08 Nov Auto enrolment pensions – an employer’s perspective.
Auto enrolment pensions are all about encouraging people to save for retirement by making the joining and ongoing decisions associated with the scheme as easy as possible for the members and making a certain level of contributions mandatory. Considering these overarching aims, it helps to explain, at least in part, why the legislation has been brought in as it has. As a result of this implementation strategy, the impact has been felt more profoundly by smaller companies as these tended to not have an existing occupational pension in place.
For small and medium sized companies, auto enrolment pensions are usually set up as trust-based occupational pensions using a master trust rather than an individual scheme for the employer. This is not the same as a group personal pension (GPP), which puts all the emphasis and responsibility for decision making on the employee, and simply requires the employer to choose a provider and pay the contributions collected from payroll on time. In a GPP, where the funds were invested, for example, was down to the individual member and any correspondence would be directly between the member and the provider. In essence, a GPP is a group of individual personal pensions, the contract is between the employee and the GPP provider. With an auto enrolment pension the provider (usually offering the master trust to many different firms) is providing a scheme for the employer to ensure that the firm is compliant with the rules. Unlike GPPs the provider is running the scheme on behalf of the employer, the employees are just members of the scheme.
If we assume that a company has to provide an auto enrolment pension, then what are the employer’s duties and obligations?
The most important is that the employer needs to provide a pension scheme and pay contributions into it if anyone who works for the company is aged between 22 and up to state pension age and earns more than £833 per month (£192 per week).
Most companies will have met this obligation, so what else is the employer liable for or needs to do once the initial duties, such as choosing a provider and the declaration of compliance, have been completed? Well, the employer still has ongoing duties towards its staff, and these include:
- assessing any new staff to see if they meet the age and earnings criteria to join a pension scheme
- monitoring the ages and earnings of staff to see if they need to be put into a pension scheme
- ensuring they are paying at least the minimum contribution levels into the pension scheme
- dealing with requests to join and leave the pension scheme
- keeping accurate records of what has been done.
But what obligation and liability do employers have towards the scheme itself and where the funds are invested for its employees? In my opinion, this forms part of the last duty above.
Employers will need to ensure that the pension scheme they choose will invest employees’ pension contributions in reasonable investment options that are in line with the needs of the employees. It is also important that the pension scheme chosen will provide information on the investment choices and ensure that the employees understand the different options that are available to them.
Employers also have a duty to assess the costs associated with each scheme they are considering and decide whether the scheme provides good value for money for their employees. This is not just at outset but on an ongoing basis to ensure that the scheme continues to be a good option for employees’ pension savings.
It is also important to establish that the pension provider has the best interests of the members when making decisions and will be able to provide good administration for the scheme.
Most of these ongoing obligations are not too different from any other occupational pension scheme or when choosing and reviewing a group personal pension provider. One of the easiest ways for a company to meet this and its other obligations for auto enrolment pensions, or any other type of company pension scheme, is to use a third-party advisory firm that specialises in company pensions. The advisory firm should then carry out a review of the staff and suggest a suitable scheme and provider who can meet the investment needs of the workforce and who also have the ability to carry out the necessary administration without becoming a burden on the company.
The obligation to use a scheme that is good value for money, has appropriate investment choices and acts in the best interests of the employees is difficult to judge. An employer cannot predict future investment performance nor be expected to find the best investment managers or suitable asset allocation for all its employees, or even the average employee, however, it should be able to document the process that it went through in deciding on a suitable provider based on charges, fund choices and administration services.
Most good auto enrolment providers offer a pension scheme and online platform for members that ticks most of these boxes for employers, but the following are some important considerations or criteria a company could use to choose its pension provider:
- Does the provider offer a secure structure i.e. a ringfenced master trust operated and governed by trustees with experience of running pension schemes?
- Are the trustees experienced independent trustees and administrators? What track record do they have in running occupational pension schemes?
- Does the scheme offer professional investment management investing in Financial Services Compensation Scheme protected funds? For example, are the underlying investment funds managed by an insurance company or investment manager and if so, is information about the funds easily available for staff?
- Is the master trust regulated by the Pensions Regulator and does it have full accreditation under the master trust assurance framework?
- Does the provider offer online access for employees so they can check they contributions, personal details, obtain details of fund values and fund information?
- Can employees access educational material to help them properly assess their pension savings and make informed decisions about fund choices?
- Can employees make changes to their investment choices and death benefit nominations directly with the provider? Reducing the administration that the company may have to do.
- Does the scheme offer index funds in addition to active fund options?
I believe that if employers go through a process which assesses schemes against a list of criteria similar to this but also including anything which may be specific to the firm (such as telephone support for staff who do not like to go online) and clearly document this process, then they will have gone a long way to minimise any future complaints against them. The process should not really be any different to choosing a GPP provider or an occupational pension provider. It may involve an initial cost for a specialist firm to do this on the company’s behalf but in the long run this may pay dividends, as the scheme should be fit for purpose and employees understand where their money is going.
It is also not too late. I am sure a lot of companies chose the first or easiest auto enrolment provider at the last minute to make sure that they met their initial enrolment obligations. I have no problem with this, there are many things that employers have to do, and auto enrolment was just another pull on companies’ finite time and resources. However, if there is a better provider out there for a firm’s employees, it is possible to put a new scheme in place and transfer any existing benefits to the new provider as long as you inform everyone involved what you are doing and why.
As time goes by the less well structured and administratively poor providers will lose customers and either cease offering pensions or merge with another provider, so revisiting the exercise and seeing what alternatives are available (and documenting the exercise) is never too late. Even in my own firm’s experience, we have already switched to an alternate provider because the first decided it could not offer pension services effectively to smaller companies so we then found a new provider who can.
In some respects, the choice in the past of an occupational pension or GPP seemed easier, and firms probably felt more in control of the process, but a lot of firms did not provide pensions for their staff. Auto enrolment has now changed this but, in my opinion – and I am not a company pension expert – a firm needs to review its scheme and spend the same amount of time and effort on making sure the provider can do what it and its employees need, as it would have done when considering a pension scheme in the past. If this process is properly documented and evidenced, then this should provide some protection against employees being unhappy with the scheme and holding their employer in some way responsible.