Payroll Providers Slow to Automate
Payroll providers slow to provide Auto-enrolment functionality
Auto-enrolment promises a major change in the way the UK saves for retirement, with payroll managers taking the central role in implementation. But are the providers ready? Philip Whiteley has an overview.
Payroll providers have been slow to develop tools to help employers with auto-enrolment, namely because they have been taken up with preparing for Real Time Information (RTI), according to pensions providers. This has enabled pensions firms to take the lead in developing auto-enrolment compliance tools. There are also indications that benefits providers are stepping in.
Ian Buchan, corporate relationship director at Standard Life, says that up until mid-2011 “none of the payroll providers were making noises about functionality [for auto-enrolment]. It was always a sensible fit that auto-enrolment would sit with the payroll provider. We were asking around, who is doing what? I was at numerous conferences, and there were never any payroll companies trying to put this forward.” Though he adds: “We are now aware of a lot of payroll people who are going to have some eligibility functionality built in.”
Edmund Downes, pensions manager at Aviva, adds: “We recognise that employers will need help. The information we have is that payroll providers are interested over the longer term, but that in the short term RTI has dominated attention. It’s a much nearer timescale. Many payroll providers felt uncomfortable dealing with pensions. We’ve effectively stepped in to try to help as much as we can.”
There is growing recognition across the pensions and payroll industries of the scale and historic nature of the pensions reform coming in from this October. The law compels employers to arrange for all workers aged over 22, and earning above the specified threshold, to be automatically enrolled into a qualifying pension scheme. They may opt out, but they will be automatically re-enrolled after three years. The aim is to improve the retirement income for a rapidly ageing society. In addition, employers are required to make contributions.
At a time of fiscal austerity and wage freezes, however, there will be a real challenge to ensure high participation and
a low dropout rate. A high opt-out rate could lead to enrolment becoming mandatory, but we are not there yet.
Buchan adds: “A lot of people overlook the fact that the Pensions Regulator is looking for good outcomes, putting quite a focus on communication and investment. Auto-enrolment, far from being sorted administratively, is a massive communication challenge.
AXA pensions development manager Mike Morrison says: “I would like to see communications from the centre… on why auto-enrolment is such a big thing – that we are all living much longer, and that pensions are important. Around 65% of people retiring this year are relying on the state pension. People need to think a little bit more – if
I start saving early enough, I can supplement that, and it’s in my control.”
With implementation for the largest employers just four months away, we provide an overview of preparations on the supply side.
One of the largest and oldest pension providers, Prudential provides a service on auto-enrolment advice and other services via its network of client managers, rather than through a separate auto-enrolment department. The technical side of
auto-enrolling is left to the payroll departments and their software providers.
“They [the client managers] will help them through the process: what to think about when designing the proposition,” says a spokeswoman. “Different clients want different things, depending on their size.”
The provider has publications, a section on its website and other materials dedicated to auto-enrolment compliance, and runs roundtable discussions “that can be particularly valuable to smaller companies”, the firm says. It gives advice on where you should be at different stages of implementation: “For example, we recommend that 15-18 months before the staging date you should start preparations, giving them enough time to find out how many employees they will need to auto-enrol, begin having discussions on the design of the pension scheme, and address the potential costs.
“We are encouraging clients to involve all relevant parties at an early stage – not only their key people internally, but also their payroll provider and any advisers. In many cases, we are facilitating these meetings and ensuring that all parties are clear on their roles and responsibilities.”
Nearer to the staging date, Prudential offers help to clients with implementation and employee communications. “For many employees the concept of paying into a pension and having less disposable income each month will be something very new to them, and ensuring they fully understand the impact on their day-to-day and long-term finances will be important.”
Standard Life is at an advanced stage of planning for auto-enrolment. Part of its approach has been to work closely with NEST, the national pension provider set up under the legislation. “We don’t see NEST as a direct competitor,” says Ian Buchan, corporate relationship director at Standard Life. “They are another provider, and it is possible we will both be wanting to attract clients, but NEST have designed their proposition for the low-paid, high-turnover part of the business. We see more options for working in a complementary way than competing.
“We are doing things like sharing all our files protocols, so they are exactly the same as NEST – they can receive automatically; you can just lift a file from one system and download it on another.”
Co-operating with NEST enables Standard Life to expand pension provision beyond the population of stable middle-to-upper earners, says Buchan. “We are currently talking to some of the UK’s largest employers, many of which are facing a significant challenge: only 10-20% of employees in a pension scheme, and thousands not in a scheme.”
There are different elements to Standard Life’s offering: tools for eligibility and opt-outs, tracked on an on-going basis. It is in the process of its first implementations. “At the moment, what we offer our clients is a portal. It allows them to view all the information and extract management information, download the new entrants and monthly contributions. Our clients go on to that portal. The final stage is adding a number of functionalities to allow them to verify eligibility and anticipate the correct payroll deductions,” says Buchan.
AEGON has partnered with HR/payroll specialist Logica to support delivery of its pension reform proposition. This is aimed at both new and existing corporate customers. AEGON’s proposition will centre around an online auto-enrolment “hub”.
Logica’s technology solution is delivered in partnership with SuperChoice, an established provider in the Australian pension market, where compulsory pension contributions have been in place since the AEGON-Logica service has been configured to meet UK requirements.
According to the providers, the online hub is slated for launch in Q4 2012 and offers employers:
l Categorisation of employees for auto-enrolment based on payroll information;
l Automatic calculation and validation of contributions based on scheme rules;
l Tailored employee communications, including electronic communications;
l Online facility to manage opt outs and opt ins, together with automatic re-enrolment of all opt outs every three years; and
l Management information to help employers gain maximum value from their pension investment.
NEST will be fully supported through the hub to form part of an integrated workplace savings proposition for employers. AEGON is also developing its platform solution for the workplace savings market, which will launch in the first half of 2012.
Paul McMahon, group marketing director of AEGON, says: “Auto-enrolment is a great opportunity to get employees thinking about pensions and planning for the future. In the current economy, employee engagement is more crucial than ever.”
The tool developed by Aviva offers a staged approach: initially, there is a simple calculation tool, which will allow employers to use it with feeds from payroll, and allow them to divide the payroll into sections to see if it is compliant. “This is not going to be anything more than a modeling tool – it’s not a compliance tool initially,” says Edmund Downes, pensions manager at Aviva. “It allows employers to experiment with different levels of contribution to see what the impact would be. It’s a standalone tool.”
Stage 2 is a full compliance tool. Employers will still be able to model at the outset, and then categorise workers at set contribution levels for each section, and then run against payroll to see if the contributions are compliant. “Your employees can see if they are compliant, then allow the employer to match across data from payroll against data requirements,” says Downes.
Stage 3: We have the auto-enrolment manager for employees (AME), which helps employers manage their regulatory requirements “with the advantage of being able to do so across multiple provider schemes”, the company says.
It has also launched Work:Life – a hub that offers a range of workplace savings schemes, including accessing their pension, savings products, benefits and financial planning tools.
From summer 2012, Work:Life will include a Pension Tracker – a tool that is designed to help employees monitor and manage their pension.
AXA does not offer a direct service on auto-enrolment, as it does not work in the group sector other than through investment offerings. However, it is heavily involved in supporting the reform. Mike Morrison, pensions development manager at AXA, says that the communication challenge is even bigger than the technical one: “The biggest challenge is telling people – they suddenly see 2%, 3%, 4% of their salary going into a pension scheme, and they have the opportunity to opt out. We need a communications exercise on the benefits of the scheme. Part of it is that the employer makes a contribution as well, and if you are not in the scheme you won’t get that. Really, the concept is good, but in difficult economic times having money taken out of your salary is not ideal.”
He pointed to figures indicating that ISAs sold more than pensions last year. “ISAs are quite simple to understand. The complexity of pensions and the rules around when you can take it puts people off. We live in a disposable society, where people want to spend today not tomorrow.”
Payroll will have to make it as seamless as possible – systems for opting in and out, and re-opting in after three years, he says.
Neil Tonks, product manager, says: “The first priority has been getting the RTI pilot complete. Now we can concentrate on pensions reform, and what we need to develop. There is a whole range of things: our system isn’t just payroll, it’s integrated HR and payroll.
“Concentrating on the payroll side: the biggest bit is spotting everyone who needs to be auto-enrolled, checking whether they meet the criteria at the point that you do the payroll calculation. Our system includes record-keeping – checking whether someone is auto-enrolled, or of they have opted out.”
The main thresholds for eligibility for auto-enrolment are age and earnings. Guidance from the government on what constitutes earnings still contains some ambiguities that need to be clarified, says Tonks. “We are talking to the Pensions Regulator about this.”
The guidance uses a general description of income that would normally be regarded as salary or wage. “We have people asking if a particular allowance counts,” he says. The aim of the payroll provider is to provide clear information to employers on payments. Ultimately, it is the responsibility of the employer to comply.
MidlandHR’s approach has been to upgrade existing software to incorporate the thresholds, record-keeping, reminders and so on to enable compliance with auto-enrolment rather than develop a new product. Whether or not there is a fee for upgrades depends upon the individual client and the relevant clauses in the service level agreement. They will be affected by factors such as the degree to which the arrangement is a fully managed outsourced payroll service, or use of purchased software, or a hosted arrangement.
Logica has partnered with pensions specialist AEGON to provide a specialist auto-enrolment service, which will centre on an online auto-enrolment hub. By combining Logica’s specialist payroll systems with AEGON’s experience of the pensions industry, the companies hope they will “create a compelling support proposition for corporate customers”.
Logica’s technology solution is delivered in partnership with SuperChoice, which is established in the Australia pension market.
Allison Fower, head of wealth management at Logica, says: “The pace of change in the UK pensions market is so fast that providers need to buy trusted, off-the-shelf solutions and services to remain competitive and offer the best service to their customers. AEGON has recognised that one of the key challenges of auto-enrolment is to make it easy to enrol employees into a pension scheme.
“Our service offers AEGON that advantage and will provide customers with the best way of managing auto-enrolment.”
Logica stressed that its offering is platform-neutral. “It’s not related to whether AEGON customers are also Logica customers; AEGON will have the system [we provide] in place – you don’t need to be a Logica customer to be able to use it,” said a spokeswoman.
Ceridian describes itself as being in a “pretty advanced stage”, with its auto-enrolment offering. “The product is in prerelease form and we are able to show our customers, and give them a clear idea what it is going to do,” says David Woodward, chief product and innovation officer.
“We are targeting the very largest customers: working to a July timeframe, while our first customers will go live in October. The only client we have [starting then] is Asda, but obviously there is a range of customers who start coming into the frame [shortly after].
The specific requirements depend on client needs, he says. “In some cases it’s minor, right through to wholesale changes in terms of pension schemes designed and configured. No two clients are doing exactly the same thing. They have all looked at the requirements here and decided to do something different – different pensions providers, different methods.”
Ceridian’s product falls into two main functional areas: the first is an auto-enrolment module that sits in the heart of the payroll platform itself, that arranges the auto-enrolment of the qualifying employee into the appropriately defined pension scheme. The second concerns the requirements around communications that are set out by the Pensions Regulator.
Web-based technology is the default recommendation. “Employees can self-register, see the communications sent to them, go to their email address – all the detailed communication that has been stipulated by the Regulator can be automated and sent to the employee,” says Woodward. “Not everyone has access to the internet, so there has to be the fall-back of using paper.”
Northgate-Arinso has acknowledged that many pension providers have taken the lead on auto-enrolment administration tools, but says: “This is not because they want to but as a risk-mitigation tool in case no one else does.”
A statement from the company adds: “Auto-enrolment is clearly a payroll-driven process. The data sits within the payroll system and that software is best-placed to deliver an accurate, risk-free solution of communicating with employees and managing the process.”
However, it acknowledges that the link between HR/payroll and employee benefits management and communication has become vital. It says it has specialist systems in all related areas, and is developing integrated auto-enrolment systems across its suite of HR/payroll and “MyChoice” employee benefit management and communication solutions.
“There are still a few key issues that remain uncertain about the execution of auto-enrolment. We continue to lobby the Pensions Regulator on behalf of our clients; however; one thing is certain, auto-enrolment will happen, and NorthgateArinso “has the ball”, says Andrew Morris, employee benefits director.
ADP, the world’s largest payroll provider, is in the midst of developing an auto-enrolment service, which it plans to launch to clients in October. Jes Turner, senior programme manager of ADP Employer Services, said the delay was deliberate as the firm anticipates amendments to the rules following government pilot schemes.
“We looked at the clients we have, and the first clients to use it will be going live in March next year.” He added: “Pensions reform will impact some clients from this July, but we didn’t think it would impact on ours.”
The ADP system will have three broad functions: the first is a tool to enable bulk enrolment, identifying all eligible employees and putting them into this pension scheme. Stage two consists of the on-going checks for eligibility, consisting of the individual company’s rules. Although the compulsion rules are fairly strict, an employer can defer for up to three months; for example, to see if a new employee passes a probationary period. Employers with weekly based pay may not want deductions to commence immediately, as a new employee has up to 30 days to opt out, and withholding payments can be simpler than reimbursements.
The third area concerns the triggers that can cause people to become eligible – a pay rise taking them above the threshold, or reaching the age of 22. The system will also handle automatic re-enrolment after three years, and requirements for opt-out.
ADP will offer the system as an upgrade. It will be on an employer-by-employer basis, in line with the phased introduction of compulsion. The upgrade will be free of charge, Turner says.
Frontier says auto-enrolment is a standard statutory update for Frontier software clients and they have just received the latest software release.
This includes initial auto-enrolment features that will enable them to begin meeting their obligations under the Pensions Act 2008.
Sharon Simpson-George, client services manager, says users will be able to identify qualifying schemes, specify a default scheme for each job, and create pension records for staff members automatically, and enter both postponement and opt-out details for record-keeping purposes.
“Our future development plans include additional functionality surrounding the earnings criteria for auto-enrolment. This will be introduced in the coming months,” she says.
“Auto-enrolment for Frontier Software has been a smooth operation. Once we successfully interpreted the initial confused communications from various official bodies and organisations, there was nothing stopping our development team. This meant we have been able to give our clients a head start in getting prepared for October 2012.”
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