So far, so good with pension reform

Supplier invoices, cash flow, the office Christmas party. UK company bosses will have spent much of the last month thinking about all three. But pensions? Maybe not.

Yet auto-enrolment is coming to hundreds of thousands of small and medium-sized UK companies and in order to meet new legislation there is much do to. Ignorance will be no defence for failing to comply.

In October 2012, following regulation passed two years earlier, the UK’s largest employers began auto-enrolling their staff into workplace pensions. Any worker over the age of 22, but under the state pension age, and earning more than £10,000 a year, was automatically signed up to start saving for retirement. The worker did, however, have the right to opt out.

By the end of November this year, almost five million workers had been auto-enrolled, according to official figures, and despite concerns about the first wave of “staging” – the legal date an employer’s duties come into effect – it has gone reasonably well.

However, these firms have extensive human resources departments. They also are likely to have complex, automated payroll and accounting functions, and an in-house team to lead workforce engagement. They make up just 1 per cent of the 1.3 million companies affected by the new measures.

As auto-enrolment trickles down to the small and medium-sized businesses across the UK, many experts are worried the next four years will become a bumpier ride.

B&CE, a workplace pension for the construction industry, has launched the People’s Pension, a not-for-profit savings vehicle open to employers of any size, from any industry. It is one of many that has been created as compulsory pension saving has become a reality.


“The objective of auto-enrolment was to get more people saving,” says Darren Philp, head of policy at B&CE. “And in the largest companies, people seem to be staying in. It has been more successful than anyone thought.”

Initial industry predictions had estimated average opt-out rates at 25 to 30 per cent. It has been closer to 10 per cent.

“The largest companies threw themselves into the process,” says Richard Wilson, who leads policy development on defined contribution pensions at the National Association of Pension Funds (NAPF), a group for UK companies and organisations running retirement savings vehicles.

“Along with efficient communication with staff, they also made supreme efforts to get things right internally before ‘going live’; the vast majority were very well resourced,” says Mr Wilson. “It is going to be a tougher challenge for smaller businesses. The concept sounds simple, but in reality it is complex.”

The complexity starts with how to categorise workers – there are three options – and then working out their earnings band, which can fluctuate. Throw in creating a scheme in-house or finding a supplier that runs a pension for third parties that fits what your workforce needs and can afford, then communicate this information clearly to staff, organise a payroll system to cope with the changes, and hit the deadline for having it all in place.

It is a big job that should be neither underestimated nor ignored.

“Fines have already been issued to employers who have failed to hit deadlines or accurately implement the process,” says Clare Abrahams, head of auto-enrolment at Aon Employee Benefits. “Some of the fines are levied on a daily basis and they are not cheap.”

Employers with a staff of more than 500 that are found to be “persistent non-compliers” can be fined up to £10,000 a day. Workplaces with between one and four staff can be issued with daily penalties of £50.

Dunelm Soft Furnishings became the first to feel the regulator’s iron fist. The company was forced to make good contributions when it was revealed in April to have missed a July 2013 deadline. It was liable for £143,000.

If this sounds tough, it is meant to be.


“The process so far has been about educating employers; getting them engaged with auto-enrolment,” says Ms Abrahams. “Going forward, fines are expected to raise awareness.”

The regulator’s research shows 20 per cent of small employers and 43 per cent of micro employers with fewer than five staff do not know their staging date. “Our message is to ensure you know your staging date – do not guess – as failure to find out the correct date in time could lead to non-compliance,” according to the regulator.

It is a big job that should be neither underestimated nor ignored

There is little scope to plead ignorance. Aside from frequent communication with employers, the Pensions Regulator’s website is a mine of information for company bosses, accountants and personnel professionals. Additionally, there is a wide selection of third parties who will help out, usually for a fee.

“Due to the larger numbers of employers for whom auto-enrolment duties will apply and changes in the types of employers, we have said we expect to use our enforcement powers more frequently in future, to ensure compliance,” the regulator says.

Since auto-enrolment began, the regulator has used its powers 177 times for non-compliance and some 163 of these cases applied after a deadline for employers, with between 150 and 250 workers, fell due at the end of August.

However, experts expect some initial wriggle room.

“The regulator isn’t being too harsh,” says Mr Philp. “But equally we are not seeing much willful non-compliance. If employers get something wrong, are going to miss their staging date or mess up some aspect of the process, if they inform the regulator in plenty of time they are more likely to get help and avoid a fine.”


But be aware that hundreds of thousands of businesses are hitting their staging dates each quarter and the regulator does not have enough staff to speak to each one individually in the event of a compliance emergency.

Trade bodies have been troubleshooting where the problems might occur. Mr Wilson at the NAPF says payroll functions for smaller employers were a concern, as many move from manual processes to more sophisticated packages, potentially causing a capacity issue.

Additionally, if a company is too small to feasibly create an in-house scheme, it may struggle to find a provider. As a volume business, several large third-party providers have taken themselves out of the smaller end of the market.

“A scheme pays an 86p pension levy on each member,” says Mr Philp. “If a member joins with a pot of £100, which is about average, and pays a 50 basis point annual management charge, equalling 50p, it leaves the provider with a shortfall.”

There are a handful of providers who will soak up the initial difference – the regulator is compiling a list of them for smaller employers – but many will not.

“It would have been better if regulation had deemed the levy should just apply to larger pension pots, leaving more money to focus on communications,” says Mr Philp.

And it is regulation that may stall auto-enrolment for smaller companies. “The legislation is complex and this has been felt by both employers and pension providers,” says Ms Abrahams. “Additionally, time pressures meant system testing was compromised, which led to huge failings with some providers’ systems.”

But once the wheels are in motion, it is difficult to stop them turning.

“There was an assumption that companies would try and bend the rules, which they haven’t,” says Mr Wilson. “It would have been better to have had principles-based legislation, but it’s too disruptive to change now.”

Employers can find out their staging date and start their auto-enrolment plan at



Dorchester Hotel

Company: Dorchester Collection

Number of staff: 1,100

Number to be auto-enrolled: 850

Staging date: January 2014

“My advice to any employer gearing up for auto-enrolment would be to give yourself enough time,” says Sean Wheeler, area director of human resources at the Dorchester Collection. “There are some big decisions to agree upon and plenty of things will happen that you don’t expect.”

The Dorchester Collection, which runs the world-famous hotel in Park Lane, started early on its journey to auto-enrolment for one main reason: its staging date. The legal date its pension duties came into effect fell in its busiest period of the year – Christmas.

Employers should take a 12-month lead-in time for auto-enrolment, given the range of topics to be covered

“We deferred it for three months to give us more time to communicate and engage with the workforce,” says Mr Wheeler. The company talked with the Pensions Regulator and explained the difficulties it would have to meet the original date of October.

With a more achievable date granted, the company was able to bring together the different parts of the business that would be most affected by auto-enrolment – payroll, personnel and finance – to figure out the best way to proceed.

Mr Wheeler suggests employers take a 12-month lead-in time for auto-enrolment, given the range of topics to be covered.

“You have to consider what provider to use and what you need from them,” he says. “We needed flexibility, due to the nature of our staff and easily accessible communication, but every company will need something different.”

The Dorchester Collection had an existing scheme with Aviva, but opted for one run by the People’s Pension, a not-for-profit savings vehicle set up by B&CE. By January, this new scheme was in place, although existing staff members were encouraged to join the Aviva pension before the staging date due to it offering a higher employer contribution.

“We looked at assumptions of contribution rates and estimates of how many people would opt out,” says Mr Wheeler. “After 10 per cent opting out at the very start, now it is no more than 2 per cent each month.”

One of the greatest changes the company faced was transforming its manual payroll department, which involved working with a supplier to create a bespoke system. Contributions are now automatically calculated and taken each month, which is essential to avoid fines from the regulator.

The process was relatively smooth for the group, but Mr Wheeler concedes that they sometimes needed outside help.

“The guidelines from the regulator were quite complex,” he says, “but the People’s Pension helped us to put the key, necessary statements into simple documents to ensure they were still compliant.”