01 November 2024
Andy Coles, deputy head of pensions and benefits, Dorset Healthcare University NHS Foundation Trust, reflects on the challenges posed by automatic enrolment (AE) compliance and the potential for further legislative changes
It’s hard to get excited about compliance. We have so much to contend with already that the thought of adding more hoops to jump through can fill even the hardiest professional with dread. For every attempt at simplification, it seems that two more complications spring up to tie us in knots. Sometimes a simple enquiry can lead you down a rabbit hole of definitions and interpretations that leave you less sure than when you started out. New rules and requirements can be frustrating but while complaining can be a healthy part of coping, it’s easy to forget that these strictures haven’t sprung from nowhere. We might question or disagree with them, but they have been designed by professionals like us to improve existing procedures or to close loopholes that less scrupulous employers might seek to exploit.
The introduction of AE
In our own payroll and pension department back in 2012, trying to get our heads around the intricacies of the new AE legislation, it was hard to focus on the positives. Poring over diagrams explaining pay reference periods, lists of employee statuses, requirements for compliant schemes and a dozen other things felt like a nightmare. As an NHS employer, shouldn’t we have an exemption? Everyone knows we have a great pension scheme and we put just about everyone in it, so why do we need to jump though all these hoops?
Of course, over time the rough edges get worn down and much of it becomes business as usual. The payroll software improves and probably does a lot of it for you now, and you’ve learned how to streamline your own internal procedures. If you’re very lucky, even those employees who really don’t want to be in a scheme have realised that three-yearly
re-enrolment is just as much of a pain for you as it is for them and have stopped giving you a hard time.
But getting to that point hasn’t been a smooth ride. Some aspects of AE can seem overly complex and designed to irritate both employer and employees. Those strict rules around opting out of the scheme that caused innumerable angry calls and emails from our reluctant enrollees in the early years are at the heart of AE. It’s funny how something that caused us so much grief was a clever bit of behavioural economics at work. The scheme’s design – insisting on opt-outs rather than opt-ins – takes the inertia and procrastination that were previously significant barriers to retirement saving and turns them into ways to get people into a pension scheme rather deterring them. Compliance as a force for good.
A success story so far
Looking back, it’s easy to see what a success AE has been, even if there are concerns that it doesn’t go far enough. Overall participation in workplace pension schemes has increased from 55% of eligible employees in 2012 to an impressive 88% by 2021. That 33% increase represents millions of workers now actively saving something for their retirement. It might not be enough but it’s an improvement over what came before. The impact in the private sector has been even more pronounced, with membership more than doubling from 42% to 86% over the same period.
The scale of this transformation is remarkable. By February 2022, more than 10.6 million workers had been automatically enrolled in workplace pension schemes. The financial implications are equally significant, with annual total savings among eligible savers increasing from £75.3 billion in 2012 to £105.9 billion in 2021. On top of that, the gender gap in pension savings has fallen and the number of young people and employees in very small business now paying into a pension has risen greatly.
If this had been a voluntary initiative, it’s unlikely it would ever have achieved such impressive results. We might feel like sitting back and congratulating ourselves on being part of such a successful programme. However, in the world of pensions and compliance, standing still is rarely an option.
Despite AE’s success, there’s a growing recognition that the current system may not be enough to secure adequate retirement incomes for everyone. This realisation, coupled with changing work patterns and demographic shifts, has sparked discussions about the next phase of pension reform. With a new government seemingly focused on pensions, we may be on the cusp of further changes to the AE landscape.
Extending and improving legislation
Several suggestions for extending and improving the legislation have been circulating for some time. While these proposals aim to build on AE’s success, they also present new compliance challenges for employers. Let’s look at some of the key ideas being considered.
Lowering the age threshold: the proposal to reduce the minimum age for AE from 22 to 18 would significantly expand the eligible workforce. On a technical level this might be a trivial change, easily handled with a software update, but the additional cost of complying with this extension, particularly for those employers with younger workforces, could be considerable.
Removing the lower earnings limit (LEL): currently, contributions are only required on earnings above the LEL. Getting rid of this threshold where AE is concerned would mean calculating contributions from the first pound earned, needing further adjustments to payroll systems and increasing costs for employers.
Increasing minimum contribution rates: while calls for this have been quieter lately what with the cost-of-living crisis, there have been persistent concerns about whether the current 8% minimum contribution rate is adequate and whether it contributes to a false sense of security while not delivering a reasonable pension. An increase to 12%, starting with the employer contribution rising to 5%, was previously suggested. Any increase would have implications for both employer costs and employee take-home pay. Also, while the employee contribution has gone up to 5% over time, opt-outs have remained much lower than forecast at the start of AE. Further increases may affect that rate and cause more work for employers as they manage more opt-outs.
Save More Tomorrow: in its 2022 report, the Department for Work and Pensions suggested trialling auto escalation schemes like Save More Tomorrow, where employees commit to saving future pay increases into their pensions. That could mean significant additional compliance duties depending on what part employers would be required to play if this kind of scheme was added to legislation.
Expanding coverage to gig economy workers: as non-traditional working arrangements become more common, there have been discussions about extending AE to include workers on zero-hour contracts or individuals whose employment status is disputed by the organisations that pay them. This would introduce new complexities in determining eligibility and managing contributions for workers with very variable incomes.
As we’ve seen, AE compliance remains a challenge and may be more challenging in the future. It’s easy to feel overwhelmed by the complexities, just as we did back in 2012. Each year, The Pensions Regulator reminds us of the pitfalls with cautionary tales of non-compliant employers.
So, let’s remember why we’re jumping through these hoops. AE compliance isn’t just about avoiding fines or dodging public shame. It’s about being part of a nationwide effort to secure better financial futures for millions. Yes, it can be frustrating to navigate the intricate rules and potential changes we’ve discussed. But isn’t it also gratifying to know that our attention to these details is directly contributing to the financial wellbeing of our workforce?
This article featured in the November 2024 issue of Professional.