A social care provider is temporarily rolling its cash-in-lieu-of-pension contribution into its auto-enrolment structure, so employees will not have to pay anything in until 2018.
AE contribution structures have come further into focus as employers grapple with how to retain enrollees beyond staging, as it is feared that individuals will opt out as this mandatory level starts to increase from October 2017.
However under auto-enrolment that is tantamount to incitement to opt out
United Response – which has 3,500 workers, around 2,500 of which were already in its plan – had historically offered staff either a 5 per cent pension contribution through its non-contributory stakeholder scheme, or the same amount as a “pension allowance”.
“However under auto-enrolment that is tantamount to incitement to opt out. So as soon as we knew about auto-enrolment we removed that option for new starters,” said Diane Lightfoot, director of communications at the charity.
In the run-up to auto-enrolment, existing staff were given the choice of receiving either a 5 per cent pension contribution, or a 2 per cent contribution plus a 3 per cent pension allowance. The organisation plans to eventually phase out the pension allowance option altogether beyond 2018.
“We chose to phase that out rather than remove it completely at stage one, and give people the option to have part of the allowance so we could still meet our minimum legal contributions… [and] which will hopefully soften the blow a bit,” said Lightfoot.
Mark Pemberthy, director at JLT Employee Benefits, said the employer’s contribution is one of the most important factors in encouraging workers to save for their retirement.
“An approach like this sends a strong message that their employer cares about their retirement and understands that it’s difficult for them to save in tough economic times,” he said.
Lightfoot described the company's auto-enrolment at a recent panel discussion.
Managing such cash-in-lieu arrangements in the face of auto-enrolment needs to be done carefully, said Phil Duly, consultant, DC proposition at at Barnett Waddingham, which worked alongside the charity on the project.
“There can be a double whammy on employees’ take-home pay, first arising from withdrawing the cash in lieu and secondly from introducing a mandatory employee contribution,” Duly said. “The contribution phasing option is useful to graduate this transition.”
However, the success of such an approach will depend on what the organisation decides to do in 2018, said Alan Morahan, head of DC consulting at consultancy Punter Southall.
“If, at that time, they then turn to their employees and say, ‘Right, you’ve now got to start contributing 3 per cent to this pension pot to ensure the contributions are within the statutory minimum’, then that might come as a shock to those people and may result in them declining to do so,” he said.
Setting up a working group
When designing its auto-enrolment scheme, the charity’s overall aim was to make it “as cost-neutral as possible”, said finance director Clare Million, and as such “we would not envisage increasing [the 5 per cent level]” beyond 2018.
United Response first hurdle in the run-up to auto-enrolment was discovering its existing pension provider was not willing to take on its auto-enrolled staff. Rather than move its current scheme, it put in place an additional stakeholder plan with Friends Life that was broadly in line with its existing arrangement.
It then established a cross-organisation working group, comprising staff from internal departments as well as account managers from Friends Life and Barnett Waddingham, which was crucial in recognising and tackling the charity’s AE challenges, said Lightfoot.
The scheme postponed its July staging date to October in a drive to get all systems properly in place. As part of this, it took on an additional payroll administrator for six months.
Tailoring the message
“This was absolutely critical for us,” said Lightfoot. “We started with an early series of communications to warm people up to the concept of auto-enrolment.”
Information was disseminated through multiple channels, which included via a staff representative body and email briefings.
Its communications drive was complicated by the fact that the charity has some workers with learning disabilities, so the message had to be tailored to their needs.
“We created documents that sort of started with, ‘A pension is a special kind of savings to help you pay for things when you stop working’,” Lightfoot explained. “It’s actually quite a good discipline to get into, because it made things easier for everybody.”
She added that the diversity of the workforce and the number of relief staff with fluctuating hours meant that the charity had to make it very clear that once individuals go above the earnings threshold, they will not become ineligible if and when they drop below it, which Lightfoot said the charity illustrated as being like “a door you can only go through one way”.
Million added that due to the non-contributory structure of the scheme in its current guise, the charity did not expect many opt-outs in the near future, but said: "In the longer term we will get some opt-outs."
