It’s nearly two years since the big pension shake up and the introduction of auto-enrolment. So what have we learnt and is it as big as we first thought?
The main issue we’ve found are the unnecessarily complex rules and regulations. The regulator has tried to be fair to low-income earners, which has created more ongoing difficulties for employers. Most companies who already operated pension schemes, or contributed to their employee’s personal pensions, thought it would be an easy transition to auto-enrolment. However, we’ve found it harder, more time-consuming and difficult for insurance companies to comply with auto-enrolment when other schemes were already in place. As auto-enrolment is tailored to employees and companies that contribute a percentage of salary, paying fixed-monthly amounts causes all sorts of further problems for insurance companies.
Many people say ‘auto-enrolment is a problem for payroll, not pensions’, and we agree. Whilst recommending and setting up a pension takes time, it’s the ongoing administration that makes it a very long process. Whether the payroll is run weekly or monthly, every employee needs assessing each time and records need to be kept. This doesn’t include the time taken to record new joiners, opt outs and sending this information to the company’s pension provider!
It’s significantly more efficient for employers to only run monthly payrolls, as it dramatically reduces the volume of administrative work. Employers with a large turnover of staff and variable pay find auto-enrolment particularly difficult to deal with because of the constant need to assess new staff and the stop-starting of pension contributions. One employer commented that before auto-enrolment they were spending only an hour on pension payments, and now it takes them a full day to complete. Whilst we’ve no doubt that the process will get quicker over time, the increased administrative burden is certainly a shock!
Initially many people were sceptical about how many employees would opt out of the pension scheme, but in our experience this has been very low. Many schemes only require a 1% contribution of qualifying earnings, and that often don’t account for more than £10 per month which most people can probably afford.
By October 2018 employees will have to contribute 4% of their salary, which may potentially lead to more employees opting out. A word of caution though, Steve Webb, the Minister of State for Pensions, has said this is just the start. We expect the percentage to rise again for both the employer and employee before we reach 2020. If more and more employees start to opt out, then we think the ability to do so will be stopped and replaced with compulsory membership. It’s easy to see how, for the next generation, auto-enrolment might completely replace the state pension.
To conclude, auto-enrolment can mean a great deal of extra work for companies, particularly the ongoing administration of it. The regulator will be making sure that everyone complies with the rules so we’d always recommend that you start planning early, at least 6 – 12 months before your staging date.