Automatic Enrolment
Scenario
XYZ Limited was aware of the general concept that it would be required to automatically enrol its employees into a workplace pension scheme at some stage between 2012 and 2016 but required more detail and, importantly, an estimate of the likely cost to the business in terms of additional pension contributions.
The Company’s existing pension arrangements were a defined benefits (final salary) scheme, which was closed to new entrants, and a Group Personal Pension Plan (“GPP”), which was open to all new employees. The Company made it clear that no consideration would be given to reopening the defined benefits scheme to new entrants.
The Company’s workforce was divided roughly into three distinct categories: 560 active members of the defined benefits scheme, 580 members of the GPPP and 290 employees not included in any Company pension arrangement.
Review
BBS were appointed to undertake an analysis of the Company’s current workforce and report back its findings against the auto-enrolment legislation that is currently in force.
An extract of the Company’s payroll data was provided to BBS and from this and other information requested from the Company, we were able to identify those employees who:
-
would need to be auto-enrolled from the Company’s Staging Date (the date that it must first comply);
-
did not need to be auto-enrolled but would be able to opt-in and claim a right to Company contributions;
-
did not need to be auto-enrolled but would be able to opt-in, although the Company would not be required to contribute; and
-
were not affected by the auto-enrolment requirements
The BBS analysis also tested the Company’s two existing pension schemes against the minimum benefit and contribution criteria respectively for them to be used as the Company’s auto-enrolment scheme from its Staging Date.
Finally, an assessment of the possible cost to the Company in terms of additional pension contributions was provided using a variety of different scenarios as to employee uptake.
Results
BBS presented its report to the Company. The main findings were:
-
the current level of contributions to the GPP would be insufficient for it to meet the quality test for it to be used as an auto-enrolment scheme. The contribution basis would therefore need to be redesigned should the Company wish to use the scheme as its auto-enrolment scheme.
-
BBS illustrated two alternative contribution bases that, if adopted, would enable the GPP to qualify as an auto-enrolment scheme during the two transitional periods and from 1 October 2017 onwards. Following receipt of these illustrations, the Company had a real understanding of the additional contributions that would be required to enable compliance with the legislation.
-
during the Review process, it came to light that the existing advisers to the GPP were receiving significant amounts of commission.
Next Steps
The Company is currently considering the impact of the potential additional pension contributions on its business. It has also recognised the impact that the legislation will have on management time. A decision has been made to:
-
use the GPP as the Company’s auto-enrolment scheme from its Staging Date. It did not wish to reduce its level of pension contributions to the minimum required by legislation;
-
amend the contribution basis prior to the Staging Date for both the Company and the members of the GPP to ensure that it is able to meet the quality test for auto-enrolment;
-
introduce a Salary Exchange (salary sacrifice) arrangement for employees and use the resultant savings in National Insurance Contributions to help offset the increase in the level of contributions;
-
move the GPP to a nil commission basis with either the existing or a new provider to ensure that the best terms are made available to the members; and
-
establish a Governance Committee to monitor the GPP on an ongoing basis to ensure best practice, and compliance with the Regulator’s guidelines for delivering favourable outcomes at retirement.
The Company recognised that it cannot avoid the new legislation for the automatic enrolment of its employees into a workplace pension scheme. By addressing the issues at an early stage, it has placed itself in a position to fully understand the implications of the new rules and has taken positive action to mitigate the potential costs.
