Auto-enrolment may be some years away for small employers – with the implementation date for employers with less than 50 employees set between April 2015 and April 2017 – but they should not be complacent.
Increased costs may be a major concern but its introduction requires project management, even for small employers. At least 12 months planning is required, not only to set up a suitable pension arrangement but to make sure that payroll and other systems are effective. This is proving to be a challenge even for companies who are used to running pension schemes; and it is a particular challenge for many small companies, who are new to pensions administration.
The Pensions Regulator is also taking its implementation very seriously, and has warned that it will use its enforcement powers and may even impose financial penalties on employers who do not meet their responsibilities on time.
This warning followed a decision by the workplace Pensions Regulator to issue its first Section 89 report on Dunelm Soft Furnishing Ltd (Dunelm), a company that failed to register in time and made serious mistakes in implementation.
Companies are required to automatically enrol eligible workers in a workplace pension scheme by their designated “staging date”, based on the number of employees in their PAYE scheme on 1 April 2012.
The process began in October 2012, with large employers and applies in stages for other employers, until April 2017. The mandatory pension contribution levels will be introduced in phases, reaching 8 per cent of earnings in October 2018, with a minimum contribution of 3 per cent from the employer and the rest paid by the employee. Employers must register with the regulator to confirm that they have complied with their auto-enrolment duties, within five months of their staging date.
In fact, it was a failure to register in time that prompted the regulator’s initial investigation into the firm. The regulator then found evidence that other “employer duties” had not been complied with – employees were automatically enrolled one to three months late and significant amounts of employer contributions had not been paid in time. There was also a failure in reporting the problems to senior personnel. The firm explained that a bespoke payroll system had a design flaw, key members of the auto-enrolment project team had left and there were data quality issues in information given to the pension provider.
The regulator issued compliance notices requiring the firm to pay all the contributions due to the pension scheme but no fine - even though the regulator has the power to issue an escalating penalty notice from £50 to £10,000 a day, depending on the number of employees, it has not issued any financial penalties up to now. In a statement, the regulator said that it wanted other employers to learn from the firm’s experiences and avoid similar risks.
Dunelm Soft Furnishing Ltd (Dunelm) is not the only example; the regulator has also investigated 133 other suspected breaches and issued compliance notices in nine cases. The key message from the regulator is to plan well in advance, with an organised project team and to ensure that employee data is accurate, staff are appropriately trained and an appropriate payroll system is in place.
Many small employers may be intimidated by the costs and administration required in the AE process – administration fees of large providers, consulting fees to advisers, licence fees of auto-enrolment software and costs of compliant payroll systems.
But should small employers have to go it alone, hope for the best and wait till TPR takes action? No, small employers can avoid attracting attention from the regulator by planning ahead and observing the following key areas:
• Project team – a project team should be set up consisting of HR, finance, pensions, payroll and IT, though in some companies, one or two people may hold more than one function. Having a dedicated project team, led by a senior member of staff to ensure a smooth handover, is essential in the event of key staff changes.
• Planning – the need to plan ahead is essential to ensure successful and timely implementation. There are four “key assessment dates” to work to; the staging date; individual earners exceeding the qualifying earnings threshold; a worker reaching the age of 22; and any new worker joining the company.
• Using current pension schemes – an existing pension scheme may not meet the requirements of auto-enrolment so small employers should be talking to their pension providers at least 12 months before their staging date to give themselves time to find an alternative scheme, if necessary.
• Choosing alternative pensions schemes – selecting a new qualifying pension scheme can be problematic for small employers. Some pension providers may not be willing to offer provision to a small number of workers that is likely to prove less profitable. Therefore, small employers may only have limited choices and may need to rely on the National Employment Savings Trust, the government-backed scheme. They should plan early if they want a choice of pension scheme.
• Assessing worker eligibility – auto-enrolment should be a less onerous process for some small employers, with a relatively simple workforce structure but there maybe issues with contractors, seasonal, part time and zero hours or agency workers.
• Specialist resources – small employers may not have large resources and may be unable to access the same support from pension providers and advisers as larger employers. They will have to seek support elsewhere such as information freely available, from TPR.
• Payroll systems – should be tested well in advance of the staging date to ensure they are able to fulfil the requirements of auto-enrolment, perhaps operating a dummy run one month before.
• Affordability – administrative costs may not be easily absorbed by small employers. They must also budget for contributions to the employee’s pension scheme that were not required under the previous stakeholder regime. Many small employers may choose to use a three-month postponement of auto-enrolment for new joiners to save costs but this can be complicated to administer.
• Communications – a wide range of auto-enrolment notices must be sent to workers about AE so small employers need to be very organised if they cannot rely on external providers to support the auto-enrolment process. Some small employers have, in the past, offered employees higher pay if they do not join the company pension scheme. This practice must end as any inducement to “opt out” is unlawful.
• Data – many small employers will need to check the accuracy of their worker information systems; the data-checking for auto-enrolment (for example, when people become eligible at the age of 22 or on reaching the earnings level for auto-enrolment ) is undertaken in some systems, but other systems may need adjustment or the process should be outsourced or carried out manually. Protecting data security and record keeping is critical and systems must be in place in time.
• Financial challenges - many small employers have little history of contributing to their employees’ pensions and so the cost of paying contributions to a pension scheme may be a significant financial challenge.
The new statutory duties mean employers must choose a qualifying pension scheme and automatically enrol all “eligible jobholders” who are aged between 22 and state pension age and earn more than the qualifying earnings trigger (currently £10,000 a year). Certain other employees may ask to “opt in” but no pressure can be exerted on employees to opt out.
When determining employer and employee contributions either at the auto-enrolment minimum level or higher, a “two-tier” system may be preferable for existing and new employees but it may be perceived as unfair.
Small employers may be unwilling to pass the costs on to customers and are more likely to look for other savings, such as restricting salary increases. Although, employer sponsorship of a pension scheme is now mandatory, minimum contributions are at least quantifiable.
It is important to realise that the process does not end on the staging date – it is only the beginning. Running administrative and payroll systems and dealing with opt outs, re-enrolments, postponements and new joiners are also a challenge that must be managed to avoid investigation by the regulator.
The regulator’s message is clear, planning ahead is the key to successful auto-enrolment.
Danny Tsang is a pensions partner and Christine Johnston is an associate at City law firm of Simmons & Simmons
