Payroll Outsourcing Query: Auto-Enrolment

Auto-enrolment, a good reason to outsource your payroll?

Standfirst: There are numerous reasons why outsourcing payroll operations can benefit a business, the arrival of complicated legal obligations in the form of workplace pension reform could well be what decides the issue conclusively for many employers. James Allen reports.

Do the words “automatic enrolment” mean anything to you? If the term doesn’t conjure up thoughts of workplace pension reform, then possible fines of up to £10,000 a day that The Pensions Regulator can impose on non-compliant employers will probably focus your mind. With posters and television adverts involving the likes of Dragon’s Den star Theo Paphitis and The Apprentice’s Karen Brady, the Department of Work and Pensions (DWP) has spent more than £6m on increasing awareness among the British public and employers of the new pension reform. Whether the message has got through remains to be seen.


Smaller and medium-sized organisations will soon be required to automatically enrol much of their workforce into a pension scheme and add an initial minimum 1% employer contribution.

However the application of the law is complex and centres around payroll to a large extent. With the clock ticking to get prepared before it’s too late outsourcing the payroll could be a genuinely credible solution. “Outsourcing doesn’t suit everyone though” says Frontier Software’s Martin Whitehouse, who adds that choosing an external payroll provider can prove expensive – but it does bring a number of significant benefits. Flexibility is the obvious one, as while an in-house payroll team requires office space, salaries and computer equipment such costs can be removed and, should the business have quieter seasons, aren’t spent unnecessarily. “The main reason for outsourcing is that driven by cost saving. Obviously it does cost to move the payroll out but the goal is that the gains offset those costs,” Whitehouse says.

Crosshead: Economy of scale

Based on economies of scale, which payroll providers can harness, and with minimal internal overheads for the client, savings in moving payroll to an external provider are typically estimated at 15%. According to Shaun Dunphy, solutions consultant at Ceridian: “The first thing an employer needs to ask is ‘why do they want to outsource?’ It’s worth them being honest or finding someone who will challenge their thinking. Is it to reduce costs or improve quality of service? Most good service providers can help employers have that conversation, because it’s not in their interests to go in with wrong assumptions.”

Shifting any concerns about compliance with legal requirements to a provider is another appealing reason to outsource. Paying people accurately and on time is the nature of their business so they can’t afford to get it wrong. While having a payroll provider wouldn’t excuse an organisation from responsibility for non-compliance with auto-enrolment requirements, they can help make it easier to comply.

“It’s a very confusing landscape. The legislation is quite difficult to interpret, you have to read it very carefully and a lot of companies are looking for guidance about what it means to them,” says Dunphy.

Concepts referred to in the legislation such as an “entitled worker” and “eligible worker” are typical examples of the jargon small employers are likely to struggle with and having a payroll provider there to support can be extremely beneficial. There has been some debate about whether an employer should seek out a payroll provider or a pension provider for an auto-enrolment solution but for Dunphy this question has now firmly been resolved. “I think it was assumed at first that auto-enrolment provision could be easy business, even provided as a free service, but they have now discovered it is actually quite labour intensive. What you’re hearing now is that some of those early ideas were over confident and aren’t working in entirety. The sensible place to do the necessary auto-enrolment assessments is when you do the payroll as then you know immediately if staff are eligible or not.”

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