Large companies that are not already preparing for auto-enrolment in the UK are "probably too late and will be bounced into rush decisions" claims the technical consultant to the Pensions Management Institute (PMI) who added that poor media coverage and insufficient understanding is contributing to inadequate preparedness

The PMI recently released research that claims "alarmingly few pension schemes appreciate the full cost of auto-enrolment" with only 14% of 250 schemes questioned admitting to have calculated the entire costs of the impending major workplace pension reform.

From October 2012 companies with more than 30,000 employees will be legally obliged to enrol all workers over the age of 22 (and under the state pension age) in a company pension scheme unless they expressly request to opt-out. While a mere fraction of the UK's 2.5 million companies fall into this bracket, their mammoth size means major administrative costs will be needed for auto-enrolment as well as major increases in sponsor contributions to match the 3% minimum employer contributions ordered by statute.

PMI technical consultant Tim Middleton told Pension Funds Insider that these giant companies are indeed "more likely to have addressed the costs involved as it is going to hit them first". He warned though that large groups who take on lots of seasonal and part-time workers such as retail operators "have to pick up on this before others do as they have effectively had their arms twisted on auto-enrolment".

Middleton said "more communication is absolutely pivotal as there has to be a commitment to make employers and savers understand what they are doing". Speaking out against the national media, Middleton added that people needed to be aware that auto-enrolment did not amount to compulsion to save for a pension. "A lot of the mainstream media coverage has been misleading on this point," he said.

Auto-enrolment also entails plenty of decision making for schemes and sponsors, Middleton reminded, as companies currently offering generous pension schemes may find it an unattractive option to accommodate all staff and new joiners into it. The small group of private firms that still operate open defined-benefit plans could, for instance, decide to accommodate temporary workers and new staff in a default-type defined contribution (DC) fund such as the government-sponsored National Employment Savings Trust (NEST).

Middleton had a clear message for trustees to gear themselves up for auto-enrolment before being spurred on by sponsors. "Regardless of what does or does not happen, trustees are going to end up carrying the can and in cases where companies have decided to use existing schemes for auto-enrolment requirements it is clearly the trustees' responsibility to ensure it complies properly with the auto-enrolment requirements."

A model for other large companies to look at might be Tesco, as the retailer has been auto-enrolling its staff over the age of 22 into its defined benefit scheme for more than 20 years. Indeed the Union of Shop, Distributive and Allied Workers recently praised the company's scheme in a submission to the pension reform commission as seeing "take-up levels of over 60% despite the relatively low-paid and transient nature of retail work."

The first wave of auto-enrolment will be followed in 2013 by thousands of other companies who employ over 350 workers, with the phasing in to continue until all firms in the UK adopt the measure by September 2016.

There is concern that small and informal companies will find auto-enrolment prohibitively costly, with the Department for Work and Pensions having estimated a combined cost of £3.5bn per year to UK employers.

The construction industry's fragmented make-up of many small, relatively informal firms, for example, has led to limited pension provision at the current moment and auto-enrolment is estimated to bring in 1.2 million of its workers into pension saving for the first time (increasing take-up from 13% now to 60%). Patrick Heath-Lay, B&CE's director of finance and customer development has said that the pension provider's contact with construction firms had shown that "preparedness is sporadic" across the industry (in which it specialises).

Heath-Lay said that in the trade, large firms with better human and financial resources are more up to speed on what the reforms will mean for their businesses and many of the more forward-looking ones are already engaging advisors and reviewing their whole pension offerings. At the other end of the scale some firms are entirely unaware of what their obligations will be under the reforms.

Heath-Lay said: "Putting a strategy in place now will allow you to decide how best to implement the new employer duties and manage not only the financial but also the administrative impact it is going to have on you and your workforce. Given the detailed and complex nature of the changes, particularly the compliance obligations, the industry cannot afford to underestimate the impact."

Reading between the lines

Heath-Lay remarked that much of the auto-enrolment challenge for employers will lie in picking through its complex regulations. He said "some of our customers are companies operating as many as 40 pension schemes and adding a new layer of complexity to that provides problems".

While conceding that unknown opt-out levels would be significant in determining the final costs for adapting to auto-enrolment, the general magnitude of costs is clear and should be understood now says Heath-Lay. He also warned that "understanding what is coming down the line in terms of both compliance and increased contribution costs is pretty key; you do have to make assumptions but any company can review the costs".

Employers fretting over the costs of auto-enrolment were given some relief by the House of Lords last week. The chamber passed the Pensions Bill onto the House of Commons with added flexibility granted to employers on auto-enrolling staff into existing schemes and a three-month waiting period earmarked for new staff.

The National Association of Pension Funds (NAPF) welcomed the move but called for greater clarity. The NAPF's director of policy Darren Philp told the press: "The clock is ticking. With the reforms coming into effect soon, employers need certainty around the new rules so that they can start making the necessary changes.

Philp added: "It is essential that the Government and the Regulator act quickly and give clear guidance to employers on what they need to do."

dbillingham@wilmington.co.uk

First published 05.05.11