Lucky number

Auto-enrolment came from a determination to address the troubling lack of pension saving in the UK. That’s certainly a laudable aim, but many employers just see it as another piece of expensive red tape

In terms of funding, most companies won’t have a great deal of flexibility. After five years of austerity, most businesses will have already reviewed their pricing and trimmed their expenses. For those unwilling to see the bottom line hit (probably the majority), this leaves the option of reducing (or at least deferring) employees’ annual pay rises as the most likely way of meeting the cost.

Diverting part of the pay rise ‘pot’ into pensions means that the cost is not borne by the employer but effectively the employee. Not everyone will agree, but employers are likely to see this as a fair outcome. In any event, this decision means that costs become a secondary issue – although managing staff expectations might be challenging.

There remains, however, the potential for auto-enrolment to cause significant and expensive disruption. The new rules and their jargon could only have only been dreamt up by a committee! We have entitled workers, non-entitled workers, eligible and non-eligible job holders as well as detailed arrangements for when a person may or must be entered into the scheme and otherwise. Then there’s the crucial difference between ‘joining’ and ‘opting in’.

To add another layer of complication, the required percentages relate to ‘banded earnings’, not all earnings, which means that in many cases the premiums will change every month. Employers must review the position of every employee (not just scheme members) at the end of every pay period (i.e. weekly or monthly). Sometimes mid-period reviews will also be necessary because spikes in pay (overtime and bonuses) can cause unexpected outcomes under the rules.

Omissions, errors and delays are very likely; fines and penalties too. Breaches of the rules can lead to fixed penalty notices of £400, plus potential daily amounts of between £50 and (for the largest companies) £10,000, until breaches are rectified.

As a final concern (perhaps not for the employer), it’s arguable that the rules penalise part-time workers, because they’re much more likely to lose out under the ‘banded earnings’ rules.
There is a way to cut through all of the auto-enrolment entanglements and adopt one more direct solution: for the employer to put every single employee into a pension scheme and pay 7 per cent of all their earnings into a pension scheme.

By phasing in the 7 per cent over a number of years, employers could still choose to fund the payments (wholly or partly) from the ‘pay rise pot’, in effect transferring the cost to employees, who wouldn’t opt out, as there would be no reason to.

The 7 per cent figure (of total earnings) will always be equal to or greater than the banded earnings definition, removing the need for ongoing assessments and onerous compliance administration.

There are other benefits. Of course, it gives employees a better level of pension savings (without discriminating against younger, older or part-time employees). It also brings a significant National Insurance savings to the employer.

Every employer must make decisions on two key factors: how the costs will be met and how the competing interests of administrative complexity and overall costs will be balanced.


Most importantly, however, employers should start to consider these matters well in advance, the better to make the process as painless as possible.

Scott Gallacher is a director at Rowley Turton

He writes the regular IFA comment in Private Client Adviser