How auto-enrolment has worked so far

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How auto-enrolment has worked so far

Since its official launch in October 2012, more than 7.5 million people have been automatically enrolled into a workplace pension scheme, with the expressed intention of government to bring 10 million people in the UK into some form of pension saving by 2018.

The aims of auto-enrolment are simple: it obliges employers, irrespective of size or industry - both public and private - to provide a qualifying workplace pension to their staff, and to contribute to it. Not to do so by the staging date will result in fines.

To capture people at the lower end of the earnings scale, the minimum salary an individual must have in order to qualify is £10,000.

While individuals can opt out if they wish, they are enrolled automatically into the workplace scheme.

The Department for Work & Pensions (DWP) has estimated auto-enrolment will lead to £17bn more a year in workplace pension saving by 2019 to 2020.

Automatic enrolment has been a success for large and medium-sized businesses.Chris Daems

The success of auto-enrolment relies heavily on the inertia element of behavioural economics to keep people in the scheme - in other words, trusting that most people simply won't get around to opting out and will simply remain invested, eventually seeing the benefit of the accumulated savings they are building up as a result.

According to Chris Daems, director of Cervello Financial Planning, said: "Auto-enrolment has been a success for large and medium-sized businesses."

As getting millions of people into a pension scheme requires a significant effort on all companies across the UK, from FTSE 100 listed corporations right down to gardening services with just a handful of staff, the DWP implemented a tiered phasing-in of auto-enrolment.

Story so far

The staging dates started with the largest firms, moving onto the medium-sized firms and now to the smallest employers, who are getting ready to comply with their 2018 staging date.

Data from the National Employment Savings Trust (Nest), as at October 2016, reveals:

  • Around 230,000 employers have met their auto-enrolment deadline since 2012.
  • At its peak, around 2,800 employers will be setting up a pension scheme every day.
  • Currently, 1.2 million small and micro employers have to meet their duties in coming months.

According to Andy Beswick, managing director of business solutions for Aviva, opt-out rates have been significantly less than expected, at about 10 per cent.

He comments: "For those that did opt out the first time round, re-enrolment is now under way so many of  those people may now have had a change in circumstances, which means they will now stay in their pension scheme and start saving for retirement."

According to Nest, its own opt-out rate is 8 per cent. As Robin Armer, senior business development manager for the provider, comments: "Our members tell us being enrolled has given them the sense of relief. For many, auto-enrolment was the gentle nudge they needed to start saving."

While some providers such as Nest are able to provide figures showing how many small businesses were early adopters of automatic enrolment - the figure for Nest stood at more than 180,000 as at October 2016 - the total number of Britain's small and micro-businesses who have complied to date is still uncertain.

Cervello's Mr Daems adds: "We are yet to see a truly accurate picture of how smaller businesses have adopted automatic enrolment.

"Firstly the data we have is running a few months behind the reality of the market due to the amount of time employers have to complete their declaration of compliance.

"Secondly, we have all of this year to go, as a decent number of the smaller firms, as well as newer employers, have to comply."

Then there are others outside of the workplace pension system who may need some form of legislation to bring them into an auto-enrolment style scheme.

Helen Baker, partner at law firm Sackers, adds: "There are some people who are not yet caught by the auto-enrolment net, such as the self-employed and those with multiple jobs who do not qualify for auto-enrolment in any single job.

"These groups are a particular focus for the government in its current review."

Developments

There have been several measures over the intervening years to help employers/scheme sponsors, advisers, employees, pension providers and administrators to make it easier to help get more people into a workplace pension.

Initially, small to medium-sized employers (SMEs) had until 2015 to prepare; this was extended to ease the burden on Britain's smallest businesses.

Subsequent legislation has aimed to help the smallest and micro-employers, as well as new employers who have recently come into existence, set up auto-enrolment processes.

This is necessary - but more is still needed to iron out some concerns, as Andy Agathangelou, founding chairman of the Transparency Task Force, explains.

"There are areas of concern, such as the fact the employer burden for the smallest and micro employers is disproportionate", he says.

"Error rates on their declarations of compliance are worryingly high, with some research indicating 26 per cent are likely to result in member detriment.

"Moreover, hearts and minds of employers and workers have not been won, so we may have highly precarious opt-out rate resilience, especially when contribution rates rise", Mr Agathangelou adds.

Adrian Boulding, retirement director of the Tax-Incentivised Savings Association, comments: "Auto-enrolment has been a great success to date.

"The 2017 review will help the financial services industry to identify ways of building on that success.

"It is widely acknowledged that contribution levels need to rise, so initially we need to ensure the increases in 2018 and 2019 are implemented as planned."

He adds: "As we go through this period of transition and look to establish an auto-enrolment solution that delivers realistic and relevant outcomes, engagement will be at its heart. 

"This will ensure that we can educate employers and employees, keep opt out rates low and achieve realistic contribution levels."

However, Mr Boulding says more can be done to help a greater number of employees.

He explains: "We believe the range of employees being auto enrolled should be broadened by phasing out the qualifying earnings lower limit and earnings trigger, so ultimately all employees are automatically enrolled and all earnings will qualify for pension contributions."

The review

Currently, the largest firms who have now completed three years worth of auto-enrolment provision are required to review their automatic enrolment arrangements.

As part of this, they are required to carry out cyclical re-enrolment every three years. Automatic re-enrolment can only be done for eligible jobholders who have already had an automatic enrolment date with that employer. 

According to The Pensions Regulator, the employer does not have to assess all their workers to identify if any meet the eligible jobholder criteria. Instead they must assess only the workers who have opted out or voluntarily ceased active membership of a qualifying scheme.

The assessment of worker categories carried out on the cyclical automatic re-enrolment date is separate to the employer’s usual assessment process, which they run each pay reference period to identify whether automatic enrolment or any information requirements are triggered.

The Pensions Regulator has put together a useful guide to help employers work out their duties when the re-enrolment process comes into play.

Figure 1: Determining the re-enrolment window

Cervello's Chris Daems comments: "While there are more smaller and start-up businesses than ever complying, it is important to understand that many larger employers are using re-enrolment to review their automatic enrolment arrangements.

"The fact they need to re-enrol the individuals who have opted out creates a logical opportunity to review all of the provisions they made to originally comply with automatic enrolment."

More to be done

However, according to Aviva's Mr Beswick, more still needs to be done among the smallest employers who are either still unaware of their duties, or just do not realise how important it is for them to comply with their auto-enrolment staging dates.

Mr Beswick says: "Fines being issued to businesses by The Pension Regulator are increasing so there is still work to be done to increase awareness of the importance of getting the pension scheme set up by the staging date."

"There is a very long way to go before we can count auto-enrolment as a success", adds Graham Peacock, managing director of the Salvus Master Trust. He explains: "Employers find the rules very complicated.

"Accountants - the payroll experts - are not getting involved, which makes it hard for employers to get the guidance needed. For example, we have seen many employers coming to us, up to six months late, and asking for help.

"From a technical point of view, moreover, the basic payroll tool from HM Revenue & Customs is not properly compatible with auto-enrolment and tax relief is still denied to many low earners."

Robin Armer, senior business development manager at Nest, agrees there is "still a long way to go", given The Pensions Regulator has estimated there are up to 800,000 employers meeting the new duties this year alone.

However, he remains positive. Mr Armer states: "Our research shows employers are rising to the challenge, getting to grips with auto-enrolment more smoothly than expected.

"The professional community, and their efforts to support employers, have also played a key role. We're working with more than 300,000 employers meeting these duties, helping 4.5m members save for their retirement. We're ready for the challenge ahead."

simoney.kyriakou@ft.com