Pension Reform & Payroll
At a ground-breaking roundtable sponsored by First Actuarial, Payroll World brought the payroll and pensions worlds together to discuss the future of pension reform – auto-enrolment.
The first companies will begin mandatory auto-enrolment (AE) of eligible staff into a pension scheme from October 2012. Nevertheless, there is still disagreement over who is ultimately responsible for the reform in organisations. Where does payroll sit?
Many payroll providers agree that payroll, as one senior compliance expert put it, “can only act on the data it’s provided. Pensions reform duties have very little to do with payroll beyond deducting money from pay.” Karen Bull, product strategy manager from MidlandHR challenged this perception, saying: “I think it can only lie with payroll. The change with this pensions reform is that it’s not based on standard earnings – it’s actual earnings calculated at the point of assessment. That implies payroll in a way never done before in terms of pensions.” Aside from managing deductions, others around the table agreed payroll professionals were not responsible for communicating changes to employees or administering opt-ins and opt-outs. “Managing the process – it’s got to be HR,” said the director of one payroll bureau.
“But payroll holds the data, and we can tell HR when the rules have changed,” said Neil Lagden, head of Bond Payroll Services. Another raised an issue that would affect smaller businesses. “At around the level of 20 employees, it’s often the accountant managing the company payroll,” they suggested. “It’s not clear whether accountants are prepared to take on the extra responsibility.”
One of the major complaints arising during the debate was that the Department for Work and Pensions (DWP) had progressed with pensions legislation without consulting the payroll sector. Whereas pensions professionals had been involved from an early date, payrollers felt that they had been left out, and burdened with duties as a result.
First Actuarial director Henry Tapper described the situation: “I went to two consultation meetings: one for providers and one for insurers. The providers were saying, ‘That’s a payroll issue’, and the insurers were saying, ‘That’s a payroll issue’. But I never saw a single payroll provider at either of these. All of this was effectively dumped on payroll, because you weren’t there.” Bull confirmed this was indeed the case:
“DWP simply has no experience of the payroll sector and doesn’t understand it. It certainly missed the payroll industry at the point of legislation being drawn up. HMRC have got this wrapped up now – it understands the form we take. The DWP does not.”
The table agreed that pensions providers claiming to be able to manage auto-enrolment independently of payroll providers are mistaken.
Ceridian’s chief product and innovation officer, David Woodward, described how a leading UK pensions provider was shaping up to be a competitor about 18 months ago. “Many insurers were making lots of promises to take away the problems,” he said. “But as legislation started firming up, people realised it wasn’t straightforward because pensions providers haven’t got the data, and won’t be able to get it.” Woodward continued to the effect that payroll has been the only player able to connect the individual elements of AE legislation.
“We’ve realised we have to fill this gap,” Woodward said. “We don’t see insurers offering workable solutions. You’ve got to take the data out of payroll for an external system to determine which employees should be auto-enrolled, then send the information back to payroll to do the deductions. That cycle does not work for many large employers.” This attitude was reflected in discussions about middleware providers. “Not all organisations are used to doing transactional processes, certainly
not in the timings required,” affirmed Woodward.
One serious problem raised numerous times during the debate was the lack of clarity in the pensions legislation. Everyone agreed that it was too complex in its current form.
One of the top payroll professionals in the room was especially vehement in his criticism. “If there was an Olympic gold medal for making the most complex legislation out of something simple,
Steve Webb deserves it,” he said referring to the Minister for Pensions responsible for pension reform. “The law is, frankly, rubbish. There are scenarios in pension reform law which are impossible.” Many commented that the Pensions Regulator cannot answer their questions, and time is running out. A pensions director said: “The more questions we ask, the more unanswered questions we have. We are reaching a point where we have to decide whether we end up compliant or not.”
A payroll bureau member agreed: “We all get a slightly different answer from the DWP when we ask the same question.” The participants concurred that the unclear legislation would have to be amended in the future, meaning processes would be corrected, adding extra costs. “There’s going to be additional cost to all payroll providers because the legislation is not clear enough yet,” said Sheila Brisland, Sage product manager. “We have to make our own interpretation because our customers have deadlines that we can’t miss. And there may well be additional costs later to change that.”
Attendees also predicted how non-compliance would be handled by the government. “
There probably will be some slack cut in the early months because everyone understands the sheer amount that has to be done. But I think they’ll (DWP) look for a big employer to come down on hard, just to spook other organisations into doing something,” suggested a top payroll representative. Another payroller raised the question of who would be answerable for the penalty. “If one of the larger clients gets slapped with a penalty, where will they go with the bill? The solution provider – because we said it would work.” The table agreed that within this climate of uncertainty, the first staging of larger employers would serve as a model for smaller businesses from wave two in mid 2013.
Many highlighted that while payroll providers are currently working on a one-to-one basis to support these primary clients, it will be impossible to replicate this bespoke approach with hundreds of smaller clients in the coming years. A common solution is required.
Simon Parsons, Ceridian’s director of tax and compliance, explained: “We’ve got to have standardisation, otherwise it will crash next year. I’ll have 300 staging in one day – can I support them in a one-to-one way? Organisations have got to realise there’s going to be a crash if they don’t get in the queue early.” Brisland agreed: “The SME end of the market needs something well defined and simple. Yes, there’s a contribution cost, but we need to make the administration costs low, or this could end up costing more than contributions.”
One of the major complaints around the table was the decision to allow employees to opt out of the pension schemes. Many foresaw this clause as a main reason AE could fail.
Roundtable participants agreed that the government had done too little to communicate to employees why it was worthwhile contributing towards a pension pot.
Michael Howard, Frontier Software’s managing director, said: “There will be low take-up because the education among employees is not there.” And Stuart Hall, managing director of Employer Services, added: “It’s one thing communicating it to employers – but who’s communicating to employees? Until the employees understand, it’s going to be a nightmare.” Neil Sutcliffe, senior client executive at Logica, warned that for some employers, opting out would continue long after the first month of staging. “There are hundreds of employers out there who have significant staff turnover. For them that introduction period will continue all the way through,” he said.
During the discussion, the payroll and pensions providers decided upon two courses of action. The first was to redress the relationship between the payroll sector and the DWP. With the help of pensions providers, they agreed to request a meeting with the department, and put forward their major concerns.
The table agreed the approach would need to be positive, as Bull described: “Whether it was us or them is irrelevant. It’s about moving forward, not looking back.” The group agreed that to ensure the DWP
listened they would have to demonstrate real dangers associated with the current legislation. These would include problems around opting in, lack of clarity, and the need for a standard interface among pensions providers. “It’s our responsibility to lobby the government to get the information because they don’t realise the seriousness we’re facing,” insisted Howard. Although little time is left, those around the table were encouraged by the department’s recent climb-down over salary sacrifice. In June, HMRC issued guidance that confirmed salary sacrifice pension schemes would be able to meet AE requirements.
Tapper encouraged the payroll profession by emphasising how important AE is for the government. “There are two big planks in the government’s pensions agenda: one is to reinstate the basic state pension, and the other is AE. Their doors will be open to you,” he said. The second outcome of the group’s discussion was to establish a standard interface among pensions providers. Ceridian’s Simon Parsons said: “I’ve got multiple clients with a single provider that have multiple format exchange files, so even between the same provider, different clients have different formats.” Tapper agreed a standard interface was a good idea, but suggested it would be difficult to convince other pensions companies. “No insurance company is going to adopt something from another insurance company.” Instead, he suggested the payroll sector create the interface and take the lead. Some payroll providers in the room were keen, agreeing that it would be quick to create and was worth a try. “You’d only need one insurance company to use it and the others would follow,” said a pensions director. Another pensions expert suggested it was important to get government endorsement. But a proportion thought it would be better to see what Origo, a pensions consortium that is currently trying to create a standard interface, produces. “If Origo is establishing a standard, I wouldn’t want to go for another one,” suggested Lindsay Mungin from IRIS SME Solutions. “It would be pointless if that process was already in process.” However, Parsons felt Origo’s project may come too late. “They anticipate completion way after the first AE points start,” he warned. By the end of the discussion, all those around the table agreed to continue working together. Tapper summed up his impressions of this first meeting between the pensions and payroll sectors to discuss AE. “There’s a human face to payroll now – I hope you feel the same about pensions. There’s much more to understand what’s going on at your end than you might have thought. If we can work together, we might find a way of making auto-enrolment work. If we stay apart, we’ll have a calamity in three years’ time.”
Pension Reform Roundtable Panel
Payroll World, Martin Kornacki, Editor
Payroll World, Chris Fitzgerald, MD
Centrica, Stella Eastwood, Director of Group Pensions
Centrica, Andy Gould, HR Business Solutions Analyst
First Actuarial, Henry Tapper, Business Development Director
First Actuarial, Alan Smith, Founder
Sage, Sheila Brisland, Product Manager
MidlandHR, Karen Bull, Marketing and Product Strategy Manager
Ceridian, Simon Parsons, Director of Tax and compliance strategies
NorthgateArionso, Kathie Hammond, Customer Services Manager for Product Development
Star Computers Ltd, Howard Hoddell, Director
Bond Payroll Services, Neil Lagden, Head of Bond Payroll Services
Bond Teamspirit, Roger Moore, General Manager
IRIS SME Solutions, Lindsay Mungin, Technical Product Manager
Frontier Software, Michael Howard, Managing Director
Esos, Michelle Crook, Director
Ceridian, David Woodward, Chief Product and Innovation Officer
Logica, Neil Sutcliffe, Senior Client Executive
Employer Services, Stuart Hall, Managing Director
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