First Draft Report of Enquiry on Costs of Payroll Services for PA

1、Enquiry for BERR and DWP on the predicted administrative costs of additional payroll services to support personal account pensionsCentre for Enterprise and Economic Development ResearchMiddlesex University Business School, LondonSeptember 2007URN: 07/1581Enquiry for BERR and DWP on the predicted adm

2、inistrative costs of additional payroll services to support personal account pensions Centre for Enterprise and Economic Development ResearchMiddlesex University Business School, LondonSeptember 20071 Introduction In December 2006 the Government announced proposals to promote private pension saving

3、across UK workplaces. These proposals are explained in the Governments White Paper, Personal accounts: a new way to save Further information on pension reform can be found at: .uk/pensionsreform . The proposed personal accounts system will operate from 2012 and will require all empl

4、oyers to enrol eligible employees into a qualifying workplace pension scheme. All employers will have to engage with pension reform, meaning that many micro-businesses will be expected to make employer contributions to a pension for the first time. However, employers with satisfactory arrangements a

5、lready in place, or who would prefer to set up an alternative qualifying scheme will not be required to join the personal accounts scheme.CEEDR was asked to conduct a survey-based enquiry on behalf of BERR and DWP to estimate the administrative cost of calculating and collecting monthly contribution

6、s for personal accounts, for businesses which outsource their payroll. This research project was intended to form part of the evidence base used by the joint DWP/BERR working group tasked with estimating the administrative costs of the personal accounts reforms. We were asked to contact and intervie

7、w 30 payroll service providers. These would be drawn from separate directory lists, and would ensure coverage across a range of IT-based services (payroll specialist agencies), accountant-based services (with a mini payroll bureau in their back office) and multiple business support services (large c

8、ompanies dealing with complex IT and logistics systems). CEEDR made efforts to secure a balanced sample and developed an enquiry instrument that was applied consistently across all of the interviews. Our researchers interviewed 30 respondents by telephone during 29-31 August 2007. As well as data fr

9、om the telephone interviews, this report draws on some background desk research, including contacts in the Institute of Payroll Professionals, the Institute of Chartered Accountants and the national chairperson of the IRENE network. 2 Details of the sample of 30 payroll service providersQuota sampli

10、ng methods were used to obtain 30 interviews, including 12 accounting practices, 14 payroll agencies plus four big providers. To obtain this sample, we used the internet Yellow Pages directory to produce England-wide reference lists of (a) self-announced payroll-specialist-led service agencies and (

11、b) accountant-led services which advertise some payroll functions. These had a good spread across regions, with at least one representative firm in each English region This sampling frame covered firms that provided payroll services to firms with up to 250 employees (a description of the structure o

12、f the payroll services sector is included as an Appendix to this report). We made separate enquiries to identify four large firms that provided payroll services to large employers. Preliminary enquiries were made by telephone cold calling; where the response was encouraging we either did a screening

13、 interview to identify a person and a time for talking with or began the telephone interview. For the accountancy firms and some payroll practices, an email questionnaire was used. Generally, the payroll service firms were more responsive to our explanation of the purposes of this enquiry than the a

14、ccountant led firms. This was potentially the result of the survey being conducted during month-end; a busy period for accountancy firms. The breakdown of our completed interviews is shown in Table A.Table A: contacts made and interviews completed by type of providerType of business process service

15、firmNumber approachedNumber interviewed(and response rate)Accountancy firms offering payroll work5912 (20%)Payroll processing specialist firms 4414 (32%)Large business process outsourcing (BPO) service firms44 (100%)Total firms contacted and total interviewed 107283 Payroll services charges for thei

16、r services to different sizes of employer3.1 The overall patternThe pattern of provision, and how payroll services are bundled, costed and priced, is very complicated so that generalisation is difficult. However, in the case of monthly paid staff payrolls which make up the majority of most services

17、workload we have learned that service providers tend to price the work per payslip processed, with many reporting facilities (such as PAYE and CIS for HMRC) offered as integral rather than charged additionally. Micro firms (1-4 employees) and very small firms (5-9 employees) face a reserve minimum c

18、harge per employee or per workforce for the agreed service across the whole year. Employers with 250 or more employees almost all went to the large BPO service firms; these clients typically had a bundle of services provided for an agreed contract price with allowance for extra services to be added

19、later. For medium sized firms with 10-249 employees, there is a “batch production” market, where the majority of services are standard pricing per payslip. Depending on whether services include BACS transfers, special reporting, and volatile payroll membership or not, prices varied from £1 per

20、payslip per monthly-paid person (£12 per annum for one employee) up to around £5 per person per month (£60 pa). This was dependent partly on the package and also on the provider. The market for payroll services is imperfectly competitive; considerable asymmetries and distortions of in

21、formation allow wide discrepancies in what is available and at what price. In principle, small firms offering other services typically accountancy could provide payroll work at deeply discounted rates as a sweetener to the other work. However, some of our evidence perhaps points to the opposite case

22、 where accountancy firms in a small local market with a good reputation may charge more than the normal market price for these additional services. Table B: Annual actual fee per employee charges by types of payroll service provider and by client sizeClient size by number of employeesActual or expec

23、ted fees for monthly payroll adminPayroll specialistsAccountancy practicesLarge BPO service firmsMicro (1-4 employees)Average actual annual fee charged now and the range of responses£64.20Range: £30 to £160£88.50Range: £30 to £192£61.00Range: £40 to £82Av

24、erage increase due to personal accounts and the range of responses£5.62Range: 0 to 20%£5.23Range: 0 to 15%£3.05Range: 5% onlySmall (5-49 employees)Average actual annual fee charged now and the range of responses£35.10Range: £24 to £55£44.60 Range: £20 to £

25、;100£31.00Range: £24 to £50Average increase due to personal accounts and the range of responses£1.58Range: 0 to 10%£2.99Range: 0 to 20%£1.08Range: 2 to 5%Medium (50-249 employees)Average actual annual fee charged now and the range of responses£26.00Range: £12

26、to £40£35.00Range: £30 to £40£24.00Range: £20 to £30Average increase due to personal accounts and the range of responses£1.10Range: 0 to 12%£3.75Range: 0 to 15%£0.84Range: 2 to 5%Large (250+ employees)Average actual annual fee charged now and the ran

27、ge of responsesNANA£20.00Range: £18 to £22Average increase due to personal accounts and the range of responsesNANA£0.70Range: 2 to 5%3.2 Micro businesses (1 to 4 employees)Summary of costs for micro businesses:· PAYROLL service firms charged £64.20 per year per employee

28、 on average (assuming an average size of three employees);· PAYROLL service firms predicted an average of £5.62 extra (+8.2%) in fees for accommodating PA deductions and both monthly and annual reporting;· ACCOUNTANCY firms charged £88.50 per year per employee on average (assumin

29、g an average of three employees);· ACCOUNTANCY firms predicted an average of £5.23 extra (+4.5%) in fees for accommodating PA deductions and both monthly and annual reporting;· VERY LARGE MULTIPLE business services providers charged £61 per year per employee on average (assuming

30、an average of three employees);· VERY LARGE MULTIPLE business services providers predicted an average of £3.05 extra (+5.0%) in fees for accommodating PA deductions and monthly/ annual reporting.For those payroll services serving a particular locality, very small businesses (sole traders,

31、partnerships, starting enterprises etc) may make up the largest client group. Both payroll-focused providers and accountants told us that this market was an important slice of their business. We were told that providers tended to state a basic annual fee for the whole payroll operation, or a minimum

32、 annual charge, even if there was a per payslip price. Accountants were more expensive than payroll providers for both micro and small business payrolls, based on our enquiries about servicing a monthly paid payroll. The majority of payroll service firms processed more monthly paid staff than weekly

33、 paid staff, although more than half processed weekly paid as well as monthly paid employeesSome respondents gave a block deal or minimum charge figure for these very small clients and we assumed three workers on payroll as the typical case. Some respondents gave absolute cash amounts for their pred

34、icted increase in fees while others offered a percentage increase; we have entered cash and percentages in Table B. We think most respondents were hesitant about quantifying the predicted increase (some suggested “minimal” or “little” rather than a figure); there is clearly some guesswork involved i

35、n estimating the costs of a process which will not be introduced until 2012.3.3 Small businesses (5-49 employees)Summary of costs for small businesses:· PAYROLL service firms charged £35.10 per year per employee on average;· PAYROLL service firms predicted an average of £1.58 (4.

36、5%) extra in their fees for accommodating PA deductions and both monthly and annual reporting;· ACCOUNTANCY firms charged £44.60 per year per employee on average;· ACCOUNTANCY firms predicted an average of £2.99 extra (+6.7%) in their fees for accommodating PA deductions and both

37、 monthly and annual reporting;· VERY LARGE MULTIPLE business services providers charged £31 per year per employee on average;· VERY LARGE MULTIPLE business services providers predicted an average of £1.08 (3.5%) extra in their fees for accommodating PA deductions and monthly/ ann

38、ual reporting.Note: Some of our respondents ran tariffs for this group starting at eight or ten employees with the smaller ones treated as micro firms with a reserve flat rate for the whole payroll.3.3 Medium businesses (between 50-249 employees)Summary of costs for medium businesses:· PAYROLL

39、service firms charged £26 per year per employee on average.· PAYROLL service firms predicted an average of £1.10 (+4.2%) extra in their fees for accommodating PA deductions and both monthly and annual reporting;· ACCOUNTANCY firms charged £35 per year per employee on average

40、;· ACCOUNTANCY firms predicted an average of £3.75 (+10.7%) extra in fees for accommodating PA deductions and both monthly and annual reporting;· VERY LARGE MULTIPLE business services providers charged £24 per year per employee on average;· VERY LARGE MULTIPLE business servi

41、ces providers predicted an average of £0.84 (3.5%) extra in fees for accommodating PA deductions and monthly and annual reporting.In the case of charges for services currently provided and predictions about extra costs for servicing PA contributions for clients with 50 to 249 employees, there w

42、ere fewer providers among accountants and small payroll agencies while the large business services firms had a large proportion of the total business in this category. We could not weight for volume as we did not have enough detail on these matters. 3.4 Large businessesOnly the four large multiple p

43、roviders served the large employers market sector. Two of our other providers had one client each just below the 250 employee threshold, and likely to grow beyond this quite soon. The large providers are business support services with up to 1000 employees active in several markets requiring extensiv

44、e IT capacity. They are well placed to offer a bespoke service which might include (for example) the employers own occupational pension scheme or a group scheme, and capacity to handle special deductions and additions and special reports. For these reasons, among others, the large providers told us

45、that they had no set scale of charges for payroll services; instead their senior sales people negotiated a package fee for one year or in some cases for three years. They did have costing guides to inform their pricing but were not willing to take us through these in a way which would allow reasonab

46、le comparisons. Two of the large BPO providers gave us illustrative prices and we have used these in the summary table below and in table B. One other talked us through pricing approaches without offering definite figures. The fourth was unwilling to talk about any commercial aspects of what they do

47、. Consequently the data for the large providers needs to be treated with caution but we have included these figures which are the average of just two cases and they suggest that big BPO providers have scale efficiencies which allow them to charge somewhat less per employee than other providers. Summ

48、ary of costs for large (250+ employees) businesses using large payroll service providers:· VERY LARGE MULTIPLE business services providers charged their large employer clients various fees per employee or per payslip processed. However, if the services offered were similar to those offered to m

49、edium sized employers there would be a further discount from the £24 per employee per year quoted for them to (say) £20.· VERY LARGE MULTIPLE business services providers have well qualified senior staff able to make informed judgements about the additional costs of servicing PA pensio

50、ns from 2012 under various assumptions about how the software will work and so on. One of those we interviewed is the chairperson of one professional group (IRENE) dealing with HRMC payroll provider returns and had also contributors to the DWP early consultation at the design stage of the PA pension

51、s legislation.Officials at DWP and BERR provided a list of payroll processing operations that the outsourcing company would have to carry out on behalf of their client for the monthly collection process. In order to cover the varied nature of the market and ensure comparability, we used our data on

52、prices charged for monthly paid workforces getting a full data processing and reporting service (including annual returns for PAYE etc) but not a BACS payment service We understand that 10p per BACS process plus some in-house administration time is the typical cost for this work.Many of the responde

53、nts who estimated price increases for personal accounts arrangements provided percentage rises rather than absolute cash amounts and we have converted these to align with the cash sums quoted for current prices. For the very large (250+ workers) clients we have restricted figures for the cost of ser

54、vices because smaller payroll providers reported having either none at all or just one of these clients and they were for the most part beyond their capacity or confidence. As discussed above many larger firms use a large bespoke provider for payroll and other HR services which are provided in a bun

55、dle of products and so the smaller providers tend to cater for the smaller employers. Further notes on the distribution of valuesActual chargesThere was a wider range of charges amongst accountancy practices. In this group, several high-end outliers pushed up the mean charge, most noticeably in the

56、services to micro firms category where several charged over £100 per person per year, compared to only one payroll service charging this much. Anticipated price increases to meet cost of personal accounts arrangementsThe most notable outlying values for the price predictions were small clusters

57、 of zero scores from both accountancy and payroll service providers. In the micro and small firm markets, there were three zero scores for accountants and three zero scores for payroll services. These respondents told us that they believed the only impact of personal accounts reforms would be in set

58、ting up new systems. After this the software would generate what was needed, so that they could absorb the minimal costs of transmitting data files. In the interviews some said “none at all” and others said “really very minimal”. We scored these answers as zero unless they went on to say that minima

59、l would in fact mean a small price increase, in which case we prompted them to put a number on this.5 Uncertainty about the reported estimatesOur brief was specifically concerned with the steady state costs of the process after software and manual routines had been run in. It was clear that a substantial proportion of respondents believed that much of the cost load would occur at the setting up stage. Small agencies tend to use Sage software a