How to navigate the complexities of auto-enrolment

Changes to auto-enrolment are expected in the coming years in a bid to improve understanding of the pensions landscape.

For a number of years there has been growing concern that not enough workers are saving for retirement, and those that are saving will not have enough to sustain a suitable standard of living.

Much focus is currently being given to the second of these concerns, quite rightly, as proposed changes are focused on improving member outcomes at retirement.

Meanwhile auto-enrolment, which was introduced in 2012 to help tackle the first of these concerns, has been arguably more complex than initially expected.

It has been deemed largely successful when measuring the number of people now saving for retirement compared to pre-2012, but many employers are uncovering issues regarding their compliance.

Common pitfalls

There are a number of common areas in which we and indeed the Pensions Regulator are seeing widespread issues.

The regulator is carrying out an increasing number of investigations, and has issued an increasing number of fines in recent years.

Some of the common pitfalls include making incorrect payments, failing to issue the necessary communications, or missing payment deadlines due to the following complexities:

Contribution rates: minimum contribution rates have changed since auto-enrolment was introduced
Pensionable salary: employers have some choice around the salary definition they use for paying contributions, but the certification requirements and minimum contribution rates that apply to different salary definitions will vary
Tax relief: contribution amounts being paid from the employer to the pension scheme differ between a “net pay” arrangement and a “relief at source” arrangement
Communication: auto-enrolment requires communications with specific content to be sent to members at various points in time
Re-enrolment: there is a requirement to re-enrol certain members who have opted out every three years
Postponement: subject to meeting several communication requirements, an employer can defer the automatic enrolment of a worker for up to three months

Beyond auto-enrolment, which is a statutory requirement, employers also have contractual requirements.

Legally binding agreements are usually in place with employees and with the pension providers, which commit employers to obligations which may differ from those under auto-enrolment.

More changes are coming

Several changes to the pensions landscape are expected in the coming years, as the drive to increase understanding and the amount being saved continues.

Changes to the current auto-enrolment regime will form part of this.

A government review recommended extending the existing auto-enrolment criteria to capturing younger workers (lowering the age threshold to 18 years old) and removing the lower limit on which contributions are often calculated.

The changes are expected to be implemented in the near future, and while they should lead to improved retirement outcomes for employees (specifically lower earners and younger workers), they will lead to further costs and responsibilities for employers.

What should employers be doing?

Amid heightened enforcement activity, reviewing past practice (with the necessary documentation to evidence good governance) can provider employers with additional reassurance that they are compliant.

The consequences of getting auto-enrolment wrong can range from financial penalties to reputational risk through public naming.

Beyond simply being compliant, many employers want to ensure they meet a fundamental duty: to pay their people the right benefits at the right time.

Reviewing current processes, alongside a more general review of pension arrangements, can help continued compliance and lead to increased efficiencies.

With further changes coming, employers should be aware of what upcoming changes mean for them.

Employers should understand the additional costs and responsibilities which they face, and consider whether their existing pension arrangements remain appropriate in the context of their wider benefits package.