It has been a hectic few months for the larger players in the food industry as they face head on the challenges posed by auto-enrolment . In what is widely regarded as the biggest shake up in workplace pensions for many years, the financial, administrative and legal challenges faced by businesses in the food sector are becoming clearer as firms confront the prospect of receiving their staging dates from the Pension Regulator.
Auto-enrolment – a quick summary
The new auto-enrolment duties came into force on 30 June 2012. They are being phased in over a period of five-and-a-half years that started on 1 October 2012 and will eventually apply to all employers in the UK. Once an employer is covered by the new duties, it will be required to auto-enrol its eligible workers - referred to as “jobholders” - in a pension scheme meeting specific standards unless the jobholders are already active members of the employer’s qualifying pension scheme. They also give “non-eligible jobholders” the opportunity to opt in to a qualifying scheme.
A jobholder can choose to opt out of the pension scheme in which he has been auto-enrolled, but if he does not do so the employer will be obliged to pay minimum pension contributions as long as the jobholder remains an active member.
An encouraging start – but is it sustainable?
Research carried out by the Department for Work and Pensions published last year indicated that 15 per cent of workers would be likely to opt out of auto-enrolment, with some forecasters suggesting that the figures could even be as high as 20-30 per cent. However, whether it be down to the apathy on the issue that pensions minister Steve Webb was hoping for, or whether people are genuinely conscious of the need to save for their future, early signs of worker engagement appear promising.
Larger employers in the food sector have started to release data on auto-enrolment engagement, with Associated British Foods reporting an opt-out rate of just three per cent of its eligible workforce, Asda eight per cent and Whitbread, the hotelier and owner of Costa Coffee, reporting an opt-out rate of four per cent among its 18,000 eligible employees. Whitbread has also reported an increase in the number of employees who were not eligible for auto-enrolment joining its pension scheme since it began communicating the reform. All put the engagement rate down to widespread and engaging communications campaigns aimed at generating interest in the subject, being both mindful of not overwhelming members with information and jargon. Also, they have highlighted that providing access to a well thought out “lifestyle” investment fund as the default option of investment of contributions can give employees a degree of comfort in relation to a subject that they may not otherwise be comfortable with.
But is this encouraging start sustainable? There is of course the fear that employees may choose to opt out further down the line as minimum contributions rates increase, putting further pressure on disposable incomes – initially auto-enrolment requires a contribution of just one per cent of an employee’s income. And it remains to be seen whether receipt of annual statements may in some cases flag up to employees just how little their contributions might actually be worth in the long term. Some commentators have also pointed out that the lower than expected opt-out rate to date might be explained by the fact that it is the largest employers (and therefore those best able to absorb the cost of auto-enrolment) that have received their staging date first. SME’s stating dates fall within the next 12 months and micro-employers after that. How easily will they be able to absorb the cost? The likelihood of non-compliance by employers is likely to track economic growth, with opting out by jobholders likely to increase if the profitability of employers’ businesses and staff pay decrease. The danger for those employers tempted to cut corners is that the Pensions Regulator is expected take a pro-active approach in policing auto-enrolment non-compliance.
The need for a clear implementation strategy
For the employer, it’s clear that planning and implementation of auto-enrolment throws up the need to consider not only pensions but also finance, reward and incentive packages, communications, payroll issues and the suitability of IT systems as well as legal compliance. For example, understanding who qualifies as an “eligible jobholder”, “non-eligible jobholder” or an “entitled worker”, calculating “qualifying earnings” and what constitutes a “qualifying scheme” for the purposes of auto-enrolment legislation can itself give rise to the need for careful analysis, with conclusions often being heavily dependent on workforce profile. There are then continuous monitoring obligations to make sure firms remain compliant - which requires suitable systems and processes to be put in place. All in all, the task can be daunting and expensive, particularly for a smaller business with limited resources. For many smaller employers, establishing a pension scheme for employees will be an entirely new proposition and how they communicate auto-enrolment and handle its implementation might influence significantly employees’ perception of pensions and saving for the future.
The Pensions Regulator has published a range of materials about auto-enrolment, including 12 detailed guidance notes. We are providing advice to a range of businesses on how to prepare for auto-enrolment.