Keep pace with personal accounts

With personal accounts three years away, employers should be working out the cost implications now, advises Foresight.

Most of the detail has been announced, and one thing’s for certain – personal accounts, which could cost businesses £3 billion per year, will have a significant cost impact on UK industry. That’s why Mercer has created the Personal Accounts Cost Estimator (PACE) to help companies measure the future impact on their remuneration budgets.

As Foresight outlined in the last issue the new regulations, due to come into effect in 2012, will require all businesses to automatically enrol staff into a qualifying pension plan. However, it is now likely that the onset of the new duties will be staged between 2012 and 2016 so that not all employers have to comply at the same time. In its simplest form, employers’ duties under the Pensions Act 2008 are relatively simple to comply with.

All qualifying employees must eventually (by 2016) receive 3 percent salary contribution from their employer and make a 4 percent contribution to a scheme themselves with these amounts also being phased in gradually. As an employer, organisations have to:

The largest employers must comply from October 2012 onwards. However, according to Steve Charlton, principal at Mercer, it will be more challenging and costly to implement than it seems at first glance. “There are lots of variables,” contends Steve. “Typically, in the UK, pension schemes work on a basic salary calculation when calculating employer and employee contributions to a scheme. However, personal accounts’ earning bands are anything but simple – the band grows from £5,000 to £33,000 and includes all income, including that above and beyond basic salary.

There are, according to Mercer, additional variables that need consideration, such as:

To help employers with the planning, Mercer’s PACE tool helps companies to compare a position pre personal accounts auto-enrolment and their post personal accounts situation from a cost perspective. “Once they’ve got a good idea of the financial impact, organisations have the opportunity to look at what the very minimum cost might be, and also at scenario planning. They can find out what the cost will be, for example, if they level down contributions or decrease pay to compensate.”

However, Steve warns that companies should consider that enrolling, what might be a large proportion of the workforce into a pension scheme overnight, must be considered a wider benefit strategy and design challenge rather than just a financial cost. For instance, many employers will have to start thinking about how this will impact on their own administration, payroll and HR systems.

“We already have a tool available called Total Rewards Statements that helps companies communicate the value of their overall benefits package,” says Steve. “It could, if implemented early enough, enable companies to manage the cost of personal accounts from an employer perspective. It might not work in all circumstances, but could be viable in softening the blow.”

Steve adds that while personal accounts may still seem some way off, for finance teams, they’re just around the corner. “A lot of employers will be looking at employee costs and setting budgets and the next three years are very much on the horizon of UK employers. Only by planning now will we ensure we don’t have a cliff-edge situation with the cost of complying coming as a shock to industry.”

Keeping you up-to-date on personal accounts

We have compiled a library of free articles, press releases, podcasts and webcasts on personal accounts issues, as well as a demo of the PACE calculator. Our next live webcast on personal accounts will be held on 5 November 2009.

Visit uk.mercer.com/personalaccounts to find out more or contact your Mercer consultant, or e-mail Mercer Foresight with any queries.