Auto-enrolment for smaller employers

Auto-enrolment for smaller employers

2015 has presented some new challenges for automatic enrolment (AE). This summer saw the first re-enrolment exercises, and we are now entering a phase which will see the very smallest employers reach their staging date. Many have seen this as the true acid test for the AE programme. For many small businesses, this will be their first experience of workplace pension provision and ensuring full compliance with their employer duties will present a significant challenge for small businesses with limited budgets and difficult choices.

 

However, the Pensions Regulator (TPR) – tasked with ensuring that employers meet their new statutory duties – has continued its excellently proactive approach to adapting to the changing requirements of each new wave of businesses reaching their staging date. Earlier this year, TPR wrote to all employers who had yet to stage to remind them of their new responsibilities and to encourage them to start their preparations early. An early start to an implementation project has always been recognised as a vital factor in a successful project, and using TPR’s online project planning tool gives employers a clear idea of what needs to be done and when.

 

One of the most serious challenges for smaller businesses is the selection of a suitable pension scheme. The range of choices is potentially bewildering and mistakes could be costly. However, for many smaller employers, options will be limited. Many will be reluctant – or indeed unable – to pay large consultancy fees to an adviser and so will be seeking to select a scheme themselves. At the same time, such employers will be aware that they have neither the time nor expertise to address the onerous governance requirements of a workplace pension scheme. Many businesses, with just a few modestly-paid employees, will not be commercially attractive to some providers of contract-based schemes. These factors mean that establishing a bespoke trust-based scheme is unlikely to appeal to any small business and many will struggle to find a provider willing to offer a contract-based alternative. For most SMEs, the only viable option will lie in the form of a Master Trust: either NEST – established by the Government to meet the specific challenges of AE – or one of the many alternatives that have emerged. A Master Trust, which allows many different employers to participate in the one scheme, can achieve the economies of scale vital to keep costs down. This is a serious consideration for those employers who are too small to provide the necessary volume through their own workforce. Additionally, a Master Trust offers centralised administration and governance. These too are crucially important for employers with neither the time, budget nor expertise to meet these requirements. However, the number of Master Trust offerings has grown greatly in the last couple of years: how can employer select a suitable scheme from the available range without paying for professional advice?

 

Fortunately, the Regulator has long recognised this potential problem and has produced a pragmatic solution. Working closely with the Institute of Chartered Accountants in England and Wales (ICAEW), TPR has developed the Master Trust Assurance Framework (MAF). Compliance with a range of quality criteria means that schemes who meet the standard form part of a de facto ‘white list’ of schemes suitable for any small employer. To date, just three schemes have completed the audit necessary for MAF compliance. Over the longer term, formal MAF recognition will surely prove vital for any Master Trust seeking to ensure commercial viability.

 

It will be interesting to see if small employers present TPR with its first major compliance challenges. It has long been speculated that SMEs would provide the first significant AE ‘rebellion’ with employers either refusing to set up a scheme or seeking to induce employees to opt out. Whilst failure to implement a scheme – either deliberately or otherwise – will be relatively simple to identify, inducement will surely be far more difficult to detect and prove. The quality of TPR’s intelligence gathering has yet to be tested, yet it will have to be effective if AE is to be effective for smaller employers.

 

 

To date, AE has been remarkably successful. Opt-out rates, at about 10%, remain lower than anticipated and new defined contribution decumulation options have helped greatly in improving public engagement with pension provision. However, we are not yet out of the woods. Phasing currently sees very low member contribution rates – typically just 1% of qualifying earnings – and whilst this is easily affordable, the higher rates that will apply from October 2018 will surely meet with some resistance from members. At the time of writing, the Government is considering radical reform to the system of tax relief used by registered pension schemes. An end to the current ‘Exempt, Exempt, Taxed’ (EET) system will make saving far more expensive. If improved rates of pension saving are to be maintained, it is vital that we strike a proper balance between affordability and expectation, and Government must take care not to focus on short-term objectives at the expense of long-term social needs.

 


Tim Middleton

PMI Technical Consultant


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PMI

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