One in four employers to mitigate 2012 costs

More than a quarter of schemes are planning to mitigate the costs of higher scheme membership from the effect of auto-enrolment, according to new figures.

And 41% of employers which already provide a pension scheme are planning to use either the National Employment Savings Trust (Nest) or a new alternative scheme to new joiners, in order to control the cost of reform. So found a survey of 468 businesses released today by the Association of Consulting Actuaries (ACA).

By creating a new "auto-enrolment section", with scheme rules explicitly following the legislation, managers can limit the administrative and communication burden in bringing existing benefits into line, and contribute an amount lower than their current DC provision.

But this tiered approach runs a legislative risk of future battles over indirect discrimination, where a worse savings provision has been typically offered to one gender or age instead of another.

Managing the reform

Lower contributions and administrative fees are inviting current schemes and employers to work together to provide a cheaper option, according to advisers

And 35% of large employers – those with more than 5,000 staff – are planning to mitigate the cost of higher scheme membership, with another 22% undecided.

The ACA report also revealed the majority of employers with existing schemes are set to auto-enrol non-joiners into them, rather than choose an alternative provision.

Of employers with existing schemes, 73% said they were “likely” or “highly likely” to auto-enrol employees into their existing schemes rather than an alternative such as Nest.

But a further 21% responded positively to the idea of auto-enrolling into a new employer scheme, and 20% said they were also considering restricting entry to the existing scheme, and moving new members into Nest.

Accompanying this scheme design, the survey revealed 27% of employers were likely to review existing scheme benefits and contributions to mitigate the cost of higher membership.

“Other options may be lower pension rates for current non-joiners and new employees and also adjustments to pay and employment levels or lower pay awards,” it found.

Nest for the rest?

Tamara Calvert, a partner at DLA Piper, said the big advantage of moving new joiners into Nest was “cost control”, by not having to amend the existing scheme to suit the legislation.

She said: “You also do not have to discuss with your current members, ‘Oh, look, we are changing your benefits.’”

But schemes and employers should be wary of indirect discrimination, if it proves to be a particular gender or age of person which determines what scheme they enter.

Calvert added: “If the effect of that is to disproportionately affect one of those groups that could potentially be indirect discrimination.”

Those who offer Nest to part-time staff, who may be predominantly women, and end up with a gender divide, could be at risk of legal challenge further down the line.

A similar option option to those 21% seeking to accommodate the reform alongside their current DC provision is to set up a new section which mirrors the legislation.

Scheme managers can set up this option with their employers, making use of their current scheme infrastructure, from administration to investment governance.

By making the benefits under the new section explicitly linked to new legislation allows employers and schemes to save costs from levelling down the contributions paid to those who have not decided to join the scheme in the past, but again raises the question of fairness.

Similar to the Nest option, creating this “auto-enrolment section” alongside a current DC arrangement avoids the communication and administration costs of changing existing benefits.

The extent of the cost control hoped for by employers is reflected in some of their targets reflected in the survey.

A tenth of respondents said they were targeting auto-enrolment costs to the employer of 1-3% of payroll, broadly matching the minimum cost of the legislative requirement.

Just over a third of respondents are targeting costs between 4% and 13% of payroll, while nearly half of respondents had not targeted a spend for accommodating the reform.