Staff who opted out of an auto-enrolled pension three years ago must now be re-enrolled. This may be a good time to review your scheme, as Jack Jones explains
UK employers are going to have to get used to automatic re-enrolment. The whole strategy has taken some time to roll out, but by early next year the final companies to hit their auto-enrolment staging dates will have to start putting all eligible workers into a pension scheme.
By this stage, however, the biggest firms will be gearing up for their second round of enrolment.
This involves sweeping up any staff who have opted out of the scheme and putting them back in once every three years. The government’s logic is that those who previously rejected the chance of saving into a workplace pension could succumb to inertia the second or third time round.
Given the low level of opt-outs (more than 90% of those auto-enrolled into schemes have stayed in) re-enrolment won’t affect too many people. But employers have to ensure they go through the process correctly, and show their compliance.
Re-enrolment also presents a chance for firms to review their auto-enrolment schemes. The market is advancing rapidly and downward pressure on costs, improved communications and the impact of pensions ‘freedom and choice’ mean that a scheme selected three years ago may no longer be the most appropriate option.
What do I have to do?
Three years after their initial staging date, companies must re-enrol staff who opted out of the workplace pension at or above the statutory minimum level of contributions. There is a six-month window three months either side of the anniversary, and firms do not have to re-enrol recent joiners who have opted out within the past 12 months.
SimplyBiz Group workplace solutions director Tom Nall says: “Good records are vital so that opt-outs and ceased members within 12 months of the re-enrolment date aren’t swept up, and to ensure relevant communications land with the right staff.”
He also warns firms against assuming that people who have declined to stay in a scheme once will drop out again. NEST Insight’s 2015 report Taking the temperature of auto enrolment shows fewer employees intend to opt out second time round.
Employers cannot postpone re-enrolment, and will have a single re-enrolment date, regardless of how many payrolls they run. So firms will have to check their payroll can handle re-enrolment, and should look for opportunities to take out complexity where possible.
Their duties done, employers will have to complete a declaration of compliance on the Pensions Regulator’s website.
Standard Life’s head of employer and trustee proposition Alan Ritchie says the process is not too onerous, but there are potential pitfalls, particularly for firms without a dedicated pensions team.
“The company could forget or decide not to do it, leaving lots of people opted out when they should have put them in, or they could go through it and forget to declare it,” he says. “Or they could include the wrong people in the re-enrolment. But providers can help with all that, and so can payroll providers now.”
Time for a change?
Many employers will see this as a good opportunity to evaluate their scheme against what else is available. This will either give them peace of mind that their scheme stands up to scrutiny, or a reason to move providers. Those considering switching should not underestimate the size of the task – and the bigger the scheme, the greater the challenge.
“But it is possible, and typically the receiving provider will go out of their way to make the journey as smooth as they can,” says Ritchie. “There’s never a barrier that can’t be overcome, but it takes time and effort and the communications to members are important. It’s not something to be done just because you’ve had a bad day.”
There are many reasons for a change, but chief among them is dissatisfaction with the administration of an incumbent.
Nall says: “There’s increased scrutiny of providers where service has been poor, particularly where non-investment of contributions or lack of first-year annual benefits statements have prompted employee questions.”
And where an employer is relying on the provider’s software and support for the assessment and re-enrolment process, it’s particularly important to be sure they’re up to the job.
Finance and Technology Research Centre director Ian McKenna says the next consideration is cost. Employers that set up a scheme six years ago are likely to find that pricing has come down considerably, but incumbent providers may be unenthusiastic about matching market prices.
“I had one example where the holding insurer was pricing in the late 60s [bps] and the adviser was saying ‘we think the market is in the late 30s’,” says McKenna. “The insurer didn’t want to move and there was a game of chicken going on: the provider was thinking: ‘They won’t go to the trouble of moving it’, and the adviser was saying: ‘If they don’t move on price, we’re going to move the scheme’.”
Fees for individual firms depend on a number of factors, and insurers jealously guard their pricing algorithms. But firms are unlikely to secure improved terms unless they look around and at least apply some pressure to their existing provider.
Even where firms are satisfied with their scheme, if their business objectives have changed, the provider might no longer be a good fit. There are plenty of companies that regarded auto-enrolment as a compliance issue to be addressed at the lowest possible cost. Some of these firms may now look at their auto-enrolment offering as a recruiting tool, and therefore want different things from a provider.
Firms will also have had the chance to scrutinise schemes’ default investment strategies now they have been up and running for some time. For those that have opted for a group personal pension, the introduction of independent governance panels (IGCs) has provided much more information on value for money and default investment performance.
While no IGCs have been openly critical of investment performance, their reports offer more information when deciding if the default option is suitable.
Ritchie says: “It’s not necessarily a reason to move but it’s a question to ask – are you sure you have the right investment set-up for your employees who aren’t making an active investment choice?”
Another area where auto-enrolment schemes have come on in leaps and bounds is communication with members. Employers are contributing to schemes and, even if they’re only putting in the statutory minimum, they generally want their staff to appreciate this.
McKenna says firms he’s worked with saw engagement levels jump significantly when they started telling members each time a contribution went into their pot, and flagging the value of the employer contribution and tax relief.
And he says it will be increasingly important for schemes to offer members tools to help them manage income and expenditure so they aren’t tempted to opt out when minimum contributions begin to rise. From next year these are set to increase from 1% of banded income in employee and employer contributions to 4% and 3% respectively.
“So is your auto-enrolment provider delivering tools that will help your staff take better control of their day-to-day finances?” he asks. “The impact of financial stress in the workplace could cost you up to 6% of payroll. It’s a question of what your scheme provides over and above a pension.”
Freedom and choice
The final significant change since many firms staged is the introduction of pensions freedom and choice. This legislation, which came into force in 2015, means members of defined contribution schemes have – in theory – much greater flexibility in how they draw their pension.
Not all providers have adapted their offerings to support those who want to do anything more exotic than buying an annuity. This is not necessarily a problem for firms that have only auto-enrolled younger workers, but they should make sure their provider has firm plans.
And Ritchie warns: “For those who went through auto-enrolment with a big scheme already in place, they will have a much older population and it will matter more to them whether something is in place now.”
But for those who are considering a change of scheme, McKenna has a word of warning. “Make sure you can get all the records,” he says, “and make sure you actually have a copy of the data – you need that for your ongoing record keeping.”
It’s a shame that some providers feel entitled to withhold data when clients move away. But with the market braced for more upheaval, employers must do all they can to keep their options open.