Date: 04/09/12 Duration: 00:31:59
In this podcast pensions auto-enrolment legislation is discussed. Dermot Courtier, Group Head of Pensions at Kingfisher, a global company employing 38,000 people, explains what it has meant for their payroll, pensions and systems departments. Charles Counsell, Executive Director for Employer Compliance, at The Pensions Regulator explains the ‘staging dates’ and the law. Andy Seed, Director Tax and Pensions, KPMG puts his view from working with employers to set up auto-enrolment.
Philippa Lamb: Auto enrolment is almost here. From October the 1st Britain's biggest employers will have to auto-enrol all their eligible employees into a qualifying pension scheme and start to make their own mandatory employer contributions as well.
When we looked at this last year in Episode 59 of the Podcast Series, the pensions Minister, Steve Rumbles told us there'll be a series of deadlines, or staging dates, for different companies to get on board. Those deadlines have now been published with the biggest companies with over 100,000 or more staff hitting the deadline first and smaller organisations coming later, some as late as 2015. So employers, big and small, need to understand auto-enrolment and comply with it and this follow up podcast is all about the practicalities of doing that.
Kingfisher Plc is a global home improvement company incorporating B & Q and Screwfix amongst others. It employs 38,000 people and as Dermot Courtier, head of Group Pensions, explains Kingfisher is well underway with the new pensions regime.
Dermot Courtier: We are one of the early starters, our staging date is formally the 1st January, 2013. We are going to seize the opportunity of the three month waiting period so we’re looking to go live from the 1st April, 2013. But we also have up to four trading companies in the UK so when we go live we’re going to go live with all four at the same time.
PL: So what pension arrangements will you have in place when you hit your staging date?
DC: When we hit our staging date we will have in place what we have at present which is a money purchase section, defined contributions section and everybody within the business aged between 16 and up to 75 can join that money purchase section and there's various matching contribution levels within it.
PL: There's a lot to arrange before April 1st and we’ll hear more about how it’s all coming together from Dermot in a moment. First though how will auto-enrolment be regulated? Charles Counsell is the Executive Director for Employer Compliance at the Pensions Regulator.
Charles Counsell: The overall approach that the Pensions Regulator is taking is to educate and enable employers so that they get themselves ready in time for their duty dates. Now all employers have a specific date on which the duty is applied to them which is known as their staging date and an employer should look up their staging date on our website www.thepensionsregulator.gov.uk so that they know specifically when their supply is to them. We have made available a series of information and tools for employers to help them to get themselves ready, all based around a seven step approach so that they can simply follow through on each of those seven steps and there's a series of tools and materials that are available to support each of those steps. Now every employer therefore will work their way through that and what we absolutely want to emphasise is to set off on this journey to get ready in good time. So find out what your staging date is and plan ahead accordingly.
PL: Unsurprisingly there's been a lot of interest in how the government will deal with organisations that fail to meet their staging dates and last month the regulator announced how it plans to enforce compliance.
CC: We do anticipate that employers will be getting themselves ready and will be ready in time. Of course there may be some and there will be some who don’t and in those circumstances we will be proportionate and reasonable about the actions we take but if an employer wilfully breaks the law well we will take action.
PL: But what exactly does this mean? Well the first step is for the government to issue a compliance notice which sets out the action the regulator is expecting the employer to take. The second stage is a £400 fine.
CC: Clearly if an employer continues to be non-compliant and therefore doesn’t provide the pension that their employees are due and doesn’t make the contributions that are in law due to them then there are more serious penalties that we can apply which are called escalating penalties which accrue by the day and they’re dependent on the size of the employer.
PL: And as you say the staging dates depend on the size of the organisation and obviously first up are the very large organisations which are hitting those later this year, I think the difficulties we’re hearing about at this stage are around IT, payroll, HR systems, so I think if they do get to that point where they’re going to miss their staging date it’s unlikely to be intentional, as you say it’s because they will have run into some sort of insurmountable technical difficulty and just to be clear in those circumstances your approach would be constructive and helpful, rather than punitive, as long as they’re demonstrating they're doing their very best and doing everything they should do.
CC: Yes that's absolutely right. We clearly set out that where it is wilful non-compliance, a deliberate attempt to avoid the law and therefore not provide pensions for their employees then we’ll take a very different approach from where it is accidental or where an employer has been trying to do all the right things but things haven’t quite worked out. Now what we would absolutely do is encourage employers to come to us early if they think things aren’t going right, then come and talk to us and come and tell us what, as an employer, what steps you are taking in order to put things right and get things right. And so clearly what we can then ask employers to do is make sure that they put the employee back in the place they would have been if they had got it right in the first place and then some of the things that might go wrong may actually have no detriment to the employee in effect and in which case we would ask, through a process of education, we’d ask the employer just simply to make sure that they do the right things going forward.
PL: Now what are your expectations around non-compliance? Are you expecting a lot of problems in that area?
CC: No we expect employers to comply with the law.
PL: Andy Seed is Director of Advisory team at KPMG, the global consultancy and accountancy firm which has been working with a range of employers over the last few months to help them prepare. So with a coalface view on now the pensions policy reforms are impacting employers does he think auto-enrolment is an achievable challenge for most?
Andy Seed: Generally speaking the employers that we’ve been working with are broadly adopting the policy intent quite warmly. I think the bit that they’re struggling with is how cumbersome it is to actually implement. I think from embracing the spirit of the policy intent a lot of employers recognise that getting people into pension saving is broadly speaking a good thing but actually the rules, regulations around how you have to physically do auto-enrolment I think has been made much more complicated than it needed to be and it’s the system’s piece, it’s the communications, making sure that members are told what they need to be told at the right time, given their options and their choices, that all of the systems and technology will feed data in the right way to the right systems to make sure that the right people are captured at the right time, all of these things are quite detailed and I think auto-enrolment is sort of 10% of pensions, the problem for organisations it’s 90% everything else that goes around that, systems, policy, process and communications problem and making sure that the regulations have been adopted properly will be a far tougher challenge for a lot of businesses with complex systems.
PL: Lots of issues there: communicating with employers, pay policy and process, but let’s start with the issue of updating systems. At Kingfisher they’re working to merge the existing payroll HR software solutions to cope with auto-enrolment.
DC: We’re working very closely with our in-house
HR payroll and IT people and there's work going on at the moment in terms of upgrading our payroll systems, thankfully we only have two across the four businesses that we have in the UK and one of those systems actually feeds the payroll for 90% of the UK business, so the task there isn’t too difficult. On the money purchase defined contributions side of our pension provision we equally have one provider so we’re working very closely with that provider as well to make sure that their systems are ready for auto-enrolment. What we are looking to do is with the payroll provider is making sure that their systems development will deal with the assessment process and with the pension provider that their systems development will deal with the opting out process because we have a trustee approach to the governance of pensions within the business and we’re hoping that the opting out process with the pension provider can be done through the centralised group pensions department.
PL: So for Kingfisher the payroll provider is involved with assessment while the pensions provider will deal with the opting out process. Working out who exactly to involve and who the key stakeholders are is the first step.
DC: In every organisation the shape and structure of the hierarchy of the business and who makes decisions to make things happen varies hugely but in our experience and from auto-enrolment solutions which are in build or in train generally the sort of ringleader, if you like, or the key stakeholder tends to be pensions-led, identifying those key stakeholders and making them work together is very important but there isn’t really a sweeping answer, catchall for everyone.
PL: As you've said it’s the pensions people, it’s payroll, HR, IT, finance, legal, marketing, communications.
PL: It’s more people than people might imagine I suppose is what I mean.
DC: Absolutely and it could be quite a diverse group and it could be quite a large group and from a consultancy perspective in a couple of instances we’ve actually been asked to project manage where internally there was some recognition that, for example there might be some conflicts of interest or actually some clashes on personality, so having an external doer if you like just to make sure that everyone’s doing what they should be the time it needs to be done can be quite helpful.
PL: And already KPMG are seeing four key systems issues arising. Andy Seed again.
AS: From a payroll end you’re starting to see the emergence of legislative updates coming through but what we’ve seen from reviewing the terms and conditions of these payroll providers they are literally doing the bare minimum only for legislative compliance. Then we’re seeing a bit of the market where the pension providers themselves are actually starting to come up with some solutions and in the bundled market which is typically led by the large insurance companies and the large pension providers we’re seeing an emergence of some solutions which will do the assessment and possibly manage the opt out process as well but it isn’t a one-stop shop it still requires a data feed so how those systems interact with payroll are going to be very, very crucial. And then thirdly if a business does already have a flexible benefits platform of its own or they’re using an external third party supplier for flexible benefits, the flex market is starting to adapt as well its technology in what’s commonly being referred to at the moment as middle wear, i.e. it’s taking a data feed, it’s doing something with it and then it’s sending it on again. So I’d say there's three main sources if you like of technology solutions in the market and what we’re seeing is that again there isn’t a silver bullet type of solution that's going to capture everybody.
PL: No one size fits all?
AS: There isn’t. I think there's one really crucial point to add though in terms of auto-enrolment and the systems solutions is that real time information which is another piece of legislation affecting payroll professionals from next year is going to bite for a lot of the larger companies who stage prior to September next year at around about the same time and one thing we are definitely seeing is making sure that payroll isn’t doing its systems changes twice and therefore there is very much a desire for the payroll community in particular and the HR to make sure that, for example, whether it's data feeds from HRIS systems and all that type of stuff that actually they're doing one change and not two. So I think that's fairly key.
PL: Central to the whole process is establishing exactly which employees need to be enrolled and that throws up questions about temporary, seasonal, casual, part time and agency staff.
DC: In terms of identifying the eligible jobholders it’s a situation where we have a whole set of diverse work patterns, particularly within B & Q. we have shifts, we have weekend, we have part time working and full time working. So it has been difficult. We’ve obviously got to identify the numbers that we auto-enrol on a headcount basis whereas we technically record them on a full time basis. So there's been a lot of work behind the scenes.
CC: The critical thing is that employers assess all of their staff…
PL: Charles Counsell from the Pensions Regulator.
CC: …whether they’re permanent, whether they’re seasonal, whether they’re casual, on whatever basis they are employed and in assessing them the two things they need to look at is age and earnings and that tells you as an employer whether or not you need to automatically enrol those staff. So it doesn’t matter whether they’re casual workers if they are of an age or of an earnings where they qualify then they become eligible jobholders who need to be automatically enrolled. Now of course what an employer may wish to do is to look at the postponement provisions because if a temporary work is with an employer for two weeks for instance and only two weeks then they can use postponement so that they don’t automatically enrol a temporary member of staff.
PL: Now what about overseas employees and indeed UK-based employees who are mobile abroad or indeed permanently abroad?
CC: Yeah the test here is whether or not they are ordinarily working in the UK. So let me talk about three different scenarios here. First of all a worker who is internationally mobile and so then there are a series of tests, again you can find them in our detailed guides, that an employer should look at. For instance do they start and end the day in the UK? Do they pay national insurance in the UK? Are they normally resident in the UK? Those are the sorts of tests and the sorts of considerations that an employer should look at.
PL: So it’s not just about how much of the time they’re spending abroad?
CC: No it’s about a whole set of factors…
PL: Where they’re rooted.
CC: Exactly. Another example would be an employee who is temporarily assigned overseas and then again you need to look at the tests here but basically if the employee is likely to come back to the UK and his contract remains in the UK then they are probably ordinarily working. And the third example is someone who is assigned from an overseas company, maybe a head office, maybe a subsidiary company overseas, into the UK and then the employer needs to consider are they likely to stay in the UK permanently and is their contract still overseas or in the UK and if it’s overseas and they’re not likely to stay in the UK then they are probably not ordinarily working.
PL: So just to be clear going back to the middle one an employee who is posted abroad for a reasonable period of time and employed under local conditions in their destination would still be required to be enrolled into the pension back here?
CC: Well I think it depends on precisely what you mean by employed under the local terms and conditions. So if the contract is not in the UK then they may not be ordinarily working but if the contract, and therefore the terms and conditions remain in the UK then they probably are ordinarily working in the UK still and if it is the intent that they will return to the UK.
PL: But the main message here is even if your workers are abroad you need to look at this on a case by case basis.
CC: That's absolutely right.
PL: This involves such a thorough overhaul of systems it’s clearly a great opportunity to review your whole approach to pay and benefits and Andy Seed thinks auto-enrolment could trigger a major shift in the way pay and benefits is managed by employers.
AS: Yeah I think so. I mean let’s take a step back and I mean the policy intent behind auto-enrolment is clearly to get non-pension savers saving but it’s coming at a very, very difficult economic time for people to save, they may have had pay freezes for quite a considerable amount of time, there might not be any spare cash and there's a lot of competition from the household spend as it is with fuel duties etc. going up and food costs etc. Not only that but let’s look at the variables actually in retirement savings themselves. You've got students or post graduate people coming into the workplace now with top up fees being introduced this year students or graduates, should I say, are going to be entering the workplace with 20, 30, 40, £50,000 worth of debt wanting to get on the housing ladder etc. etc. and at the other end let’s also not forget that gilt yields are very, very low in terms of converting pots of money into pension income. So therefore if you put all of those dynamics together it’s a very, very difficult time to get people to save and what I think we will see more of is companies get more creative over their pay and benefits in terms of making it more relevant for their workforce, particularly for example if you’re a professional services firm that recruits a lot of graduates, for example, we recruit over 1,000 a year and therefore they might not necessarily all want to start saving into a pension, they might want to pay off their debt quicker but as long as we embrace the policy intent which is broadly right to get people accumulating wealth independently at this stage, I think these are all good things but back to answering your question I think we will have to see the emergence of some more innovative and creative, what I would probably term something along the lines of sort of lifetime savings accounts as opposed to necessarily just pensions or just something else. I think we’ll see the badges change.
PL: If you have a bundled or structured pension product that carries a member charge, in other words you pay a percentage of your fund to cover admin charges, auto-enrolment may well bump up the number of employees in the scheme so how should employers react if their existing pension provider doesn’t want to take on these extra employees or they want to renegotiate terms and conditions. Andy Seed.
AS: This is a really interesting question and something we’re actually seeing quite a lot of in the market. What we’re seeing is behaviour from providers saying, “Well gave you that charge based on a certain average contribution and by putting all your low paid employees into this same scheme that's actually massively lowering our average contribution and therefore that's a less attractive scheme for us and you can’t have it at the same price.” So I think there's three elements to this question where companies…well what you can do about it. I think number one is what happens if you do nothing? And if you do nothing then clearly members are going to be worse off i.e. existing members are going to be paying higher charges and clearly that's very unpalatable. So doing nothing isn’t really an option you’re going to have to do something. So number two would be to step back a second and say, “Well how important is my business to my pension provider?” because actually if you've got a significant tranche of defined contribution pension assets already and there are a number of employees which make that a very attractive scheme for you pension provider to hang on to your negotiating power might be far greater than you might expect and literally by asking them the question, “Well why does the charge have to go up?” you may find that you don’t need to negotiate too hard. Thirdly if they dig their heels in then actually there's perhaps another work around which is, “Okay well we can keep the charges the way they are if we keep the scheme the way it is and therefore rather than set up a new scheme why don’t we set up a new section or category of membership that's different?” and that different category of membership perhaps would carry a higher charge but not necessarily impact on the existing member. And last but not least if that option doesn’t work for you or your business for whatever reason then we are also seeing some organisational behaviour where there is a desire to introduce what we’re calling nursery schemes if you like whereby the population isn’t currently in any pension scheme, joins a different arrangement, that could be NEST, it could be any one of the master trust solutions, it could be another scheme by your existing pension provider but that nursery scheme would probably have an eligibility attached to it which may be, for example, lengths of service and once you've effectively hit your probationary or length of service requirement for that nursery scheme you then might effectively go back into the main scheme as everyone else and it won't affect the shape of the charges. So I think those are probably the four variables where we’re seeing charging behaviour being defined in the market.
PL: Our national lethargy about pensions works in the government’s favour here, the more passive employees are the more we’ll remain in the system but people can opt out and predictions vary about how many will chose to do so. I asked Dermot Courtier what sort of opt out numbers he's planning for at Kingfisher.
DC: We’ve got a history of employing older people, particularly within B & Q so we don’t necessarily believe that we will have too high a level of opt out. We’re probably going to see an opt out level around about the forecast that the DWP and NEST are talking about, in the range of maybe around 25 to 30% but compared to other UK retailers that may be seen as relatively low but we do actually have this diverse approach in terms of our recruitment and we do tend to recruit older age people as well and it’s been great from an employment contract point of view because it gives us a lot more stability with the workforce. So I think there will be other sectors that do have much higher opt out rates.
PL: With younger employees.
DC: Yes, yes particularly in the areas of the hotel, catering and tourism sector.
PL: Based on the conversations he's had with various organisations so far Andy Seed is expecting opt out rates to be higher than the government predicts.
AS: I believe and this is a personal view rather than an in house view but I believe in certain industry sectors there is a lot of evidence to suggest that the opt out rates will be far higher than the Pensions Regulator and DWP have been assuming and we’ve seen opt out figures from them suggesting 25, 33%. I think in certain industry sector pockets, particularly perhaps travel, hospitality and leisure where perhaps English isn’t the first language of a lot of non-pension members at the moment I think the opt out rates will be far higher and that's clearly going to be an issue for some businesses to manage.
PL: Yes I mean we heard about suggestions of 40% at the beginning of this process didn’t we, opting out and the government was keen to damp down that suggestion but you think in particular sectors we might see that?
AS: I do and again the stats vary hugely but there's anywhere between eight to 11 million non-pension savers in the UK and let’s be absolutely clear if we got 60% of those people saving that's several million people saving into the future that currently aren’t so that's a good thing embracing policy of intent and hopefully getting them some retirement savings which will give them a meaningful income in retirement alongside supplemented by the state but I don't think all businesses are going to be able to achieve opt out rates of less than say 33%.
PL: As Andy says even if opt out rates are higher than predicted there will still be millions more saving than currently which can only be a good thing. Nevertheless communication is key to reducing opt out rates and with an April 2013 start date Kingfisher is gearing up with a raft of communications measures to get their employees in the loop.
DC: We’ve been working with the DWP and the Regulator as one of the early large organisations very closely to look at the communications that they’re publishing on a generic basis and we’re taking that material and customising it to our own needs and requirements as well and we’ll continue to do that during the autumn months as well, ahead of the go live date. In terms of actually going out with our first formal auto-enrolment communication we’re planning to do that in the first two weeks of December 2012, flagging up to all our employees that auto-enrolment is coming and then we’ll be planning beyond December regular communications all the way through to April and beyond.
PL: What sort of communications are you talking about?
DC: Generally it will be paper communications. We are looking also in terms of using modern technology as well, whether we can make better use of iPhones and iPads.
PL: Yes because most of us are very bad about reading communications about pensions aren’t we?
DC: Yes in reality I suppose most of us probably just bin it so we’ve got to make the communications interesting, fun. So really it’s an education programme.
PL: Whilst for Kingfisher it’s about effective messages to employees for the Pensions Regulator and the government the measure of auto-enrolment’s success rests on communicating successfully with employers.
CC: Long term measure of success is this is just simply how business is done in the UK. In the shorter term of course for us the first thing is that employers are aware of these new duties, that they understand the duties, that they are preparing for the duties. I can’t emphasise enough how important it is to start to prepare early. For most employers they should start to think about this no less than 18 months before their duty date, just to make sure that they are ready and they think through all of the implications, including involving their IT department, their finance department, their internal communications and they consider all of those things in their preparation and that of course that they carry out the duties and they auto-enrol their staff and then they continue to make payments into the scheme once they have automatically enrolled their staff. I think the other point here though that's very important is the Pensions Regulator we recognise that the majority of new money that will go into schemes through automatic enrolment will go into defined contributions, money purchase schemes as many people will know them and therefore we are working with the pensions industry to make sure that the products that employers automatically enrol their staff in are safe and durable, so we’ve published six principles with a set of underlying features to enable product providers to prepare their products so that they do have those features built into them which means that for an employer they’ll know that they're buying and putting money into a safe and durable product.
PL: We’re still in the very early stages of all this and clearly the system will evolve over time, the big question is how. Andy Seed.
AS: I think the evolution of auto-enrolment is very difficult to sort of crystal ball gaze if you like, ultimately if opt out rates are as high as I believe they will it’ll trigger compulsion at some point.
PL: Well that was my next question because we can see a proliferation of more and infinitely sophisticated ways in which people are encouraged to save but if the entrenched millions refuse to do so can you see the opt out disappearing?
AS: I think it will almost certainly go in time. I mean if you look at the model that the UK auto-enrolment system has been adopted from I mean broadly speaking it’s most like the Australian superannuation system and if we look at superannuation there it is absolutely compulsory you have no opt out choice at all, but also not just compulsion I think contribution adequacy is going to have to come on the agenda as well and if you look again at the Australian system they started with 6%, they’ve already moved to 9% and within one generation of pension savers they’re already in the middle of moving from 9% to 12%. So given that we’re starting at eight and we already know, and by the way that's not until 2018, we know that 1% of not a lot is going to be not a lot and I think another economic factor that might determine higher opt out could be a quite noisy crowd of early retirees from auto-enrolment who are making a lot of noise about the fact that it had absolutely no impact whatsoever on their retirement income and I think that could be quite damaging. So to contain that I think contribution adequacy and compulsion are the only two triggers that you can really pull to influence that.
PL: Finally it’s down to Dermot Courtier who’s just months away from his staging date, what will success look like for him?
DC: That's a very good question. I think increasing our overall pension membership levels. At the moment we have around about 20% of our eligible working population in our DC Money Purchase section and undoubtedly the philosophy of this legislation is to encourage more membership and one would hope that those numbers will increase and if we’re right about our optance [sic] out levels then it would be great to see membership levels of around about 50, 60% over the next five or six years. It won't come overnight, it will be a gradual build process but I guess if we say by 2018 we’ve got 60% membership then I think that would be a form of success.
PL: And it would be really pleasing wouldn’t it? That's a big leap.
DC: It is a big leap yes, it’s three times where we are at the moment.
PL: We’ll ask you back and you can tell us how you’re getting on.
That's it for this month. Join me next time.