The new employer duties are being phased-in over the period from October 2012 to April 2017, with larger employers becoming subject to the requirements first. In July 2013, the DWP announced that the millionth worker had been auto-enrolled. By the end of August 2013, 2,256 employers had confirmed that they had met their duties by registering with the Pensions Regulator (TPR).
In August 2013, the DWP published the results of research covering the first seven months of auto-enrolment, based on a sample of 50 large employers ranging in size from 6,000 to 120,000 workers. 42 of the 50 employers provided opt-out rates representing 1.9m workers. Of these 1.9m workers, 61% were already in a pension scheme before the employer’s staging date, and 24% were auto-enrolled. The average opt-out rate of those auto-enrolled was 9%, with most employers reporting opt-out rates between 5% and 15%.
As auto-enrolment continues to be rolled out, it remains to be seen whether smaller companies experience similar opt-out rates
These opt-out rates are lower than many commentators had predicted before the introduction of auto-enrolment. As auto-enrolment continues to be rolled out, it remains to be seen whether smaller companies experience similar opt-out rates and also whether those who have been auto-enrolled into a workplace scheme remain in the scheme over the longer term.
Some companies enrolled workers into workplace savings through terms in the worker’s employment contract (known as ‘contractual enrolment’) before the date required by the employer duties. The research found that whether or not a worker had been previously enrolled through contractual enrolment was the most significant factor affecting opt-out rates. For workers who had already opted out of workplace pension savings, the opt-out rate was 16%, which was twice that of those who had not (who had an opt-out rate of 8%). The average rate of participation by workers in workplace pensions of employers who had used contractual enrolment was already high at 90%, and this was estimated to rise to 96% (despite the higher opt-out rates) as a result of auto-enrolment. Employers who had not used contractual enrolment had a much lower initial average participation rate of 36%, which was estimated to rise to 71% following auto-enrolment.
Another factor affecting opt-out rates appeared to be age; on average rates were 25%-50% higher among those aged 50 and over. Other factors, such as gender, salary, full or part-time status and level of employer contributions did not appear to have an influence on opt-out rates.
In July 2013, TPR published its first in-depth analysis of the initial implementation of auto-enrolment, covering the first six months of auto-enrolment (i.e. from October 2012 to March 2013). TPR plans to make this an annual publication. Some of the key points include:
83 organisations registered with TPR, the majority of which were large employers. 53 had staging dates within the reporting period (of which 10 brought forward their date to an earlier date in the period) and 30 voluntarily brought forward their staging date. 35% of these employers were public sector, with approximately 488,000 workers; 65% were private sector with approximately 1,661,000 workers.
Approximately 308,000 workers were auto-enrolled, the overwhelming majority of whom were employed by a large employer. 57% of workers were already members of a qualifying scheme.
As of 31 March 2013, TPR had opened 89 investigations into possible non-compliance by large employers. TPR has not yet needed to use its powers to compel compliance.
Reported opt-out rates from some of the largest employers were below 10%.
Awareness and understanding of the employer duties tended to decline with decreasing employer size.
The Pensions Bill
The Pensions Bill was formally introduced to Parliament in May 2013. It is mainly concerned with the introduction of a new single-tier state pension; however, there are some parts relevant to auto-enrolment as well as the legislative framework for the government’s proposed new automatic transfer regime (also known as ‘pot follows member’). The Bill also includes fairly broad powers to ban schemes with certain charges from being used for auto-enrolment.
For further details please see our May 2013 briefing note ‘Pensions Bill published’. It is expected that the Pensions Bill will receive Royal Assent around April 2014.
DWP bans ‘consultancy charges’
In May 2013, the DWP announced that it intended to ban ‘consultancy charges’ in defined contribution (DC) schemes used for auto-enrolment. Since 31 December 2012, paying financial advisers and employee benefit consultants via commission has been banned. A permitted alternative was ‘consultancy charging’, under which the adviser is paid directly via deductions from the member’s funds. However, this practice has now been outlawed for auto-enrolment schemes unless the charging arrangements were put in place before 10 May 2013.
The government also plans to publish a consultation this autumn, following the recent OFT (Office of Fair Trading) report on the market for DC workplace pensions. This consultation will include proposals for a cap on default fund charges for DC schemes.
Removal of restrictions on NEST
The National Employment Savings Trust (NEST) was designed to fill a gap in the market by targeting groups that commercial providers had found difficult to serve profitably, including low to moderate earners, smaller employers and employers with a high labour market ‘churn’.
At present, there is an annual contribution limit of £4,500 (for 2013/14) that an individual member may pay into NEST, as well as a ban on transfers into and out of NEST in most situations. Concerns had been expressed about the impact of these restrictions, including a Commons Work and Pensions Select Committee inquiry earlier this year, which concluded that they may prevent NEST from addressing the market failure it was designed to address.
In July, Steve Webb, the pensions minister, formally announced that the current cap on annual contributions to NEST will be lifted from 2017. The existing ban on transfers into and out of NEST is to be lifted as well. The lifting of the restriction on individual transfers will coincide with the start of the ‘pot follows member’ regime (as yet unknown). The ban on bulk transfers will be lifted in April 2017, which is the end of the main ‘roll-out’ period for auto-enrolment.
Also in July, NEST Corporation announced that it had been the victim of a significant fraud. NEST Corporation’s accounts stated that in ‘January 2013 we were notified that there had been an incident of fraud. This fraud was directed at NEST Corporation, resulting in a loss of £1,446k from our operating budget. It was of a type known as mandate fraud, involving the diversion of a supplier payment. No money was taken from members’ retirement pots.’
What can we expect in future?
The DWP has recently consulted on some technical changes to auto-enrolment (for details, see our June 2013 briefing note “Will DWP proposals make auto-enrolment work better?”). The government response to the consultation is still awaited, with many of the proposed changes expected to take effect from April 2014.
So far, only a relatively small number of large and medium-sized companies have come within the scope of the employer duties. The next few years will see a comparatively large number of smaller and micro-sized employers falling within scope. Surveys carried out of employer awareness of the new regime have, perhaps unsurprisingly, tended to show that larger employers had higher levels of knowledge, awareness and preparation than smaller employers. The next year may therefore prove to be a significant one in terms of whether or not the employer duties prove to be a success.
This briefing note is provided from Punter Southall for general information only and is based on our understanding of the position as at the date shown. It should not be relied upon as advice on your specific circumstances.