakes, particularly given that staff must be opted back in every 3 years and anniversary dates will vary according to when staff joined the business.
Efficient opt-out system: Employers can help themselves by ensuring they have an opt-out system that allows staff to join and leave in an efficient way. This will be of particular value to employers with a high turnover of staff or lots of short-term workers.
Timing: How and when employers enrol individuals can also affect costs. Small gradual changes to a scheme may cost more. Some employers plan to go straight in at the maximum contribution level of 3% to avoid the upheaval of staging, with associated administrative costs. As this will also involve employees having to contribute at a higher level, it may have the effect (whether intended or not) of putting some employees off and choosing to avoid the cost altogether by opting-out.
Be fair: Avoid the risk and cost of Tribunal claims – do not treat any worker unfairly by subjecting them to a detriment or dismissing them in relation to auto-enrolment (for example, threatening the removal of a promotion opportunity if they do not opt out). In addition, staff will be able to whistle blow if they believe their employer is failing to comply with this legislation.
Making it work
Whilst there are inevitable costs to be absorbed, it is to an employer’s advantage to make the scheme work in a way which offers their staff the benefit of a future pension. The risk of not doing so is a mass opt-out, when there is every chance that the Government will move to a mandatory scheme, where workers (and employers) no longer have a choice in the matter or the cost.
