New rules this Autumn will oblige organisations to enrol employees into pension schemes - but with issues of staff turnover and fragmented employment contracts, FM service providers will be hit worse than most. These and other issues were the subject of debate at a recent roundtable, sponsored by The People's Pension.
5 July 2012
From 1 October this year, the Pensions Act 2008 comes into force. This new law obliges companies to automatically enrol certain employees into a pension scheme (automatic enrolment, or 'auto-enrolment'), with contributions to pension schemes being compulsory for both staff and employer.
The exact date at which companies are obliged to comply is determined by the number of people they had on their payroll as of April this year.
These are known as 'staging dates'. Staging starts with the country's largest firms, beginning 1 October, with the obligation then brought in gradually for others. By October 2013, all employers with more than 800 staff will need to comply, with the smallest companies in the country coming under the law by April 2014.
Employees that need to be accommodated are those aged between 22 and the state pension age, and who earn above a trigger salary of (currently) £8,015.
The minimum amount an employer is obliged to pay as an employer contribution will also rise in stages, from 1 per cent of pensionable earnings (1 October 2012 until September 2016), 2 per cent (October 2016 to September 2017), and 3 per cent (from October 2017 onwards). Employee contributions will also rise over that period.
The intention is clear - to make the transition more bearable for employer and employee alike. Make no mistake, for FM service companies this is a significant overhead.
The legislation means that employers must first identify which of three categories their employees fall into. These are:
- Jobholders aged between 22 and the state pension age, with earnings above an annual earnings figure that triggers their eligibility for auto-enrolment (currently £8,015). These are the employees for which auto-enrolment is mandatory
- Non-eligible jobholders aged either side of the age band above (ie between 16 and 22, or between the state pension age and up to 75, each with qualifying earnings)
- An entitled worker aged between 16 and 75 but earning below the lower limit for qualifying earnings.
Communicating the changes
At our roundtable event, representatives of variously sized FM service providers explained the extent to which they were prepared for the changes. Auto-enrolment adds a significant and cumbersome layer of administration to payroll departments already beset by issues of managing different workers with differing conditions of employment on different contracts.
Worse still, forcing companies to auto-enrol their employees into a pension is even more problematic when many earn not much above the minimum wage.
Even the largest service providers present had not yet started communicating the changes to their employees, principally because of the absolute certainty that huge numbers of staff will have left by the time the new law hits. Spending money communicating the changes to employees who would likely not be with the company when the changes take place was something they could not afford to do (despite official advice that they should have started to do so at least a year before their staging date).
"We have this churn the whole time," explained Ann Chesher of Servest. "Six months down the line we'll have a whole raft of new people. For us, it is better to communicate the changes nearer the staging date. The bigger issue at the moment is making the wider business, and some of the more senior directors, aware of what this all means. Because our staging date isn't until 2013, other things keep taking priority. But as we know, this law is going to have a huge impact."
The staff churn issue so entrenched in FM is likely to have a particular impact on auto-enrolment, with OCS Group UK's Ian O'Sullivan and Servest's Ann Chesher pointing to the often short service of their employees.
Servest's Ann Chesher agreed. "There's a debate about whether transient workers are going to be interested in setting up a pension, and generally we think they are probably not. This is mainly because they are earning close to the minimum wage and are probably only going to be around for a short time. Are they really going to be interested while they are here in putting money in to a pot for a pension?"
"A good percentage of our workforce doesn't go past three months' service," agreed O'Sullivan.
Tracey Dyer explained that partly due to the comprehensive vetting and screening requirements G4S needs to deploy on its contracts, her company had a smaller transient worker population. G4S's staging dates are between March 2013 onwards, and the company has begun its communication programme with employees, creating an initial 'high-level awareness' of what the changes mean.
"Where appropriate we've been talking with union reps and taking people's questions at employee forums, but clearly we don't have the answers to everything at the moment because the government have changed their minds on a few things and there are some points that need clarifying."
"We have some employees who don't currently have a pension as well as people who do have GAD (Government Actuary's Department) pensions. We quickly realised that it's not just a matter of communicating with the people who are not currently in a pension - we also need to reassure those employees already in a pension scheme that they needn't worry, and that those schemes will continue as agreed.
That's something we've been working through in the last couple of months."
Ian O'Sullivan said that a major issue with any communication programme is that "around 60-70 per cent of those needing the changes explained to don't have English as their native language".
Paul Murphy of The People's Pension pointed to a "rather nebulous" statement from the Department of Work and Pensions (DWP) putting the onus on those employers with a significant proportion of the workforce for which English isn't their first language to provide some form of alternative communication. "The trouble is they don't define what that 'significant proportion' is," said Murphy.
Ann Chesher thought this unworkable. "We employ people from hundreds of nationalities,
so how do you do that?"
Murphy had an answer: "We've created a facility on our website where everything an employee needs to know will be translated in to any of 64 different languages. We built that facility for just this reason - that it's quite an ill-defined area."
For Laura Phillips and Melanie Osborne of Rollright and Incentive respectively, the scale of the translation issue was much smaller. "We have translators on call for some of our everyday work already," said Phillips. "A lot of our managers and supervisors are multi-lingual," said Osborne.
Pensions experts predict that around a third of employees eligible for auto-enrolment will opt out. As of this month, employers are banned from offering incentives to their workers to opt out of the auto-enrolment process.
Inducements such as offering a bonus or a higher salary if employees agree to opt out, or threatening to dismiss or withhold a promotion if an employee does not, will see organisations heavily sanctioned. A scale of escalating penalties could cost up to £10,000 a day for offending employers.
One of Tracey Dyer's major concerns was the longer-term implication regarding individuals' ability to opt out or opt back in. This would add a considerable administrative burden that the company was reviewing.
Ian O'Sullivan said that OCS was working to an assumption that 70 per cent of its employees would take up a pension through auto-enrolment, with 30 per cent opting out - a figure based to an extent on the experience of other countries with similar auto-enrolment projects.
"We have built 70 per cent in, and used that figure when calculating our contract bid figures for the last two years," said O'Sullivan. "We're now dealing with our current contracts, trying to negotiate how best we can collectively spread the cost. When we renew contracts we're going through the new model in which the cost of auto-enrolment is built in, but for our five, 10, and 15 year contracts we are having the discussions."
Ann Chesher said this was a delicate issue that varies by contract type, the different stages the contract was at, and the employee mix within that contract. "Certainly, we've been mindful of costing this in, making sure during our bidding for work over the last few years that clients are aware of the new rules; it's not something we have hidden from, even though we weren't completely certain a few years ago exactly where the percentages were going to end up."
Many organisations are seeking to offset their costs by expanding the number of salary sacrifice arrangements they have in place. Companies have realised that the increased cost of pension provision is not going to go away and are looking at innovative ways of reducing their exposure.
At the roundtable, an anecdotal example was given of a company who had decided to restructure their whole benefit arrangements in light of auto-enrolment, and the savings achieved, including those through a series of new salary sacrifice initiatives including pensions, car sacrifice, childcare vouchers, and cycle schemes, helped to fund the anticipated increase in cost base.
Many roundtable attendees were considering salary sacrifice options, although OCS's Ian O'Sullivan questioned whether a rush to make use of all available salary sacrifice options was in fact sustainable.
"Are we confident salary sacrifice is going to stay?" he asked. "Surely if everyone uses salary sacrifice schemes it will defeat the very object of what we are doing for auto-enrolment? If we accept that the Government can't afford to pay for people to retire, and yet everybody moves into salary sacrifice schemes, aren't we just taking money off the Government anyway?"
KPMG's Anne-Marie Robinson explained that it is difficult to predict legislative change. "Salary sacrifice is a well established principle, people are probably most familiar with childcare arrangements". She acknowledged there is also a longer-term project considering the possible merger of tax and national insurance that it has been suggested could negatively impact salary sacrifice.
The consultation phase has recently been delayed until after the summer and in any event it is not clear how this would impact salary sacrifice, if at all. If there are any changes here there is certainly no suggestion they will be in the short term. Nevertheless, she warned that "salary sacrifice arrangements do need to be implemented and communicated to employees with care" to ensure arrangements are effective and not open to challenge by HMRC. "The costs of getting this wrong can be significant."
The DWP allows firms to defer the staging date for some or all employees. Paul Murphy wanted to know how many participants were aware of the postponement option open to them, and whether or not they were considering using it.
The DWP allows firms to defer the staging date for some or all employees. Paul Murphy wanted to know how many participants were aware of this option, and whether or not they were considering using it.
"Once you have deferred your staging date, the DWP will allow you to postpone auto-enrolment of those individuals for three months from the original staging date," explained Murphy. "You can do that for the whole of your group, for part of the workforce or just on an individual basis."
"In those three months, the profile of the workforce could change radically. Most probably with FM firms the principal communication with workers will take place at some stage during that three months, because that's when they'll be most certain it is likely to embrace the majority of people who it is going to affect."
OCS's Ian O'Sullivan said that deferment would help prevent issues of human error from contract managers. On occasions, contract managers fail to get details of who should be paid in on time, leading to non-payments followed by double payments in the next pay period. "If we went with auto-enrolment from day one, then those issues would also occur with auto-enrolment.
It shouldn't happen, but there's always going to instances when contract managers don't get their hours in on time. To defer would help us deal with that."
Ann Chesher said Servest would definitely make use of the deferment option, but was concerned at the potential for error. "The big issue I see is that someone doesn't reply to our communication, so we then make a deduction - and they probably won't realise straight away that we have made that deduction; they'll wait until they see another deduction in the following pay period, and only inform us then.
People will be very unhappy people when you tell them "You can't have that money back. Organising refunds will take time."
Paul Murphy suggested that putting information about the changes on employees' payslips would help get the message about the new legislation across. "We tested different forms of communication. Most effective was a couple of lines in the payslip explaining that 'we will be taking an amount out of your pay packet to go into your pension.'"
Ian O'Sullivan said that OCS was doing just that. "We'll be telling our employees that the change is coming. You only need to have two or three sentences on their payslips."
Paul Murphy said that such a message should be generic, rather than something that attempted to explain the precise implications for that particular employee.
Anne-Marie Robinson of KPMG said that organisations must put in place a system capable of dealing with the inherent complexities of the new legislation: "A good system is going to be absolutely vital to ensure you can identify who needs to be included as a worker, track your relevant job holders and workers when they change bands, opt outs, refunds and other complexities.
"It's a good time to consider such systems - because auto-enrolment is not the only new law affecting organisations and their payroll departments. Between now and October 2013, the government is introducing a new way of reporting PAYE. 'Real Time Information', or RTI, is so-called because it requires employers and pension providers to inform HM Revenue & Customs (HMRC) about PAYE payments at exactly the time they are made.
This will be part of the payroll process, with payroll software collect the data and sending it
on to HMRC. Previously, all such information was supplied in one transaction at the end of
the financial year. This will give HMRC much better visibility of what payments are due and the precise details of the payments that are being made.
RTI is being introduced just as the majority of companies will be impacted by auto-enrolment. Many firms are looking to introduce systems that cater for both obligations at the same time.
Anne-Marie Robinson said she understood this approach.
"It's the right time for our clients to be planning ahead and looking at this now, as the projects are running to similar timescales and will involve a number of common stakeholders, such as HR and payroll. Clients want to avoid duplication, especially when they are investing in systems and changing processes.
This is a really good time to also cleanse data, systems and look at efficiencies. It is important to undertake a gap analysis and plan ahead, allowing enough time to manage the end to end process."
The impact on TUPE
The impact of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) is a thorny part of the auto-enrolment issue. The discussion indicated that FM firms are still seeking clarity on what happens to their obligations when individuals working for one employer are then transferred to another.
TUPE and separate pensions legislation means that firms have to offer TUPE'd staff the same (DC) pension contributions they were getting with their previous employer or, where the previous employer offered an occupational scheme that cannot be replicated, match contributions up to 6 per cent - figures that may be higher than the minimum level contributions that auto-enrolment obliges.
The effect of this would be that staff transferring to a new employer could work on the same contract as other employees yet receive employer contributions at a considerably higher level.
Anne-Marie Robinson raised the issue of whether, in a TUPE scenario, an individual with a salary sacrifice arrangement with their original employer would then be able to claim they were disadvantaged if the incoming employer did not offer such a scheme.
After the event, Angus Menzies, a director at KPMG highlighted that most salary sacrifice arrangements enable the employer to withdraw or amend the arrangement at any time, and that a new employer following a TUPE transfer could invoke this clause.
Accordingly, a failure to provide an identical salary sacrifice arrangement to that offered by the previous employer need not necessarily be a breach of the TUPE obligation to maintain terms and conditions of employment. However, such a failure could potentially be a substantial change in working conditions to a transferring employee's material detriment - which could still give such an employee grounds to regard himself or herself as dismissed under TUPE (regulation 4(9)). Such a dismissal would usually be automatically unfair.
Angus Menzies suggested that in fact, the rules relating to TUPE and pensions already exist - it's just that the obligation to offer a scheme under auto-enrolment will see the problems they cause coming up much more frequently.
In a nutshell, this means FM firms adding the issue of pension obligations to the due diligence process they undertake when looking to bid for new work.