Danby Bloch: The auto-enrol dangers facing small firms


Auto-enrolment rolled out with few hitches in its first two years, when it was confined to larger employers. Between October 2014 and March this year, however, The Pensions Regulator issued 1,529 compliance notices and 17 unpaid contribution notices: a huge increase on the earlier period.

This is almost certainly the result of smaller employers reaching their staging dates. Now it is the turn of the smallest employers of all.

The crucial date for PAYE employee numbers is April 2012, regardless of changes since then. Employers with fewer than 30 employees can stage at any time between now and April 2017. Most advisers will have clients facing auto-enrolment challenges, so I thought it might help to set out some of the things that can go wrong.


According to our auto-enrolment specialist Steve Wood, the most common problem of all arises from employers not giving themselves enough time to prepare. Sometimes complacency comes from assuming the payroll or pension provider will deal with everything.

While the DIY approach can work, employers need to spend enough time on the preparations and understanding the issues. In the case of one client, we had to undo and redo everything – everything that could go pear-shaped had done so, including non-compliant communications, wrong timing and even incorrect applications for postponement and opt-out – all to save what would have been a relatively modest fee.

TPR should contact employers 12 months before their staging date. However, letters have sometimes gone astray or are wrongly addressed, especially if HM Revenue & Customs records that TPR relies on are incorrect.

We have had several clients whose letters have gone to their (unmanned) registered office or to their previous accountants. Wood warns employers to not assume that just because they have not had their letter yet their staging date is still a long way off. If an employer has not had a letter, they should check TPR’s website using their PAYE scheme reference.

Change of circumstances

Advisers should also be aware of complications that can arise from company reconstructions, new acquisitions and the transfer of undertakings.

One of our new clients that had exited from a larger group was expecting their staging date to be this year. However, we discovered that this relatively small client should have complied with auto-enrolment in 2014.

The employer still had its legacy staging date from the group of which it had been a member in April 2012. We had to explain the situation to them (and to TPR) and propose a solution, including a plan to correct enrolments and backdate contributions. Having an open and honest dialogue with TPR and an action plan to resolve the issue meant the employer avoided any fines.

Incorrect schemes

Meanwhile, some employers have discovered at the last minute they cannot use their existing pension scheme for auto-enrolment, even though the contribution levels are above the minimum.

There is a wide range of possible reasons for this. Some providers just do not allow their schemes to be used for auto-enrolment or even to be designated as qualifying schemes for existing members. Furthermore, they might not be willing to put the necessary agreements in place (e.g. for PPPs or Sipps) or the charges might exceed the 0.75 per cent cap.

Confusion with contracts

The definition of some categories or workers can also be confusing for employers. Some of the main problems arise with contractors, freelance workers and casual workers. One client ignored all their freelancers because they worked on occasional contracts and for a number of other employers but many of them were their workers for auto-enrolment. Likewise, some employers simply ignore overseas employees or those on secondment.


Employers often make mistakes with the actual auto-enrolment process. An employer we encountered assumed it complied because it offered its non-contributory scheme to all its employees three months after joining the company. However, the employees still had to complete an application form, choose whether to contribute themselves and select their investment funds. There are other set timescales for issuing communications. Many employers (and even providers) have omitted to send all the required information in time.

Salary sacrifice and opt-outs

A number of employers have got salary sacrifice completely wrong as well, potentially falling foul of contract law and salary exchange requirements, or the auto-enrolment requirements (or both). The key is to make sure the effective change of contract happens before salary exchange can be used for paying pension contributions. It is perfectly possible for employees to be automatically enrolled using salary sacrifice but only if their terms and conditions and contracts have been changed first.

Opt-outs are another area of difficulty. For example, some employers have issued employees with opt-out forms. This is not allowed: TPR takes a dim view of what can be seen as encouraging opting out.

Danby Bloch is chairman of Helm Godfrey



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There are 5 comments at the moment, we would love to hear your opinion too.

  1. There are of course easier ways to relieve the burden on the smallest firms.
    1. If at all possible see if the employees can go self-employed.
    2. Can you cut down on staff?
    3. You may not distribute opt out forms, but an adviser should be employed to point out the disadvantages. A decent and dare I say even ethical adviser, can easily show that opting out is by far the best course for the majority of those who are over 45.
    4. Draconian measure. Sack the staff if at all possible and re-employ those over 65.
    5. Nuclear option (which was adopted by a client who was mid 60’s and had two employees). Close the firm.

  2. Wow Harry Katz – do you ever have anything positive to say!

    Push people to 0 hour contracts; cut jobs; opt-out; sack everyone under 65 or just go bust!

    How you can even state that somebody who is over 45 would be worth opting out of an employer based scheme? A Group Scheme that complies with auto-enrolment where the employer pays 4% of basic salary (not between the LEL and UEL) by October 2018 for the employee paying 5% receiving tax relief on their contributions – yeah sounds awful!

    So what if they save it and then blow it all in one hit under the new pension freedom rules I’m sure they would have had a good time doing it and they’ve also saved for that privilege.

    Or i suppose they could just ‘advise’ them to opt-out and let the state look after them when they retire; or they could continue working for the rest of their life not allowing the younger generations to gain experience or expand that industry.

  3. @DanielX2

    1. Remember we are talking about the smallest firms. They are not benefit agencies. They need to ‘stick to their knitting’. It is the employers’ duty to provide competitive salaries and a decent working environment, not to act as a branch of the DWP. AE is a fixed cost at a time when firms are trying to reduce overheads. AE doesn’t recognise single premiums therefor a small firm cannot align its remuneration policy to the fortunes of the company.

    2. Most people still believe that NI pays for their pensions and healthcare – so believe that they are being taxed twice under AE. They have probably not had a decent rise for several years and a further 5% out of their salary is about as welcome as a bucket of sick.

    3. At national average earnings for someone over 45, they will be lucky to have amassed £60k over 20 years – and that’s not counting the investment risk or the fees. Remember that Gordon George is toying with the idea of abolishing tax relief. So what do you recon is the opportunity cost of foregoing income at this level over the term? Most would prefer to enjoy themselves now, rather than wait till they get to retirement- if they have any surplus cash. Oh and not’s let forget that they would also probably be far better off reducing their debt now rather than relying on trashing the cash when they finally get it. And that’s not counting the unnecessary interest they would have paid by keeping debt longer. If they are minded to save in a pension, they could make their own arrangements and negotiate with the firm for company contribution at review time (which may have an element of bonus and would probably be a single premium) and perhaps also include an element of (unofficial) salary sacrifice. This would be a far more flexible arrangement and neither party would be in the straight-jacket of AE.

    4. Finally it is as well to note that most of the people under this consideration have on average a much shorter life expectancy. Not everyone in the world works sitting on their backside, in spite of what many advisers believe.

    I do wonder what your experience is of running a small company with employees earning around national average earnings?

  4. Harry,

    Virtually no staff member should opt out and you either know it, or you need to look into it further. If you disagree, let us see your reason why or advice letter to a staff member advising them to opt out and the reasons for it and then we can see where that takes us. I have read lots of your comments over the years and they are usually entertaining, but you need to back down on this one.

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