The UK has seen major reforms in pension policy, but it is almost three years since the government launched the most significant social engineering project for several generations.
Auto-enrolment (AE) is a simple idea, to ensure every UK worker is enrolled in an occupational pension scheme. Employers are required to enrol staff automatically and make contributions to their pension funds. Employees also contribute and there is tax credit top up from the government.
More than 5.2 million UK workers have been auto-enrolled since October 2012, an increase in numbers of almost 60 per cent. “Three years in and we can safely say so far, so good,” says Helen Dean, executive director of product and marketing at provider Nest, which itself has enrolled 2.3 million savers.
Auto-enrolment has forced innovation, changed business models and driven down charges, which means those who succeed in this market will be offering better products than ever before
Thousands of employers have successfully staged their businesses in the AE schedule, but there are still more than a million to come. More than 141,000 are expected to stage this year, leaving around half a million micro-employers from 2016.
Getting started is easier than it has ever been as providers have entered the market focusing on the small and mid-sized business market.
Part of AE’s success has been to stimulate a huge amount of innovation in terms of investment, but also technology, says Tim Banks, managing director, sales and client relations, UK and Ireland, at investment manager AB. This will have a lasting legacy.
“AE has forced innovation, changed business models and driven down charges, which means those who succeed in this market will be offering better products than ever before,” he says.
That said, not all technology is born equal, says Mr Banks. Even if the kit is up to the job, the vast volume of employers coming through in the next couple of years will present considerable data issues.
“Most of our clients are getting people into the system and making sure of data integrity. That can be a costly business, but it does mean the process can run very smoothly,” he says.
Even businesses that have their data sorted out are still experiencing difficulties, says Robert Reid, director of Syndaxi Chartered Financial Planners. Mr Reid says the Pensions Regulator has failed to come to grips with the needs of group companies.
“I had one with five different staging dates [due to the relative size of each operating company],” he says. “I had to explain to them I was going to stage them all on a single day, meaning some of them would be done early.”
Providers’ desire for fully electronic administration has also caused problems, says Mr Reid. A hotel group client had three enrolled employees with learning difficulties who were unable to do the enrolment online. When Mr Reid spoke to the provider, they confessed they hadn’t thought there would be any need for a manual process. “It was a total mess,” he says.
Another example of a lack of foresight presented itself with a client where 70 per cent of the workforce doesn’t speak English as a first language. After getting nowhere with the provider, Mr Reid simply had the documentation translated into Polish and Hungarian, which “made a massive difference and was greatly appreciated by the staff”, he says.
The AE rules are complex and companies will make mistakes. The main cause of compliance failure has not been implementing a pension or getting payroll lined up, but through omissions in the compliance process, says Chris Daems, director of AE in a Box.
These are often minor tasks such as registering with the regulator or nominating a contact, but were omitted because the employer was focused on the big picture and wasn’t aware of the small, but important, details.
“These are jobs that take 15 or 20 minutes for someone familiar with the process to complete,” says Mr Daems, “but they were overlooked or left to an accountant or payroll bureau that are great at payroll, but not due diligence on AE.”
Another simple check employers should make is to ensure their contracts no longer specify employees can join the pension scheme after a period of six months or more, as the maximum postponement is now three months.
The Pensions Regulator has to date been understanding about mistakes made by employers.
Between April and June 2015, it issued 119 compliance notices, 50 unpaid contributions notices, 68 fixed penalty notices, but no escalating penalty notices.
But enforcement is increasing– there were twice the number of referrals and cases raised in 2014 against the previous year – and the regulator is likely to be less lenient in the future. This is because employees who do not wish to save with AE must opt-out on a three-year cycle and this starts again in October.
However, this may not be as problematic as once feared, at least for the large firms, says Andrew Cheseldine, a partner at consultants LCP. His clients have an average opt-out of 8 per cent, yet only 3 or 4 per cent of those individuals still work for them.
The big problem will be the national living wage from 2016, as it will bring many more into the eligible worker category. “By 2020, when it hits the £9 an hour rate, it will mean qualifying earnings will be about 40 per cent higher than they are now in real terms, making the funding of the pension much more expensive,” says Mr Cheseldine.
AE may cover 20 million workers, but there are more than five million who have fallen through the cracks as they do not qualify for automatic enrolment.
There are nearly as many self-employed who are also bypassed, meaning around ten million economically active individuals are not saving into a pension plan.
While many are not entitled to employer contributions, says Tom McPhail, head of pensions research at Hargreaves Lansdown, that doesn’t mean they shouldn’t be saving.
“The worst case scenario is they would only get tax relief, but as they could take their money out at age 55 and shelter in a tax-free fund, I can’t think of anyone who shouldn’t be taking advantage of this,” says Mr McPhail.
Employers must start budgeting for pension saving more systematically. As the living wage swells the ranks of enrolled employees, so contribution levels must also increase. Employers must contribute a minimum 3 per cent by October 2018 to raise total contributions up to 8 per cent (employee 4 per cent, government 1 per cent).
This is only the start, as the long-term aim is to drive that rate higher still, in line with other nations such as Australia’s 9.5 per cent. Even so, it is widely accepted this is not enough to provide a secure income in retirement and, as pressure continues for an increase in contribution rates, some of this new burden may fall on employers.