15 Jul 2018
The automatic joining of workers to a company pension scheme – known as auto-enrolment – celebrated its fifth birthday in October 2017. On 1 February 2018, the process was finally completed, but, as Adam Bernstein explains, auto-enrolment is still a big and potentially costly issue for British business ...
Adam Bernstein
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Image © Schlierner / AdobeStock
Automatic enrolment tackles a huge, impending social problem of people not having sufficient monies saved to support themselves in retirement.
Relatively static wages, soaring property prices and increases in the cost of living have left many people unable (or unwilling) to put funds aside for when they finish work. Faced with this prospect, the Government decided to act by making it compulsory for employers to automatically enrol their eligible workers into a pension scheme. The employer must also pay money into the scheme.
Now the auto-enrolment (AE) process has been completed, in theory all UK businesses should be compliant, although that is clearly not the case.
Senior pensions analyst at Hargreaves Lansdown Nathan Long said: “The sniffer dogs at The Pensions Regulator [TPR] have been unleashed to track down the employers not complying with these new rules – indeed, TPR has issued fines to employers on more than 20,000 occasions. These can run up to £10,000 per day for the largest firms, but even the smallest firms can see fines of £50 or £400 per day.
“Anyone doubting whether TPR actually collects these fines and follows through on non-payment with court action would do well to look at the its website [www.thepensionsregulator.gov.uk] and, in particular, the section on penalties.”
Fines range from a lowly £500 up to a whopping £52,500 handed to firms that include R&B Services, a cleaning company in Aberdeen, Cromwell Care Home in London and The Norfolk Ski Club.
Vets and other health care firms have not been exempt either. Tower Veterinary Group’s retirement and death benefit scheme 62266 was fined £500 for failing to produce required information, Chatham Street Surgery was fined (and subject to a court order for not paying) £2,500 under an escalating penalty notice, and Wesley Dental Care was fined £5,000 for an undisclosed (historical) reason.
For those not yet familiar with the rules, employers of all shapes and sizes – even those with just one member of staff – are tasked with ensuring their eligible staff are saving for retirement. Eligible staff are those aged between 22 and state pension age – and who earn more than £10,000 per year.
Pension contributions for these employees need to be at least 5% of “qualifying earnings” with at least 2% coming from the employer. These “qualifying earnings” are effectively all earnings between £5,876 and £45,000, meaning there is no need to pay pension contributions on the first £5,876 that an employee earns.
“Small businesses, in particular, should be alive to the very real risk of increased costs coming down the tracks”
The problem for employers, however, is this is about to change. Nathan added: “These minimum contributions are due to rise to 8% in April 2019, with at least 3% coming from the employer.
“It may be job done for the Government, but it’s one that is never truly complete for employers due to their ongoing responsibilities as part of the rules.”
These responsibilities can be broken into several steps:
Providing employees earn more than £833 per month, or £192 per week, and are between 22 and state pension age, you will need to put them in. Keep an eye out for newly eligible staff – the obvious group is new employees.
Nathan added: “Be careful with those people who weren’t enrolled first time round as they didn’t earn enough or were too young, because when their circumstances change you’ll need to put them in too.
“As the eligibility is measured by pay period, even a short pay spike could mean you have to enrol members of staff, so remain vigilant. It is possible to offset this disruption by deferring entry by up to three months. Don’t ignore those who are not enrolled; if they ask to join, you’ll have to enable this and pay contributions if they earn more than £490 per month (£113 per week).”
This should be a matter of course for most employers, particularly if they outsource their payroll or use a provider’s payroll software. Firms should be extra vigilant when pay changes or bonuses are paid, as these events could lead to change in the amount that needs to be deducted. Employers will also need to comply with the increased contributions that come in effect from April.
Certification is simply an audit of your pension scheme to make sure you have paid the right amount, for the right people. There is no need to submit anything – it is self-certification – but you need to have your house in order should TPR come calling, as it increasingly does.
Re-enrolment of those who have opted out or left the scheme previously must happen every three years, around the anniversary of an employer’s staging date (start date for AE). This ensures staff are continually given the opportunity to save for retirement. Once this exercise is complete, the results must be passed to TPR.
The Government has done a pretty good job of improving the rules as it goes along, even though they may seem rather onerous at first. Nathan said: “There is a ruthless determination to ensure AE remains successful and the Government recently made recommendations as to future changes to the legislation.”
The two key changes for employers are that staff will need to automatically be enrolled from age 18 as opposed to 22; and contributions will accrue from the first pound of earnings, whereas currently the first £5,876 can be excluded.
Nathan added: “The changes are great for pension savers, but will impact on some sectors more heavily, such as hospitality and retail, that employ large numbers of younger people. These recommendations will not only mean people retiring with more income, it means they will have greater control over leaving work. In fact, someone with average earnings could increase his or her pension pot at retirement by more than £60,000.”
Increasing the reach of AE is great for the long-term retirement prospects of the nation, but adds yet further costs for businesses.
The Government is clearly mindful of this alongside the ongoing Brexit uncertainty, so opted for a long implementation period, with the changes not due to be rolled out until the mid-2020s.
“It may be job done for the Government, but it’s one that is never truly complete for employers due to their ongoing responsibilities as part of the rules”
Nathan added: “It is widely recognised that contributions of 8% are not enough for a comfortable retirement, with a growing consensus contributions of 12% are more appropriate. Furthermore, the Government has also recommended reviewing the minimum contribution levels from April.
“Small businesses, in particular, should be alive to the very real risk of increased costs coming down the tracks.”
Empirical evidence is showing larger employers driving higher levels of understanding and engagement among their staff by embracing workplace financial education programmes.
Nathan said: “A possible solution to improved engagement could lie in allowing staff to be able to select where their AE contributions are paid if they already have their own pension plan.
“There would still be a company-appointed provider for anyone who doesn’t choose; however, anyone who has truly got to grips with their pension planning could continue to contribute to their preferred plan.
“The responsibility would then be on pension providers to engage their customers to retain their business. This solution need not add more administration for employers – in the same way that you require an employee’s bank account details so you can pay their salary. Simple details of pension provider and policy number could allow correct payment of pension contributions. The technology to enable this already exists; it simply must be adopted for this revised purpose.”
The key message for employers of any size is that AE is an ongoing exercise and, crucially, requires ongoing compliance with any rule changes.
First up will be the hike in contributions in 2019, but employers need to keep their wits about them. While it may seem TPR is out to get small businesses, actually the opposite is true and www.thepensionsregulator.gov.uk is a great source of information for businesses of all shapes and sizes.
