Efforts to prevent a generation of impoverished pensioners are under threat from ill-equipped employers and failing provider business models.
Automatic enrolment was launched to boost the private pension savings of workers as defined benefit schemes closed and longevity increased.
While large employers have coped well – opt-out rates are at an average of just 10 per cent – small and micro firms have a worrying lack of knowledge about their new duties, despite all employers needing to be fully enrolled by the start of 2018.
An improving economy has also forced The Pensions Regulator to increase its forecast of the number of firms that will be eligible for auto-enrolment by 500,000.
Politicians, business organisations and corporate advisers fear the Department for Work and Pensions’s flagship policy is “going up the wrong path” and will be a “complete nightmare” for hundreds of thousands of employers.
At the same time some of the largest pension providers are struggling to make their business models work over the long term without introducing new charges.
Chancellor George Osborne’s pension freedoms have also been a distraction as the industry and policymakers battle to keep up with the biggest changes for a century.
Fears are growing auto-enrolment will come unstuck just as the employees it should help the most begin saving. But experts believe there is still time to intervene and help the firms most likely to break rules and and prevent them from racking up thousands in fines.
Enter the micros
The largest employers in the country began auto-enrolling staff in 2012 with typically very low rates of people opting out once they were in. These firms generally maintain full-time pensions departments and have a history of providing pensions to their staff.
While this represents over five million members, 97 per cent of all employers are yet to hit their staging dates. Around 1.8 million companies have not yet begun auto-enrolment.
A survey conducted by TPR of small companies – with between five and 49 members of staff – and micro firms, with fewer than five staff, reveals the scale of the challenge to come.
Only around one in three (38 per cent) small and micro firms know their staging date, according to TPR. Around half (48 per cent) of micro employers and 41 per cent of small employers think auto-enrolment will be “financially difficult”.
A fifth of small firms currently do or plan to use an IFA, as do 15 per cent of micros.
Conservative MP for South Thanet and Department for Work and pensions select committee member Craig Mackinlay told Money Marketing he plans to work toward a “more elegant solution for smaller businesses”.
He says he has first-hand experience through his accountancy firm of “companies calling up because they’ve got a letter from TPR and they’re scared”.
“With a lot of these things, once they bed in it’s never as bad as the fear factor you had before, but auto-enrolment is going up the wrong path with small employers.
“It’s not too late to actually do something about it because the staging dates aren’t here yet.”
He adds: “You would get a lot of SMEs in this country going bankrupt under the fines that are being promised, that’s got to be looked at. At the moment there’s too much obligation on a small employer, when all they’re trying to do is run a shop with a couple of workers and all of a sudden they’ve got TPR on their back.”
In May TPR issued its first four escalating penalty notices. These can range from £50 to £10,000 a day depending on the size of the firm and severity of the breach. The regulator would not say what level of fines were issued. In addition, 332 £400 fixed penalty notices had been handed out at the end of June.
LEBC division director of group savings and investment Glynn Jones says smaller firms can be split into two groups; those that use book keepers and accountants, and those who do everything themselves.
He says: “We get the impression the book keepers and accountants are getting there. We are launching an online service for them to help manage auto-enrolment for their clients.
“But the problem remains for about a third of the small and micro market who do it themselves.
“I don’t know if it’s too late for them to get themselves sorted. Our solution can be used directly by companies, but they’ve got to know where to find us.
“It could really be a mess over the next two years, I don’t know how to reach those hundreds of thousands of employers.”
The Government has already given small firms one reprieve, delaying staging dates for those with fewer than 50 employees by a year back in 2011.
Now Mackinlay calls on the Government to change its approach to small and micro employers, who he believes will always struggle complying with auto-enrolment.
He says: “What I’d like to see would be an alternative for smaller businesses where, rather than them sending contributions to Nest or Standard Life, it is collected through additional National Insurance contributions and sent to providers via HM Revenue & Customs.
“It would be administered within the NI system, so employers just take another 1 per cent and do not have to build an entirely new system.”
While the idea has support in principle, most think it is too late to change the model for auto-enrolment.
Rowley Turton director Scott Gallacher says adapting the contracting-out system used for the additional state pension was considered before auto-enrolment began, but the Government shied away from taking on the administrative burden.
He says: “At the start of auto-enrolment the better option would have been to do the entire thing through the NI and contracting-out system we had for Serps.
“You have an existing NI system where all employers have to pay themselves and on behalf of their employees. We could have just rep-laced pension contribution rates with additional NI contributions. Then you could have made pension providers agree certain standards, like we have now, but also to agree to take on anyone.
“Then people who don’t make a decision are allocated a provider at random. There would have been no impact on employers and employees at all, other than making contributions. That would be incredibly clean.”
Institute of Directors senior adviser Malcolm Small says expanding the reach of auto-enrolment – though a greater financial burden for employers – would make it simpler for small firms.
He says: “I would favour a situation where if you are paid at all, contributions are automatically paid, whether you are earning £10 or £1,000 a week.
“That would radically simplify the situation for employers. At the moment small employers are struggling to understand the rule set, it’s not that they don’t want to comply, they just have to find their way through an incredibly complex rule system.”
Figures published by the Pensions Policy Institute last week show only half of the working population – around 20 million people – are eligible for auto-enrolment. Women, older and younger workers are most likely to be excluded and most likely to be employed by small firms.
Small says: “There are a lot of people who fall outside the problem on paper, even though they might have two or three jobs that take them above the threshold. My concern is people are just not being caught by the system in the first place.”
Aviva head of financial research John Lawson agrees expanding auto-enrolment to all workers “will truly democratise savings and simplify the calculations and eligibility assessment”.
But he warns employers are “unlikely to agree to this as it would increase their costs significantly”.
Rising employer costs
Small employers could see their costs rise in any case as more providers eye new charges. Last week, master trust Now: Pensions revealed it would be adding an employer charge of up to £40 a month to new customers from 2016.
The level will be set depending on the results of a survey of employers’ needs, which could include support staff assigned to individual firms.
Last year, Money Marketing rev-ealed The People’s Pension was considering adding a charge and the provider is yet to rule one out. Government-backed scheme Nest says it will not follow suit. Aviva already levies charges in addition to member fees.
Lawson says: “Where average contributions are lower and staff turn-over higher, that is when a higher charge is required to recoup costs. If these costs cannot be fully covered by a 0.75 per cent charge, employers are offered the option of paying an additional fee.
“Most mainstream providers have already gone down this route. The difference here is that Now: Pension’s proposition is not as broad as many mainstream providers – for example, most mainstream providers offer a wider fund choice. They may find it more difficult to compete if their price is similar but the proposition is not as broad.”
SimplyBiz workplace solutions director Tom Nall says Now: Pensions’ approach is “reassuring” and predicts more providers will add charges.
He says employers often do not realise the extent of costs in addition to contributions – such as technology, administration, consultancy and advice fees.
He adds: “Employers are used to paying fees for services, they value and evidence from providers that do charge fees is that the issue may be more a legacy of how pensions business has been done in the past rather than great resistance from employers.”
A Pensions Regulator spokeswoman says: “Our research shows most employers want to do the right thing by their staff and that most small and micro employers due to reach their staging date this year are well underway with their plans.
“We continue to review our communications and tools so that they are suitable for changing audiences. We are now refreshing our website so that employers who may not have pensions experience will be able to easily follow the steps they will need to take to comply with the law.
“Seven out of ten employers will be asking their advisers for help and we are ensuring advisers have the information and tools they need to help their clients with their automatic enrolment duties.
“Most employers who have implemented automatic enrolment say they wish they had left more time and small and micro employers should ensure they leave enough time to get their plans in place.”
We need to charge employers to keep the doors open
So far, auto-enrolment is doing its job. Department for Work and Pensions figures show the policy has already successfully stopped the long-term downward trend in pension saving in the UK.
But it is far too early to hail a victory. While 5.3 million people have been auto-enrolled, it is important to remember just 3 per cent of employers have gone through the process.
Analysis from The Pensions Regulator shows that of the 1.8 million employers yet to stage, two-thirds employ between one and four workers while 16 per cent employ between five and nine workers and 17 per cent between 10 and 49 workers.
Most of these small businesses have no experience of pensions. Research Now: Pensions conducted with 269 employers yet to stage revealed two in three do not have an existing pension scheme. They are also less likely to seek professional advice with only 6 per cent stating they will seek the help of a financial adviser for auto-enrolment.
As a result, they are going to be relying more heavily on their pension provider for support both with scheme set-up and on an ongoing basis.
For many providers, the effort involved with administering these schemes will not be worth it. Some will choose to withdraw from the market altogether, others will operate bespoke terms and opaque charging structures.
We remain committed to serving the entire market and recently launched a consultation to give smaller employers the opportunity to tell us exactly what they want and need from their auto-enrolment provider. Using feedback from this consultation, we plan
to enhance our proposition to specifically meet the needs of smaller firms.
We believe it is vital there is choice in the market for companies of all sizes. But in order to keep our doors open for everyone and provide the right level of support, it is necessary for us to introduce a monthly service charge for firms staging from 2016 onwards.
The exact level of the charge will be determined following the conclusion of the consultation but it will be no more than £40 per employer per month.
A competitive market, where employers have choice and commercial providers can run their businesses sustainably, is a healthy market. And a healthy market is essential if auto-enrolment is to achieve its objectives.
Morten Nilsson is chief executive at Now: Pensions
Nest – 2.4 million
The People’s Pension – 1.5 million
L&G – 1.4 million
Now: Pensions – around 550,000
Chris Daems, director, Cervello Financial Planning
Now: Pensions needs to ensure its model remains sustainable and therefore making a commercial decision to apply a monthly charge is understandable. However, from a small business owner’s perspective the key factor is how much additional value they add over and above pension providers who do not charge employers directly.
A different approach for auto-enrolment around SMEs may have been appropriate prior to the implementation of the reforms, but trying to change course now is the wrong thing to do. There are other examples across the world of similar legislation being effective over the longer term, Australia being the most pertinent example. The right approach is to focus on continuously trying to make auto-enrolment legislation easier for all employers.