CWS 3.0: January 11, 2012

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U.K.: Providers Brace Themselves for Next Major Legislative Change

Having had to make considerable changes to their internal processes to accommodate the new Agency Workers Regulations, U.K. staffing agencies now must prepare for another piece of far-reaching employment reform: automatic pension participation, which begins to go into effect in October.

Historically, U.K. workers had the option of participating in their employer’s pension programs. Employees were invited to opt in to pension arrangements; however, this system has failed to establish what the government perceives as adequate pension cover among the working population. In 2006, the U.K. government produced a white paper that introduced the concept of "soft compulsion" into workplace pension plans, a provision that was ultimately approved in the Pensions Act 2011. Simply put, employees are automatically enrolled in pension programs, though after enrollment, they have the option of opting out. Following an opt-out, the worker must be refunded moneys paid into the program.

Automatic Enrollment. The reforms require employers to enroll all employees (earning more than £7,500 per annum) automatically and make contributions to a pension plan on their behalf. The Act allows for an optional waiting period — automatic enrollment can be deferred for up to three months to help those employing short-term and seasonal staff. However, only once they have been enrolled may employees then choose to opt out of a pension scheme.

Under the reform, employers must contribute a minimum of 3 percent of employees' salaries, employees must contribute at least 4 percent of their salary, with the government contributing another one percent to the pension plan. Employers that do not have their own pension program in place can participate in a new national pension scheme (the National Employment Savings Trust or ‘NEST’) that was set up.

The implementation of the new regime will start in October 2012 for the largest employers (with over 120,000 employees), continuing for employers of between 50,000 and 119,999 in November 2012, although these employers may participate earlier, from July 2012, if they wish. Other employers will be included in monthly stages, in order of size (again employers may choose an earlier date subject to certain conditions). Employers having fewer than 50 employees will be included in May 2015 (a year later than was originally proposed following lobbying by the business community).

Contingent Impact. Staffing providers will have to enroll their temporary workers after 12 weeks on assignment with the agency. However, the staged implementation will create some imbalance in the market given that large staffing agencies will have to amend their processes much sooner than smaller ones. A concern among those in the industry is that most temporary workers will choose to opt out after being enrolled, creating more administration for staffing agency personnel — typically, temporary workers prefer to take advantage of cash now rather than deferring it until retirement. The administrative costs involved in refunding the workers’ contributions upon opt-out could be higher than the contributions themselves.

“Although the changes are being phased in and not all [companies will be affected] in 2012, it is important to start getting to grips with the practical implications of auto-enrollment,” says Scott Pendry, policy advisor to the Recruitment and Employment Confederation.

Preparations. With a definitive timescale in terms of considering the implications of the new legislation, companies and staffing providers must begin to assess its potential impact on pension and wider total remuneration costs. They should be calculating their likely start date for compliance and putting together an action plan to consider the implications of the new legislation and the potential impact of the additional pension and implementation costs in their financial planning. They should also be considering whether to use their existing employer-sponsored arrangements or through the new NEST vehicle.

The Pensions Act 2011 implements a number of other fundamental changes to pension provision in response to shifts in demographic, social and economic contexts. Life expectancy has increased by 40 percent over the past 25 years, with pensioners now outnumbering those under the age of 16 in the U.K. By 2031, almost a quarter of the population will be over 65 (five percent higher than today's number). Meanwhile, the State Pension age for women will rise faster than originally planned starting in April 2016, equalizing with the age for men at 65 by November 2018 and, between December 2018 and October 2020, that age for both will be increased to 66.

While the pension reforms have been broadly welcomed by the business community, for staffing agencies, the reforms will require more administration and add to their costs when they have only just been obliged to implement extensive new procedures to comply with the Agency Workers Regulations. The staffing industry is also waiting to see what compliance mechanisms will be put in place.

Given, the current economic uncertainty, staffing agencies are likely to be worried that passing on the additional cost burden to their customers will not be easy.

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