The DWP has recently issued draft regulations on how automatic enrolment will work in practice. All employers – unless they are a single-person company – have to adopt this process, whether they automatically enrol their workforce into a private pension scheme or personal accounts.
The draft regulations set out what employers and schemes have to do and when, what information they have to give and to who, and what action workers have to take to opt out.
This will mean a radical change to the process of joining an employer’s pension scheme. Traditionally, employees are offered membership of a pension scheme, and decide whether to join. The new process turns this on its head. In future, employees will be automatically enrolled in, and then will have to decide whether to opt out.
The Government is hoping automatic enrolment will harness the power of inertia and more people will become pension savers. I have no doubt it will.
But there will still be significant numbers who opt out. A conservative estimate of the average opt out could be 30 per cent, but in some industries and for some age groups this will be much higher.
The opt-out process is tricky. The enrolment information employers give employees has to explain the right to opt out. If the employee chooses to opt out then they have to get the opt-out form from the scheme, maybe through the scheme or provider’s website or by telephoning the scheme or provider direct. But employees cannot ask the employer for the form.
Employees have to return the opt-out form to the employer, who has to send it to the scheme. However, the employer cannot act merely as a postbox. It has five days in which to validate the form has been completed correctly, and if not, to tell the employee.
If the employee opts out, the employer has to return any contributions already taken from the jobholder’s wages.
There are strict timescales – contributions have to be returned by the second pay date following the employer receiv-ing the returned opt-out form, or 21 days after the form is received, if later. Having time to return the contributions is welcome as far as employers are concerned. But it could mean employees don’t receive their contributions back until a couple of months after returning the opt-out form.
Opt-outs are going to be part of life. The process of deducting contributions for, sometimes, a sizeable part of your workforce, only to return them a few weeks later will fill many employers’ hearts with dread. This is overly complicated, and a simpler solution would be to release the employer from this administration hell, poss- ibly by only collecting contributions from when the opt-out period closes.
We can still influence the final regulations by responding to this consultation by June 3.
Pensions are a long-term investment. We need to develop a culture where people are committed to paying pension contrib- utions over 40 years.
Missing the first six weeks of contributions is not going to derail people’s pensions plans. But insisting on disruptive administration may very well turn employers completely off pensions and we need employers’ buy-in if pensions reform is to succeed.
Rachel Vahey is head of pensions development at Aegon