Making workplace pension schemes work
Despite increased penalties and a government campaign, the auto-enrolment of employees in a pension scheme remains a challenge for smaller employers, writes Amelia Garman
Workie says: ‘Do not ignore the workplace pension.’ This is the message behind the ambiguous furry creature in the multi-million-pound televised advert which forms part of the government’s campaign to encourage more workers to save for their retirement. The advert attempts to communicate that the workplace pension does not simply apply to large employers but to small and micro employers too.
By February 2018, all employers in the UK will have automatically enroled eligible workers in a pension scheme and will be paying mandatory contributions accordingly.
Auto-enrolment has been a staged process over a period of five and a half years. The staging or phased implementation has been an attempt to recognise that smaller and micro employers are more likely to find implementation and staging arrangements arduous, both in terms of cost and time, compared with larger employers who have more resources at their disposal to manage this process.
Every employer in the UK has been assigned a staging date, determined by the size of its payroll, from which it will become subject to the new duties. These dates have been revised over time:
Small employers with fewer than 50 workers in their PAYE scheme have been allocated a staging date between 1 June 2015 and 1 April 2017;
The staging date for medium-sized employers with between 50 and 249 workers in their PAYE schemes has already passed; and
- This is also the case with larger employers (i.e. 250 workers plus in their PAYE schemes).
It is essential that the employer complies with both its employer duties and with the staging arrangements above, as failure to comply is likely to result in enforcement action and the issue of a warning notice and/or a penalty. The Pensions Regulator (TPR) is the regulator of work-based pension schemes in the UK and is the body responsible for ensuring that employers comply with their duties. TPR has a number of statutory objectives under the Pensions Acts 2004 and 2008, which can be found at paragraph 2.5 of TPR’s compliance and enforcement strategy. These include:
Establishing and maintaining a pro-compliance culture among employers;
Maximising deterrence for employers considering breaching their new duties;
Swiftly detecting non-compliance by employers;
Investigating potential breaches of the employer duties fairly and objectively; and
- Taking enforcement action against non-compliance by applying appropriate civil or criminal sanctions.
A worker can bring a claim in the employment tribunal in relation to unfair dismissal or detriment connected to auto-enrolment but cannot generally bring a claim if their employer does not comply with its new duties. This is where the TPR steps in to ensure compliance and to oversee the introduction and implementation of auto-enrolment.Penalties for non-compliance
While before June this year penalties for non-compliance were relatively rare, the financial consequences have been illustrated in the case of Swindon Town Football Company Limited, which the TPR fined a total sum of £22,900 in April this year, following its repeated failure to comply with its employer duties and put eligible workers into a pension scheme or comply with other workplace pension duties. It is important to note that employers that fail to comply risk not only a fine but will also have to pay backdated contributions.
In the instances where a breach is not remedied, TPR may order two levels of penalty: fixed penalty notices or escalating penalty notices. The former provides for a flat-rate penalty of £400. The latter is associated with more serious or persistent breaches and there is a system of escalating penalties, varying according to employer size. These range from £50 per day for employers with one to four workers to £10,000 a day for those with 500 or more workers.
TPR may also take civil or criminal action. Certain acts or omissions by an employer can amount to criminal offences.
TPR publishes a quarterly compliance and enforcement bulletin, highlighting the extent to which it has intervened to enforce the employer pension duties. For the last quarter (1 July to 30 September 2016), TPR used its powers 19,852 times. This is a significant increase on the previous quarter, when it used its powers only 4,489 times. The July-September quarter figure includes 3,728 fixed penalty notices and 576 escalating penalty notices.
Based on this last quarter, it would appear that auto-enrolment is now entering its most challenging phase yet. This might be explained by the shift in focus from large, household-name employers to around 1.8 million small and micro employers, ranging from corner shops to individuals who employ a nanny. It is likely that this trend will continue as smaller employers have fewer people and less time for administration duties and less means to fund the scheme. The disparity in the amount of time spent on small schemes as compared to larger schemes was flagged up by my colleague Jennie Kreser in her article in December 2015 (SJ159/44).Auto-enrolment costs
A report published by TPR, presenting the results of the autumn 2015 wave of auto-enrolment communications research with employers, appears to show that while the vast majority of small and micro employers are aware of changes to workplace pensions, they are not so aware of auto-enrolment. For these reasons it seems that these smaller employers are perhaps more likely to find themselves the recipients of fines.
However, in contention with this analysis, ‘Working out your client’s costs’, an article by TPR based on research conducted among small employers (who have already met their duties) on the one-off costs of setting up auto-enrolment, as well as the ongoing costs of paying money into a pension scheme and managing the process, shows that:
60 per cent of employers with one to four staff had no overall set-up costs;
70 per cent of employers with one to two staff had no overall set-up costs; and
- 95 per cent of employers who did not have any staff to put into a pension scheme had no overall set-up costs.
Despite purporting to demonstrate that the costs associated with auto-enrolment are minimal, it is arguable that these results are limited in what they actually show, as they relate to schemes already enroled and it is likely that these schemes are already enroled because they are at minimal cost to the employer.
Small employers are also more likely to purchase off-the-shelf solutions on account of their lack of experience in this field. With off-the-shelf solutions it may be harder to separate out the different costs in the package and identify the real costs for the employer. The attraction of these packages is that they offer simplicity and peace of mind for the inexperienced small employer.
The same report does recognise that set-up costs will vary depending on the time that the employer spends on setting up auto-enrolment, how business advisers are used, how the employer runs payroll, and the choice of pension scheme.
Costs for advice in this regard ranged from between £200 to £1,000 depending on the region and also the level of advice.
Costs associated with payroll will vary depending on whether this function is outsourced and run by an accountant and, if so, whether auto-enrolment is included in the current charges or whether extra charges will be incurred. If payroll is done in house, costs will again vary depending on whether the existing software supports auto-enrolment.
Pension scheme set-up costs will differ, with some schemes aimed particularly at small employers which do not have set-up or monthly charges for auto-enrolment. The National Employment Savings Trust is a pension scheme provider established by the government that does not have set-up charges and is obliged to accept all employers that apply to use it for auto-enrolment.
Despite all the potential costs and the time involved for the employer in implementing auto-enrolment, the message from TPR remains clear: employers both large and small must comply with their duties and are actively encouraged to seek guidance if and when needed. However, the increased amount of penalties issued in the last quarter suggests that Workie, the anthropomorphic star of the government’s auto-enrolment campaign, may not in fact be working – or at least is not as effective as anticipated, despite the advert’s attempts to specifically target smaller and micro employers and the significant amount of public funding which went into the campaign.
Amelia Garman is a trainee solicitor at Silverman Sherliker