In the three years since it was launched, pensions auto-enrolment seems to be having the desired effect. The biggest revolution in UK pensions for 100 years, it has seen 5.4 million people automatically enrolled into workplace pension schemes and has propelled saving for retirement up the list of consumer priorities.
However, with up to 5 million more employees due to follow them and up to 1.8 million small and micro-businesses still required to stage their workplace pension schemes for staff between now and 2018, auto- enrolment is entering a critical stage.
While the experience of the UK’s large companies was generally problem-free, it was certainly not without its costs. Lloyds Banking group is one of the few large employers to go public with the price of its own auto-enrolment implementation, after admitting it spent over £1m adapting its payroll systems for the new regime.
Average auto-enrolment costs for small businesses will be £8,900, says economics consultancy the Centre for Economics and Business Research (Cebr). But experts warn that the real challenges of pensions auto-enrolment are yet to come as, without the financial clout or in-house expertise of their larger counterparts, the UK’s smallest companies are likely to struggle.
We're not trying to educate them in pensions. We're trying to get through auto-enrolment
Already, a significant increase in the number of compliance whistleblowing reports to pensions watchdog The Pensions Regulator (TPR), together with enforcement action over auto-enrolment, is underlining a growing concern that SME employers will struggle to comply with the new regime.
Under the workplace pensions law, which came into force in 2012 and beginning with the largest employers, all businesses must enrol eligible workers – those at least 22 years old and under state pension age, earning over £10,000 a year and working in the UK – into a qualifying workplace pension scheme by April 2017. Employers need to repeat the automatic enrolment process approximately every three years, known as re-enrolment.
By now all businesses should have received notification of their staging date – the date from which an employer’s legal duties begin. And yet, ignorance is rife. Only a third of business owners surveyed by accounting software provider Intuit said they could accurately describe the legislation and 65% admitted to not knowing their staging date. “A lot of SMEs can have the mentality that this doesn’t apply to them and it doesn’t matter how much press you put out there if they’re not listening,” says Chris Roberts, a trustee representative at Dalriada, the UK’s biggest independent pension trustee.
Charles Counsell, executive director for auto-enrolment at TPR, told economia that a revamp of its website was designed to make it easy for an employer to work through the process and understand which duties apply to them. “We’re not trying to educate them in pensions, we’re trying to get them through auto-enrolment.”
Despite attempts by TPR to simplify the task ahead, the majority of small businesses will look to a third party to help them. According to a survey conducted by Enrolsme, 42% of small businesses plan to turn to either their accountant or bookkeeper for guidance when it comes to getting their staff enrolled into a workplace pension. This figure rises to 59% in businesses with one to five employees.
Auto-enrolment offers a great opportunity for accountants to expand their service offer, and those already offering payroll service are well geared up to talk clients through the mechanics of the new regime. Where they are most likely to add value is translating the different definitions of earnings that can be used in contributions calculations and identifying which staff are eligible to be enrolled. Accountants can also help clients communicate the new rules to employees.
However, there has been a mixed reaction from the profession. “My sense is that many accountants currently see it as a threat rather than an opportunity,” says Liz Cole, business law manager at ICAEW. “Many practitioners with clients yet to stage have not yet grasped the nettle.”
Even though the selection of a qualifying workplace pension scheme is a non-regulated activity, scheme selection is a new area for many practitioners and concerns about crossing the line into financial advice have led many firms to drag their feet over engaging with clients on pensions auto-enrolment, so ICAEW has issued a helpsheet for members on scheme selection.
The launch in May 2014 of the voluntary assurance framework for master trust pension schemes by ICAEW in association with TPR was supposed to take some risk out of the selection process by giving an independent review of master trust governance and administration against an industry-wide benchmark of quality.
However, just four large master trusts of around 50 involved in auto-enrolment have achieved the voluntary assurance standard, with NEST, the workplace pension set up by government, the most recent scheme to do so.
Paul Budgen, head of business development at NEST, admits the pension industry has historically done a good job of hiding behind a wall of jargon, but auto-enrolment is putting the onus on simplicity and usability. “We’ve put ourselves in the shoes of someone who’s earning an average salary. Employers and members tell us the system is very intuitive. We’re trying to make the journey as easy as possible.”
Firms should structure a proposition that meets the needs of clients, and revisit engagement letters. “You need a strategy. If you don’t have the resource and competence in house you should look to some kind of strategic alliance,” says Anthony Carty, group financial planning director at Clifton Wealth.
With 100,000 small businesses due to stage in the first three months of 2016 – more than the total to date – automation is key to getting through the impending “capacity crunch”. But Cole says software for auto-enrolment remains a moot point. Firms should review their payroll software to make sure it has auto-enrolment functionality.
“Many of the glitches between software and schemes are being ironed out,” Cole says. “It’s fine for a practitioner to have a link with only one or two schemes, but they must tell the client that other schemes are available. The Pensions Regulator doesn’t want software compatibility to be the tail that wags the dog by restricting scheme choice.”
Companies and their advisors should start planning at least six months ahead of their staging date. The risk of leaving things too late is that companies end up with a pension scheme that they don’t really want. Accountants should be thinking about the cost of auto-enrolment for clients and factoring that in to financial planning, warns Will Aitken, leader of Deloitte’s national defined contribution and employee benefits business.
The choice of workplace pension schemes seems to boil down to a choice between cost and a better member experience, says Chris Faulkner, an associate director in Grant Thornton’s employee benefits team. “Do you want to do what you need to get you over the line or do you want to embrace pensions auto-enrolment and make it a clear benefit to individuals and help them pay for their retirement?” he says.
Bear in mind, too, that pension providers may get choosy about the types of scheme they take on. “Not every pension provider is interested in every employer,” warns Aitken.
Enforcement action against employers has stepped up from just five in the first quarter of 2013/14, to 247 in Q1 2014/15. The regulator’s most frequently-used power is to issue a compliance notice. Failing to comply can lead to fixed penalty notices and unpaid contribution notices, forcing the employer to pay the employees’ contributions as well as their own.
For those businesses that have already set up workplace schemes, the pensions auto-enrolment journey is just beginning. In October 2017, contributions rates increase from a minimum of 2% overall to a minimum of 5% overall with at least 2% from the employer. They will increase again in October 2018 to a minimum of 8% total with at least 3% from employers
Questions remain over the impact increased contribution levels will have on opt out rates. The hope is that by then a culture of saving will have been instilled in the collective psyche.
The challenge of encouraging savers to save still remains. Recent research from Deloitte found that the annual savings gap for the total population will reach £350bn by 2050. “There’s a healthy realisation that this is the start of the journey,” Budgen says. “But this is getting pensions into everyday language. People need to get comfortable talking about the size of their pot.”