Schemes called to urgently review TPAs for 2012

Schemes have been urged to clearly define their responsibilities and those of their sponsor in respect of the reform, and to review whether their third-party administrator (TPA) is able to handle the additional workload.

Under auto-enrolment rules, a worker has to be enrolled into a qualifying pension scheme if they are aged between 22 and the state pension age, work domestically and earn over £7,745 in 2011/2012.

Current schemes need to make sure they provide by October 2017 the statutory minimum, which for a defined contribution (DC) scheme is 8% of qualifying earnings, with the employer paying a minimum of 3%, or another provision which meets the "test scheme standard".

Schemes and sponsors which do not adhere to the rules will be subject to punitive action by the Pensions Regulator. 

A forthcoming report for Hymans Robertson is set to lay bare the unreadiness of many employers for auto-enrolment, as they pass the eighteen-month deadline for their specific staging date.

And research published yesterday by Close Asset Management reported 61% of 2,000 employers surveyed by OnePoll were unaware of the 2012 changes.

Lee Hollingworth, head of DC consulting at Hymans Robertson, said more schemes faced being lumped with the administrative burden of auto-enrolment by lax sponsors.

Scheme managers at such employers, particularly those in the retail and hospitality sectors, face a tough choice whether to update, replace or augment their current scheme administration to meet the challenge.

Hollingworth said: “The issue for the trustees will be on the administration – will the administrator be able to deal with their issues?”

If a third party administrator is unable to deal with a scheme’s specific auto-enrolment demands, such as changes to payroll systems, trustees and managers need to act now to appoint a new administrator in time for 2012. 

Penny Green, chairman at the newly relaunched Pensions Administration Standards Association, and chief executive of SAUL Trustees, has called upon schemes and employers to define their responsibilities in implementing reform.

In a comment piece for schemeXpert.com, she argued identifying eligible employees and preparing for the inevitable opt-outs and refunds will create an extra workload to fall somewhere.

“Given the opt-out is a trustee responsibility,” she said, “the trustees will need to be talking to their administrators to ensure there is capacity to deal with any additional workload.”

This message is repeated across the industry.

Xafinity Consulting has today published a fifteen-point action plan for employers setting out the requirements on sponsor and scheme.

For example, point 10 states when the employee submits a valid opt-out form within a month the employer is duty bound to repay the contributions to the employee, and the pension scheme must refund the sponsor its contributions.

This is the kind of administrative process which existing schemes will need to work into their own arrangements.

“The main message at the moment for the small and medium sized schemes is to get them to start planning now,” said Richard Bryant, head of trustee services at Atkin Trustees.

Trustees should be taking the opportunity to speak to sponsors about this issue, especially if the trust-based scheme is being considered as an alternative to Nest.

The right tools

There are three broad options for schemes reviewing their processes in expectation of the auto-enrolment administrative challenge.

The first, and cheapest, is to update the current system to the reform criteria, where possible.

Bryant said: “If a scheme had invested in a new admin system in the past couple of years, one would hope it would have been future-proofed.”

The second is to replace the existing system.

“If the systems are fairly old, it may be time for these schemes to consider getting complete new systems in, but there is a time and cost involved in that,” added Bryant.

The third option is to bolt on an auto-enrolment system to the existing tools, but this obstructs clean flow-through of the administration.

This option removes some of the inherent cost of replacing an entire system, but it is hardly ideal to divide the administrative flow.

Over the counter

The industry is already designing products to alleviate this burden.

BlackRock is developing a staging system as an optional extra to pension scheme clients as part of its administration offering before auto-enrolment.

The system, to be launched in the first quarter next year, would give schemes a more sophisticated way to capture information about their members.

For example, this would flag up employees of the sponsor company who suddenly become eligible for auto-enrolment, either through increasing earnings or age, or those who need to be re-enrolled.