Automatic enrolment of workers into a pension scheme is due to begin in October, when the UK’s largest employers, those with more than 120,000 employees, will be required to enrol qualifying workers (see Key facts, below) in a pension scheme, with both employees and employer expected to make deductions.
Over the next four years, more and more workers will be brought under the legislation as its scope is widened to include employers with smaller numbers of workers.
Recruitment agencies will be doubly affected. Not only will their own employees fall within the scope of the legislation, but also their temporary agency workers, in some cases numbering in the tens of thousands.
According to Nigel Pettinger, director of customer services at NEST, a pension provider that is expected to be popular among recruitment agencies, the new legislation “is turning pensions on its head”. “In the past you [a worker] did nothing and there was no pension. Now if you do nothing money is put aside which starts to build a pension for the future,” says Pettinger.
Few would argue against the government’s aim of encouraging Britons to put aside more for their retirement. However, automatic pension enrolment raises serious challenges for agencies, as well as concerns as to its effectiveness within the temporary agency worker market.
“Agencies are going to be among those hardest hit by this legislation,” says Mark Baker, senior associate and a pensions specialist at law firm Pinsent Masons, who adds that because of the complexity “a lot of companies have put it in their ‘too difficult’ pile”.
However, with fines of up to £10,000 a day for the largest staffing companies, as well as criminal penalties in the case of ‘willful’ failure to comply, failure to be ready in time could prove hugely costly.
With the date (the staging date) for implementing the legislation dependent on the number of employees, including temporary agency workers (see Key facts, below), Randstad has a staging date of March 2013.
According to Ian Naylor, Randstad’s legal director, the company has been planning for auto enrolment since the beginning of the year. “The time and the cost involved in getting ready for auto enrolment are significant, but we have a high level plan and now it’s all about implementation,” he says.
Naylor says that one of the first measures was to establish project groups drawn from across the company. Payroll will play a vital role in ensuring that deductions are made correctly and on time and paid over to Randstad’s chosen pension provider, says Naylor, and consequently Randstad has been talking to its payroll software provider to ensure that its software is fit for purpose.
David Hancock, a director of Oxford Software, a company that provides payroll software for a number of recruitment agencies, says he is confident that his company will have its newly developed software ready in time.
Meridian Business Support, whose staging date is May 2013, began planning for auto enrolment at the end of last year. With two-thirds of its 4,500 workers eligible (its PAYE temps) finance director, Jeanette Barrowcliffe, says the company is facing a number of challenges. “The legislation is complex. It takes up as much management time as AWR trying to understand the legislation,” she says.
Barrowcliffe says that among the “grey areas” are technical, but nevertheless vital, details such as whether the three-month waiting period before automatically enrolling an agency worker begins at the date of registration or when an assignment starts. There are also questions about agency workers’ rights to opt out (see Key facts, below). Barrowcliffe says the company is still seeking clarification from the Pensions Regulator on a number of points.
Jason Perry, director of ASL Recruitment and a regional director at TEAM (The Employment Agents Movement), says the biggest challenge for the recruitment industry is charge rates. With recruitment agency pension contributions starting at 1% of relevant earnings and rising to 3% from October 2017, Perry says the big question is “who is going to bear the cost?”.
Barrowcliffe agrees that this is a huge issue for Meridian. She estimates that unless it can pass on the cost to its clients the legislation will add “a couple of million in extra costs”.
Perry says initially he expects agencies to absorb some of the cost. However, once their contribution rises to 3%, he argues they will have no choice but to pass it on to their clients. “No independent recruiter can sustain such a hit to their bottom line,” he says.
In addition to the question of who bears the extra cost, one of the knottiest issues facing recruiters is the opt-out. Under the legislation, an agency worker has one month to opt out from the date they were automatically enrolled. After this the agency must refund the worker their pension contributions.
However, given that agency workers are by their nature transient, this could entail considerable administrative burdens on agencies, and in particular keeping track of them.
And the complexity for agencies is sure to be added to because different agencies will use different pension providers. In addition to NEST, Now: Pensions and the People’s Pension, some of the big insurance companies may wish to tap into this market, says Rob Davies, a director of EFG Independent Financial Advisers.
Davies says that given the transient nature of the agency worker market and the strong likelihood of significant numbers of opt-outs, technology “is absolutely crucial”. A case in point is that because agency workers’ incomes are subject to wild fluctuation, recruiters will need a payroll system that works out when they go above the qualifying limit for earnings.
“Agencies are going to have to be able to track the agency worker for three months, as well as monitor their eligibility and earnings,” says Barrowcliffe.
However, Perry points out that beyond the administrative burden, the opt-out issue has wider implications for staffing businesses, particularly their ability to budget accurately, and to price contracts. While more agency workers opting out reduces agency employment costs, more staying in the pension scheme pushes them up. “Agencies are going to have to make some sort of forecast about what the opt-out rate is going to be,” says Perry.
However, NEST’s Pettinger warns that at this stage this is all but impossible. “Nobody really knows because we don’t have any evidence,” he says, suggesting that it could be anything between 20% and 60%.
Barrowcliffe argues that among low-paid agency workers in particular “a large proportion will opt out” simply because they won’t able to afford the contributions from their wages.
“It is the uncertainty,” says Naylor. “No one knows what the impact will be, and how many agency workers may decide to opt out.”
However, Matt Huddleston, chief financial officer at umbrella firm FPS Group, says that the legislation could push up the numbers of agency workers on pension schemes. One of the requirements is that on the third anniversary of their staging date staffing companies must automatically re-enrol eligible workers who have left the scheme or opted out. Huddleston says that some of these workers may eventually decide they are “fed up” continuing to have to opt out, and stay in.
Perry suggests that one option for agencies would be to charge out all their agency workers at a rate that takes into account the agency’s pension contributions. However, he warns that clients asked to pay a higher rate for workers not in the scheme are likely to be “disgruntled”.
Recruiters also need to take note of strict anti-avoidance measures within the legislation, says Caroline Blackwood, senior associate at Osborne Clark. For example, while it may be tempting to offer to provide clients with only those workers outside the scheme, because they are cheaper, this is likely to fall foul of the legislation. As Blackwood explains, the legislation prohibits employers enticing workers to opt out and in this case supplying only opted-out workers would likely be seen as an enticement because it increased opted-out workers’ chances of being offered work. “The big thing is to talk to your client as early and as openly as possible about what is going to happen,” says Perry.
As recruiters face up to yet another piece of complex though well-meaning legislation, as with AWR communication with clients will be key. But with the clock ticking on auto enrolment, they could do worse that adopt one of the other key lessons from AWR. “There is a considerable amount for recruitment agencies to do, but it’s doable if they start early enough,” says Pettinger.
Agency workers aged between 22 and state pension age who earn more than £8,105 will have to be automatically enrolled into a pension scheme
Each staffing company will be required to begin auto enrolment by a certain date (its staging date). This date based on the number of people (own staff and agency workers in its largest PAYE scheme on 1 April 2012), with the largest employers expected to implement auto enrolment first.
Timetable for auto enrolment
• More than 250 employees/agency workers, beginning with those with 120,000+ from 1 October 2013 to 1 February 2014
• 50-249: 1 April 2014 to 1 April 2015
• 30-49: 1 August 2015 to 1 October 2015
• Fewer than 30: 1 June 2015 to 1 April 2017
• The regime catches PAYE temps and umbrella workers; the only category not covered are truly self-employed contractors.
• Broadly, the person who pays the agency worker will be responsible for automatic enrolment and making employer contributions on their behalf.
• Employers’ contributions will be phased in beginning at 1%, rising to 2% from October 2016 and 3% from October 2017.
• Eligible workers will pay 1% rising to 5% in October 2017.
• A worker can opt out, but there are strict anti-avoidance provisions to prevent staffing companies encouraging workers to opt out.
• Recruiters will be able to delay automatic enrolment for three months, but only if it follows the correct procedures.
Action Points for recruiters
• find out your staging date
• start early
• set up project team
• talk to payroll provider
• choose pension provider
• communicate with clients
• train staff