Pensions  

Who might be left vulnerable by AE implementation?

Who might be left vulnerable by AE implementation?

Significant society-wide change will always have unintended consequences and for three vulnerable groups, auto-enrolment may bring unforeseen issues.

The first group can be both at the centre and the margins of our society: nannies and carers. Where their contract of employment is with an individual – rather than an agency – a grey area emerges. Childcare agencies are warning that, due to the additional costs of pensions contributions, the ‘black market’ of nannies falling off payroll, or being paid in a mixture of through the books and cash in hand,is likely to grow.

Typically, the extra cost to a parent of paying into a nanny’s pension would be £200 a year, rising to £600 in 2018 when employer contribution levels rise to a minimum of 3 per cent. Of course, if the nanny earns more than the average wage, this could be significantly higher – up to £1,096.83 (based on the current upper level of qualifying earnings of £42,385, less the lower band of £5,824 = £36,561 x 3 per cent).

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The result for nannies and carers may be a reduction or freeze in salary to accommodate costs, or – perhaps especially for new workers – being driven towards a growing black market which increasingly becomes the norm.

The second vulnerable group is those finding themselves deemed an employer because they need care in the home. I’m not claiming that all those who need care are vulnerable or won’t be able to navigate the complexities of auto enrolment – Professor Stephen Hawking being a case in point – but it’s another burden many will bear with uncertainty.

I hope more can be done to help ensure all steps, including the Declaration of Compliance, are understood and completed so that this group in society does not become part of the fixed penalty notice statistics. Just as setting up a pension in payroll does not actually set up a pension, having a pension scheme such as Nest does not mean all the steps are complete and fines will be avoided.

Finally, there are businesses and their employees who are finding the rules of chance affecting them in unexpected ways. Take two companies, both trading in April 2012 but staging perhaps a year apart because of something as arbitrary as the last two characters in their PAYE code. Let’s say they’ve both been successful, and have grown to 50 employees each, earning an average of £26,500.The employer staging first could be paying over £10,000 in pension contributions before the other firm stages. Conversely, the employees at the second company have missed out on over £400 each invested in a pension. These are serious cash flow challenges to employers and a ‘cost of delay’ for employees.

There are 216,000 employers (plus a proportion of the approximately 400 new firms likely to have started up since April 2015) that will stage straight into contribution levels at 2 per cent employer/3 per cent employee. Without the gentle training slopes of 1 per cent and 1 per cent this could be a sharp shock that leads to higher opt out rates due to perceived affordability. Nest research shows that employees value pensions more once they’re enrolled, but at higher contribution rates, many may not stick around long enough to feel the benefit.