26th September 2013
Medium sized employers could face costs of close to £80 per worker for those who sign up to the new workplace pension scheme says employee benefits firm Buck Consultants.
Using its experience with one client, the firm says that this is the cost per member experienced by a firm with around 6,000 employees taking into account legal, technology, communication and payroll expenses.
The new system of auto-enrolled pensions started around a year ago with the largest employers before the scheme is rolled out across smaller employers in the next few years. For example, medium sized employers with employee numbers of between 800 and 1249 are due to stage this month.
The biggest cost for many employers especially those that either haven’t offered pensions before or were only a small number of employees have been in a scheme is likely to be the contributions for the increased number of employees who are likely to stay opted in. But Buck suggests that employers may not be forecasting for the associated administrative costs. It is also warning that while big pension providers have offered technology solutions to bigger providers for free they may charge smaller employers partly because it is less profitable business.
Philip Smith, Head of Defined Contribution and Wealth at Buck Consultant says: “The industry has definitely scaled a huge learning curve during this first year. For those that have staged, automatic enrolment is working and opt-out rates are pleasingly low. However there are still major issues to address for those businesses left to stage.”
He adds: “The costs involved in implementation have been high. Significant changes to payroll systems and technology have been challenging, expensive and generally much greater than anticipated. To claim that you can implement automatic enrolment without advice is unrealistic. Until now providers have been providing technology solutions to larger companies for free, but we’re seeing that change now. As a result, this cost is likely to be a significant issue for smaller companies who are fast-approaching their staging dates.
“For one client, with around 6,000 members, the cost of implementation was close to £80 per member; a figure representing legal, technology, communication and payroll expenses. Additionally, the cost has meant that a significant number of businesses are reducing pension benefits for new joiners, to offer them the minimum under automatic enrolment or simply scaling down the contribution rate across the board,” says Smith. According to Buck, opt-out rates are, to date, in the region of 5 – 10%, which it says is a healthy figure.
However, the key issue is whether current contribution levels are high enough to give people a comfortable retirement. Smith argues that the minimum rate is simply not enough. “Minimum contributions from both employers and employees into automatic enrolment schemes start at almost nothing. Even by 2018, when they reach the full minimum amount of the equivalent of 8%, a worker earning £20,000 p.a. will only see £1,154.88 p.a. going into their pension pot. For these workers, who will probably have saved for decades with the intention of buying an annuity, they’ll be lucky to get £100 a week; this is far-removed from a comfortable retirement.” Smith concludes: “I think we should all be pleased with the progress made in the first year, though there are still some major issues to be addressed. The biggest of which is, in my opinion, that current contribution rates are simply not high enough to ensure that people have enough to live on in retirement.”