Employers are the real stars when we look at Automatic Enrolment Successes

When I first got involved in managing client relationships in 2009 a key topic for discussion with Employers and advisers was ‘Pensions Reform’ and what was known at the time as ‘Personal Accounts’. These ‘Personal Accounts’ were proposed in the Labour Party’s 1997 manifesto as a way of giving access to good quality pension schemes for employees via the workplace.

The term ‘ Personal Accounts’ was eventually ditched and replaced by the more self-explanatory ‘Automatic Enrolment’ as we headed towards the first staging dates for Employers in October 2012 (some 15 years after that initial pledge from New Labour). Who says things don’t move fast in the world of pensions……?

Over these 9 years of working with customers Automatic Enrolment (AE) has been a central agenda point for Employers: from the preparation phase of understanding the rules (and the appreciation that non-compliance was not an option) onto compliance with the rules and ongoing maintenance of their duties.

AE is now a constant part of UK business and has been heralded as a huge success with over 9m workers enrolled into schemes. For me, however, the key to success has been the 1 million plus Employers who have entered into the spirit of the legislation and declared compliance and enrolled their employees. The vast majority of Employers I have supported over the years didn’t resist this change but embraced it as a valuable development for their people who weren’t planning for later life.

The continued success of AE will very much rely on the ongoing support of UK businesses.

To a great extent this will be measured by the implementation of the recommendations proposed in the December 2017 AE review that would see Employers enrol more employees through the lowering of the age limit to 18. It also recommends an increase to pensionable pay by removing the Lower Earnings Limit from the Qualifying Earnings definition.

These recommendations are being targeted for the mid 2020s (more evidence of how rapid things can happen in our industry…..) but there is something far more pressing that will have an impact on the view of AE as a success.

I refer of course to the increases to minimum pension contributions or AE Step Ups.

Auto Enrolment Step Ups – the next major milestone for AE

My current role as a Workplace Pensions Specialist means I am a step removed from the day to day management of customer relationships so I was delighted to see such a strong interest in Step Ups from Employers when 300 registered and attended a Webinar I hosted on 14th March. The levels of engagement during the call can be measured by the 60+ questions that were submitted and it tells me that Employers are still fully committed to playing their part in the ongoing AE journey.

Having spent the 15th March reviewing those questions I didn’t have time to answer on the call, and then following up with customers I picked up some themes around AE Step Ups from an Employer perspective and wanted to share them.

For anyone who, like me, has been involved with AE since the start you will have had many moments of incredulity around some of the quirks and complexities in the rules, and for Step Ups it is no different as there are a few areas that Employers clearly need help with from industry professionals.

Opting Out / Opting Down

By far the most common question on the webinar was around the options employees have if they don’t want to take the Step Up. It is not uncommon for our industry to get bogged down in jargon and complexity and on this topic Employers are seeking clarification about ‘opting out’ of the Step Up. This does us no favours though as ‘opting out’ in AE land already means something pretty fundamental to the whole process.

Here is how I have landed on explaining the differences:

Opting Out – this terminology relates to someone who wants to leave the scheme completely and stop contributions. For Auto Enrolment if you do this within the first 30 days then you get a refund. If you do it after 30 days you don’t get a refund but you come out of the scheme – this would be traditionally classed as stopping contributions (becoming inactive).

Opting Down – there is a loophole in the AE rules whereby technically someone can agree with their Employer to pay less than the post April 2018 minimums and not ‘opt out’ completely e.g. continue on 1%. TPR has outlined that they do not want Employers to mention this loophole to employees in any awareness communications but can react to it on a case by case basis. They want Employers to implement the Step Ups and then deal with any queries after the event.

In both situations these employees will need to be reassessed on the re-enrolment date (every 3 years) and enrolled on the minimums that are required by law at that time.

Interestingly a few Employers asked for more information about the re-enrolment process generally and if they will be notified about their specific date and if re-enrolment comes with opt out rights again (which it does).

Unfortunately there is confusion here and it is understandable why given, as is often the case with AE, things aren’t simply black and white.

Our FAQ helps clarify this area and more besides.

Do I need to do anything?

I had to face into questions literally at both ends of the spectrum around the basic need to act on the new minimums:

Employer 1: “I am currently paying 1% do I need to do anything?”

Employer 2: “I currently pay 10% Employer contribution do my employees need to start paying?”

Employer 1 clearly has a need to increase to the new minimum of 5% in total (2% from them) and so I was delighted they dialled in and hopefully they sorted out the increases with their payroll provider.

Employer 2 is in the luxurious position of being beyond 2019 minimum levels and their employees will not need to start paying unless they wish to. My guidance to that Employer was they should still be sharing positive messages with staff about the great scheme they offer and ensure their staff appreciate the significant investment they are making for them.

Certification

During the Webinar I made a fairly fleeting reference to certification of alternative contribution bases. This is where an Employer is not applying the Qualifying Earnings definition of pensionable pay and has opted for one of the three alternative definitions.

My point was that if an Employer has certified the scheme then they need to check that their certificate factors in the increased contributions. The DWP template is prepopulated with this information so many Employers will be covered. If their certificate doesn’t cover the increases then the Employer would need to end their existing certificate and re-certify on or before 6th April (and then renew it every 18 months).

It was slightly concerning, therefore, that a few Employers either didn’t know they had to certify their contribution base or were asking for more information about the need to renew this every 18 months.

This reminded me that Employers need to have processes and reminders to ensure that they are complying with their ongoing duties around AE. From the continuous assessment of staff to re-enrolment to step ups to certification and so on. The need for guidance and advice from providers and advisers remains a need for customers.

It also highlights the benefit of Good Governance for Workplace Pensions, which isn’t compulsory for Employers with contract based schemes but is good practice and creates a set time every year (or more frequently) to review their processes and their scheme and ensure that everything is in order.

Engagement

On the topic of engagement for Step Ups TPR say:

“There are no additional duties under automatic enrolment for employers to advise members about the increases, though they may wish to do so anyway to help minimise queries, or reduce the number of workers subsequently leaving their schemes.”

I agree with this and we are helping Employers engage staff on this issue and promote the good reasons for staying enrolled and taking on the Step Up.

I presented this on the Webinar and a number of Employers have asked for template letters and workplace communications to engage staff before 6th April so that they are aware of the increases and the benefits of staying in the scheme.

Our messages focus on the benefit of tax relief and Employer contributions and the potential increase to a pension pot that just doing the minimum will achieve. Nice simple, clear messaging to help customers understand the basics and make an informed decision. These communications will also help Employers manage queries from staff after the increase kicks in to reassure them that staying in the scheme is a good thing.

This need for engagement was brought home to me at the end of the Webinar when the participant lines were disconnected and I was left in the private conference with the guy who had been helping me with the running of the call:

Operator: “How was that for you today Mr McCallum?”

Me: “That seemed to go really well. Thanks for your help.”

Operator: “No problem sir…… can I just check one other thing with you?”

Me: “Sure.”

Operator: “Did you say that my pension contributions are going to increase?”

Me: “Well that depends on what you are currently paying in at the moment.”

Operator: “So they might increase?”

Me: “Possibly yes but you should check with your employer if you want to be sure.”

Operator: “Ok, I’ll look into it”

Although this is just one young guy I suspect that many employees like him around the UK are unaware of the increases, and it is important the Employers have the support at hand to manage the key messages with staff.

Employers are the Key to ongoing AE success

So by April 2019 we will arrive at ‘steady state’ for minimum contributions for Workplace Pensions having stepped up to at least 8%. Referring back to the pace of change, this is 7 years later than was initially planned for during the early formation of the AE regime. But we are almost there and although, for many, this rate of saving will not help them reach an adequate replacement income in retirement it is an important step forward.

The success, or otherwise, of these step ups will inform what happens next with contribution rates. The AE Review stopped short of any formal recommendations on contributions while there is uncertainty about how Step Ups beds in.

Whatever happens next let’s hope that it doesn’t take 21 years to get there!

What is certain, however, is the central role that Employers have played and will continue to play in the continued success of Automatic Enrolment.

The first phase has in many ways been in the establishment of compliant schemes and creating processes to remain compliant with the rules. The next phase is in making their Workplace Pension Schemes more meaningful for their employees both in terms of increased contribution rates but also in the education and guidance that they can wrap around it to ensure staff understand the scheme and get the most out of it.

Given the interest shown on the Employer Webinar on 14th March I have every faith that UK Employers will rise to the occasion as they have done over the past 5 years.

Alex McCallum

April 2018