What price auto-enrolment?

While pensions may be the main track event in the 2012 Olympic year, there are races to be won in group risk too says Richard Davey, head of commercial development at Enrich

In fewer than 600 days, the UK will host the Olympic Games for the first time in more than 60 years. Preparations will continue until the Olympic torch lights up the Games. And by the time the flame is extinguished at the closing ceremony on 12 August 2012, there will be less than three months remaining before auto-enrolment becomes the UK’s latest attempt to deal with the huge gaps in pension provision.

Whilst we cannot compare the excitement of the 100 metres final to the new personal accounts, there are obvious similarities in terms of timing, preparation and making sure that your corporate pension provision in place is in the peak of health and fitness when the starting pistol fires.

Thankfully, many employers are listening to advisers, and awareness has been further raised by significant discussion within the trade press and announcements by The Pensions Regulator.

Yet are employers just considering the main event and overlooking the full picture?

Any employer who links membership of pension to benefits such as life assurance, death in service pension, income protection, critical illness and private medical insurance needs to give serious thought to the look of these benefits from a contractual, financial and strategic point of view.

Let’s start by considering group life assurance. This is the most likely benefit that an employee becomes entitled to on joining a company pension scheme. During the phased auto-enrolment, entire workforces will be enrolled automatically into a pension scheme which could easily give rise to additional life provision for the entire population.

Companies with low pension take-up should already be budgeting for the additional pension contributions they will be required to find when auto- enrolment commences. In a recent NAPF survey, statistics showed that only 57 per cent of employees participated in their company pension plan. Given this figure, the average company will need to include a further 43 per cent of its population in group life assurance –where the linkage exists – something that is not likely to be easy on the pocket.

Life assurance continues to be a relatively low cost yet highly valued benefit for employees. But other benefits, such as group income protection and group private medical insurance, come at a higher premium. Without a strong game plan in place employers could find themselves scrambling around for additional budgets, re-writing contracts and in a worse case scenario have the need to self-insure potentially huge liabilities post 2012.

To say there are no easy solutions to these issues would be incorrect, but any decisions taken need to be thoroughly considered from all angles. Companies need to question the purpose of these benefits. Typically, employers want to provide an attractive benefits package which will help retain and recruit. Others have global strategies which steer a UK benefits provision. The scenarios will range greatly, therefore each company needs to review the insured benefits on their own corporate merits.

One answer could be for an employer to simply close all insured benefits to new entrants. A few tweaks in the paperwork and the problem disappears. Yet, is this really the best solution?

The decision could flout corporate strategy, hinder recruitment, and longer term lead to higher premiums as the population matures and the profile of the scheme becomes less attractive to insure. How often do advisers find legacy schemes for small closed groups which are far more expensive than schemes sometimes more than double the size?

Employers must also consider what processes they have in place for members who subsequently opt out of the pension plan after being auto-enrolled.

Will employers require “live” accounting to allow for real time cost for their premiums, rather than a year-end adjustment? If so the choice in the market for live accounting is slim. Where members opt back in, what consideration has been given as to how this will be monitored to avoid the discretionary entrants issues? Shall we factor in the removal of the default retirement age to this too? This is a big piece of work and potentially a very expensive change for employers. These are just a few of the issues that employers need to add to their ‘to do’ list in advance of 2012.

The message we should be giving to employers is not just to focus on the 100 metre dash but to have at least one eye on the marathon. The Olympics are coming and so too is auto-enrolment, and we the advisors, along with providers and employers, need to adjust to life after auto-enrolment.