Time to act on pensions

DAVID SPRECKLEY of KPMG’s pensions team explains why firms need to take action ahead of auto-enrolment pensions

IN LESS less than a year, auto-enrolment pensions will become compulsory for large employers and, with around 10million additional people expected to join pension schemes, firms need to take action fast.

And if the looming deadline for auto-enrolment is not sufficient incentive for companies to review their pension provision, the prospect of more than halving their running costs might spur them into action.

KPMG has found that employers who review their entire pension provision in the context of auto-enrolment and take advantage of all the savings and efficiencies available can see costs fall by up to 60%.

Auto-enrolment will compel employers to make pension contributions for virtually all their employees. It comes into force from October 1, 2012 for companies with 120,000 workers or more. Most medium-sized firms will have to comply from early 2013.

Initially, employers will have to contribute a minimum of 1% the eligible worker’s salary, rising to 3% by 2017. The vast majority of workers will be eligible for auto-enrolment, apart from those earning under �7,474 per year, those who do not meet the age criteria, and those who actively opt-out.

Most employers, especially the larger ones, already have some pension provision in place for staff, but it may be that not all staff are scheme members. Under the new rules, almost all employees will need to be enrolled in a company pension scheme.

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Employers need to consider how to approach this now in terms of what sort of pension provision offers the best value to the business, the best pension terms for the employees and can be delivered in the most cost-effective and efficient way.

Businesses with a significant number of workers not currently in a work-based pension scheme face a substantial increase in pension costs, not only in the form of the pension contributions but also increased running costs.

Businesses can mitigate this by taking the opportunity now to ensure they fully integrate their HR, payroll and pensions systems and also reviewing their existing administration delivery methods. If appropriate, they could consider moving to a more integrated “bundled” approach under which scheme administration and investments are managed by a single provider rather than separate ones, thereby reducing operational costs.

October 2012 may feel like a long time away, but when you consider that most employers may need to redesign schemes to maximise savings, review any existing schemes and importantly review and upgrade systems and allow time for testing before the “go live” date for auto enrolment, planning now is critical.