Steve Rumbles of BlackRock provides practical examples to show how different companies with different needs can effectively respond to auto-enrolment.
Starting this year, companies will be required to ‘auto-enrol’ all eligible1 employees into a pension plan and make contributions on their behalf. This will have a significant impact on many employees and will completely redraw the pension landscape of the UK – leaving employers with some important decisions to make.
The costs of contributing for every eligible employee will be significant and, for many employers, it will place additional burdens on pension administration and communications programmes.
However, both employers and trustees must also start thinking carefully about what schemes to use to meet the demands of new, auto-enrolled members while ensuring levels of provision are maintained for existing members.
More ‘paternalistic’ firms will want to contribute more than the minimum legal requirement in order to provide their employees with more lucrative pension packages. Yet employers must balance paternalism with cost and other factors. Considerations such as staff earnings, turnover rates and whether or not existing schemes comply will determine the best scheme structure for each employer.
Companies with a segmented workforce comprising different demographics may consider placing different segments into different schemes. Those that wish to put all their staff into one existing pension will need to assess whether it complies and whether it provides the desired level of benefit.
The National Employment Savings Trust (NEST) presents employers with yet another possible component to their pension solution. It was introduced to ensure all employers can meet their new legal duties, and was designed with a particular focus on low-to-median earners.
Employers have the option to auto-enrol any or all employees into NEST instead of using a qualifying occupational scheme.
Below are three case studies that highlight how companies with differing workforces and needs can respond to auto-enrolment.
Company 1 has a 100,000-strong workforce, most of whom earn a below-average wage. Many work part-time and the rate of staff turnover is high. Some 55,000 will be eligible for auto-enrolment.
The majority of the DC scheme’s existing members are higher-earning with a lower staff turnover rate, and this is reflected in the current charge. However, the addition of automatically enrolled lower earners with higher turnover could have a negative effect on both the price and the breadth of features offered.
As a result, the employer is motivated to ‘protect’ the existing DC scheme and extend its use to a higher-earning segment of that 55,000 only.