Pension providers have warned the Government’s flagship automatic enrolment reforms risk “falling over” because up to a third of employers who should have set up compliant schemes in April and May have failed to do so.
The policy, introduced in October 2012, is designed to boost pension provision in the UK by forcing all employers to establish a workplace scheme for their employees.
But with 32,000 small and medium-sized firms due to reach their staging date in the 12 months to April 2015, insurers are raising concerns that between a quarter and a third of employers who should have staged in April and May this year remain unaccounted for.
With ministerial attention focused on radical Budget liberalisations and collective defined contribution reforms in recent months, industry concern is mounting that a politically toxic auto-enrolment compliance problem is brewing.
Aviva head of policy John Lawson says the provider’s internal analysis suggests between 25 per cent and 30 per cent of the employers who should have staged in April and May have not yet chosen a pension scheme.
“We didn’t have this problem last year because the larger employers who were staging had pension departments and payroll departments, so they were on top of this stuff,” he says.
“This year we have reached employers who don’t have payroll and HR departments who look after this, and therefore a lot are beginning to miss their staging date.
“We have looked at the number of our firms who have confirmed they are going to use us for staging and those who have confirmed they are going to use someone else.
“There is a gap in between of the “don’t knows” – that has been increasing and it is beginning to reach fairly significant numbers.
“I would say somewhere between 25 per cent and 30 per cent are in that ‘don’t know’ camp. Most of those people should have complied in April and May.
“There are potentially thousands of employers missing their staging date and that will be a very difficult situation for The Pensions Regulator to manage.”
Lawson says officials at the Department for Work and Pensions are “monitoring the situation closely”.
‘Eye off the ball’
Standard Life head of workplace strategy Jamie Jenkins says if large numbers of small and medium-sized firms fail to meet their auto-enrolment duties then the entire reform programme could crumble.
He says: “If you add up the number of those who say they have set up schemes, it is about two-thirds of the number of schemes that should have been in place over April and May.
“The worrying aspect is we do not know why this has happened and, at its worst, there could be willful non-compliance or a lack of support meaning employers are not doing what they should be doing.
“My concern is we are not talking about this enough. If there is a problem with auto-enrolment then every other aspect of the Government’s reform agenda comes under threat. The number one priority in pensions must be the success of auto-enrolment. The reality is if auto-enrolment starts to fall over this year, it will only get worse next year.”
Lawson says if auto-enrolment does “fall over” it would be politically disastrous for the Conservatives and the Liberal Democrats.
“You are going to have an election next year so the eye might be off the ball in terms of ministers,” he says. “It is up to Steve Webb to address this because going into Christmas with headlines of ‘auto-enrolment collapses’ would be a disaster.”
According to a freedom of information request submitted to TPR by Hargreaves Lansdown, only 15,099 employers had confirmed their auto-enrolment scheme details by the end of May – despite 22,940 hitting their staging date.
Hargreaves Lansdown head of pensions research Tom McPhail says: “It isn’t yet clear whether this shortfall in scheme reporting is the result of delays in the registering of schemes which are fully compliant, or in fact it is attributable to thousands of employers failing to hit the deadline. We’ll find out one way or the other over the next couple of month.”
Rowley Turton director Scott Gallacher says: “This has all the ingredients of a Government omni-shambles. This is a big concern for employers because they could be hit with big fines if they fall foul of the rules.
“Given that we are dealing with fairly big firms here this does not give much hope to the man in the chip shop when his auto-enrolment staging date comes round.”
The Government has been criticised for failing to communicate the reforms to SMEs. A survey by Creative Auto Enrolment, a firm that helps companies comply with their legislative duties, found that, based on 505 firms, just 24 per cent of SMEs due to stage this year feel they have had enough information from the Government.
Creative Auto Enrolment chief executive David White says: “Everything we are hearing tells us many employers are mishandling the process because they are ill-informed. It is unfair to hand out penalties to companies that have not received adequate information and guidance in order to prepare for auto-enrolment. Our research is clear; the Government’s communications are not getting through to those who need it most.”
Syndaxi Chartered Financial Planners managing director Robert Reid says advisers could be hit with complaints if they have failed to inform corporate clients of their auto-enrolment duties. He says: “Non-compliance could be a huge problem for the Government and any advisers who have not been on top of this because they will effectively be an accessory to a crime.”
Nest was set up by the Government to support the auto-enrolment reforms. Nest chief executive Tim Jones says the scheme has staged fewer employers than anticipated in April and May but insists he has seen “no evidence” of a potential compliance problem.
“We have had fewer employers than we were expecting,” Jones says. “We had a central internal forecast of just over 10,000 firms staging with us over the summer and we have operationally planned for 15,000, but if I was a betting man today I would say it is likely to be 7,000 or 8,000.
“There are a variety of possible explanations for that. I do not have any evidence of a compliance problem and the most credible explanation I have heard is the incumbent providers have done more of their existing book than the model predicted.”
Firms who fail to meet their auto-enrolment duties could face daily fines of up to £10,000 a day from TPR.
A TPR spokeswoman says: “Our research to date has indicated the majority of employers staging this spring were on track and had both selected a scheme and were aware of their duties well ahead of their staging date.
“We have an extensive team of compliance investigators and those employers who may choose to ignore their duties should be aware of the potential penalties. We intend to begin to publish regular information on our enforcement activity from next month.
“If employers do not comply, they will face enforcement action in line with our risk-based approach. Enforcement action starts with statutory notices and is followed by penalty notices, which may result in court action.
“This means compliance notices – which clearly indicate what an employer must do and by when – are often issued before an employer receives a fixed penalty notice.”
Through the Budget announcement and collective DC, Chancellor George Osborne and pensions minister Steve Webb have thrust pensions policy front and centre of the political debate.
Both will now be praying auto-enrolment, which sits at the heart of this reform programme, does not begin to crack ahead of the May general election.
Richard Grover, corporate adviser, Wingate Benefit Solutions
“It has been quieter than everyone expected and I think there are some employers who are burying their heads in the sand over auto-enrolment.
“It may be the regulator needs to be more aggressive and rattle a few cages to encourage compliance. A big fine would be a warning shot to all companies that this is serious.”
Carl Lamb, managing director, Almary Green
“Employers have split into two camps – those who are embracing auto-enrolment because they have no choice and those who are doing their best to ignore it.
“But the providers have not helped the situation by cherry picking clients and leaving the rest out on their own.”
It is difficult to deny that automatic enrolment is going very well. The number of people saving as a result is approaching 4 millon and less than 10 per cent have opted out.
But we always knew this summer was going to be the first big challenge, with the number of employers due to stage increasing dramatically.
By my reckoning, the average scheme set up needs to move from three hours to under 10 minutes in order to meet the demand.
Expectations were that provider capacity would be the biggest problem, but most of the major pension providers have responded
with propositions that allow for this.
So why should we be concerned?
Based on the number of employers due to stage in April and May, only two-thirds of employers due to stage in this period have established schemes on time. If this is correct, it could be for a number of reasons, including:
- Employers are simply late, but will register soon to confirm they have set up a scheme and communicated it to their employees;
- They are late with the scheme set up, but on track to automatically enrol people within the three month timescale;
- They are having difficulty getting things done due to lack of awareness, knowledge, or simply the absence of will to comply.
You could probably live with the first two reasons; if you looked back in a year’s time and employers were simply a little late this summer, we could still count that as a win for the policy.
But if you looked back and reflected on not having tackled a more systemic issue – allowing it to disrupt the positive momentum – you would have to regret that.
Jamie Jenkins is head of workplace strategy at Standard Life