Automatic enrolment: the payroll perspective

16 October 2015

As the automatic enrolment process is becoming a reality for 1.3m SMEs in the UK, it is timely to understand just what sort of impact this will have on small businesses.

Automatic enrolment was for many, a pension problem about how to increase savings rates across the population. However, automatic enrolment, as designed by the government has always been a payroll and data problem.

The various steps required to stage and comply with the legislation was always going to fall back on payroll and accountants as smaller employers went through the process. These smaller firms do not have the capacity in terms of time or money to go about this in the same way as large firms. This is borne out by our results. Payroll and accountants accounted for just over 40% of the sample when asked from whom employers are seeking advice. For many employers they have never engaged with pensions, this is simply something that is an additional part of salary, and so it is a payroll problem. The logic from the employer’s side is clear. What is missing is an understanding of just how burdensome automatic enrolment is and how complicated it is even for payroll specialists.

However, this burden is getting smaller. The time needed to help SMEs to stage is considerably smaller than for larger employers. In 2013, the CEBR estimated it could take up to 103 days for firms to stage,[1] while our results suggest that this process now only takes an average of 20 days. This significant improvement is due to payroll bureaus being pushed into the auto enrolment environment and as a result they have amassed significant specialisation in pre-staging processes and have developed knowledge and skills that are designed for high volumes of firms going through the process. Payroll is responding to the auto enrolment challenge practically using solid processes and technology.

For post-staging tasks, that the time taken to undertake ongoing administration has remained the same as those numbers reported by the CEBR, with the average time taken remaining 3 to 4 days per month. This is in part due to a lack of uniformity in the pensions industry, resulting in the need to move to inefficient manual processing. However, this view of ‘on-going’ tasks over-estimates the time taken to do ongoing administration. Many of these tasks are ad hoc and non-recurring, the actual time taken to do ongoing tasks is, therefore, only 4.5 hours, as the only task that has to be undertaken every month is the data transfer to pension providers.

One consequence of this is that payroll costs have, on average, increased by 30%. Moreover, payroll providers are charging for their auto enrolment services, and while there remain issues around how much firms are willing to pay, many in the payroll industry are upping their commercial offering and generating new business as a result of the expertise they have developed.

Despite these risks and costs, automatic enrolment is becoming an efficient process and this is being made possible by the efforts of the payroll industry. The industry may have been forced to engage with this process but payroll has made automatic enrolment work as part of a broader commercial offering and SMEs are benefiting from the industry’s specialization and expertise

[1] Source: Finding your way out of the auto enrolment maze: An analysis of the employer costs of pensions auto enrolment, CEBR, September 2013.