House of Commons - Automatic enrolment in workplace pensions and the National Employment Savings Trust

Automatic enrolment in workplace pensions and the National Employment Savings Trust - Work and Pensions Committee Contents

4 Implications for employers

93. Establishing and administering an auto-enrolment pension scheme will create both immediate and ongoing financial costs for employers. The Government has introduced several mechanisms to help businesses manage the costs and complexities of auto-enrolment. The policy will be introduced gradually over a six-year period through the Government's "staging" and "phasing" model:

Staging: Although the new duties commence from 1 October 2012, individual employers' own duties will be introduced gradually over the following five years and will be based on the size of the employer, typically by PAYE size. The largest employers will be staged first, followed by medium and then small firms. Employers will be given the flexibility to enrol workers three months either side of their automatic enrolment date.
Phasing: Employers' contributions will be phased in gradually: the minimum rate of employers' contributions will start at 1% of the worker's salary, rising to 2% in October 2017 and 3% in October 2018.

The Government amended the timetable for implementation of auto-enrolment in November 2011. The details are set out later in this chapter.

Financial and administrative impact on employers

94. Aviva explained that employers will experience two types of cost—one-off upfront costs in setting up schemes and responding to the new legislation, and ongoing costs in the form of long term increases to their pension contributions.[103] In a 2010 survey commissioned by DWP, 31% of employers said they would absorb the extra costs through profits or overheads, 18% said they would absorb costs through lower wage increases, 16% through restructuring or reducing the workforce and 15% through increased pricing.[104]

95. The Federation of Small Businesses (FSB) believed that DWP's estimate of the administrative cost of auto-enrolment to business was a "gross underestimation". FSB estimated that auto-enrolment would cost an average small firm with four employees £2,550 per year in administration costs and pension contributions.[105] The DWP estimate was that micro businesses (fewer than five employees) would need to pay up to £1,280 in pension contributions and up to £440 in administrative costs in the first year.[106] The Minister defended the Government's figures, highlighting the work DWP has undertaken to collect precise data, and Jos Joures outlined the processes the Department has carried out to verify its estimates through employers' working groups.[107]

96. The FSB believed that the spirit of auto-enrolment had been altered since the Pensions Commission report, which recommended that all employees without an existing scheme should be enrolled into a single savings scheme (i.e. NEST). The FSB believed that, by allowing employers to choose between NEST and a range of private providers, the Government had created additional complexity and administrative burdens for employers. They argued that there should be an exemption for businesses with fewer than 10 employees from the requirement to automatically enrol to enable both employers and employees to make their own choices in their best interests. According to the FSB's 2009 survey, only 18% of small businesses offered a pension scheme to employees and 49% felt that pensions were too expensive. In addition, only 50% of businesses with a pension scheme contributed towards their employees' pension.[108]

97. John Longworth from British Chambers of Commerce (BCC) described the potential administrative difficulties facing smaller employers:

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Mr Longworth also explained that some employers may not use computers and may not have adequate IT systems to handle their new duties.[110] BCC proposed that sole traders should be exempt from auto-enrolment for three years from taking on their first employee. They suggested that one in three sole traders regarded auto-enrolment as the biggest barrier to them taking on their first employed person, and proposed that workers should not be allowed to opt in during the three month waiting period, as this could place a further administrative burden on employers. [111]

98. However, Age UK expressed concern about the possibility of exemptions for small businesses. They suggested that the burdens on smaller firms should be reduced by targeted support, rather than by excluding their employees from auto-enrolment.[112] The Johnson review had previously considered recommending the exemption of smaller employers from auto-enrolment, but concluded that there would be practical implementation problems in identifying and keeping track of employers of very specific sizes. The review also highlighted the views of consumer and employee representative groups, who felt that exempting small employers would be unfair to those individuals who worked for them, as they would lose out on the benefits from pension savings, employer contributions and tax relief.[113]

99. Neil Carberry from the CBI believed that creating exemptions for smaller companies would create more barriers in the employment market than benefits for employers.[114] The CBI described the Government's phasing and staging arrangements as "essential", as companies' cashflow was likely to remain under pressure in the current economic climate. It believed that these steps would give employers the time they needed to plan ahead and absorb as much as possible of this cost into their pay systems.[115]

100. If an employee opts out of an auto-enrolment pension scheme, employers will be required to re-enrol them every three years. BCC argued that if employers take money out of an employee's pay without express consent, this will "damage the employment relationship and cause unnecessary red tape for firms". It recommended that instead of automatic re-enrolment every three years, HMRC could simply include a reminder about pension saving with employees' final yearly income statements.[116] However, removing the requirement to re-enrol individuals every three years would mean that some individuals would fall through the net into a state of inertia, remaining outside retirement saving.

101. We recognise that auto-enrolment will create new costs and administrative requirements for employers at a time of economic uncertainty. However, we believe that, through the staging and phasing arrangements, the Government has designed a flexible and gradual implementation process with employers' needs in mind.

102. We understand the calls from employers' representatives for some exemptions to auto-enrolment, for example for micro businesses, but believe such concessions would add to the complexity for employers, as well as having detrimental effects for employees. It is also important to bear in mind that micro businesses and their employees have to date been the hardest group to reach in terms of workplace pension provision. We therefore support the Government's decision that auto-enrolment should apply to employers of all sizes.

103. Whilst we recognise that the requirement to re-enrol individuals every three years has administrative and cost implications for employers, we believe this step is necessary to ensure high levels of participation in workplace pension saving.

Delays to the auto-enrolment timetable

104. In December 2011, the Government announced delays to the roll out of the programme. The Minister explained that the Government had decided to "soften" the timetable to recognise "the fact that businesses—and smaller business in particular—are currently operating in very difficult economic conditions".[117] Under the revised timetable, small employers (those with fewer than 50 employees) will not be required to auto-enrol employees until between May 2015 and April 2017. They were originally due to enrol between May 2014 and February 2016. In addition, the timetable for the increases in minimum contributions was delayed for one year; the minimum rate of employers' contributions will start at 1% of the worker's salary and rise to 2% in October 2017 and 3% in October 2018.

105. Adrian Boulding, Pensions Strategy Director at Legal & General, described the delays as "a huge mistake", and outlined the potential consequences in terms of overall retirement saving:

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The Minister stated that the actual figure for lost pension contributions may in fact be in excess of £5 billion, if this calculation took into account both employer and employee contributions.[119]

106. Mr Boulding also believed that the delay in increasing employer contributions would encourage larger employers to offer less generous pensions to staff who were not part of their employers' existing schemes. He suggested that delaying the gradual increases in employer contributions would widen the gap between employers' current more generous existing schemes and the statutory minimum, making the statutory minimum more attractive to employers and therefore increasing the risk of "levelling down".[120]

107. Standard Life's Head of Pensions Policy, John Lawson, argued that the delays might not actually bring significant benefits for businesses: "The decision was rushed and has not been justified. If the Chancellor expects the economy to grow by about 3% in 2013, 2014 and 2015, then a pension contribution of 1% will not have much impact on small businesses."[121]

108. The Director of the Institute for Fiscal Studies, Paul Johnson, who led the Making Automatic Enrolment Work review in 2010, questioned the Government's commitment to auto-enrolment, stating: "The Government has increased the uncertainty over the reforms and there is a risk they will end up being put off indefinitely."[122]

109. The Minister provided a firm assurance that there would be no further delays to the timetable.[123] He indicated that the delays would give the Government more time to refine the process for auto-enrolment and learn lessons over the next few years, and he hoped that the delay would also mean that the economy would be in a much stronger shape by the time small employers join the programme.[124]

110. We note with regret the delays to the schedule for implementing auto-enrolment announced in November 2011, although we recognise that these delays may be welcome to some small employers. The delays mean that millions of employees will start workplace pension saving later than anticipated, and overall retirement saving will be reduced significantly as a result. It is vital that there is no further postponement to the implementation timetable, and we welcome the Minister's assurance that the timetable will not be changed again.

Preparation of payroll providers

111. The Pensions Regulator (TPR) has highlighted that payroll software is expected to play a key role in enabling employers to meet their requirements under auto-enrolment. However, its guidance for software developers indicates that some existing payroll systems might not be able to support the full range of employers' auto-enrolment duties. The technical guidance therefore encourages software developers with products used by the largest employers to take immediate action.[125]

112. TPR has also expressed concern that employers have not received sufficient information from payroll providers about the new software being developed for auto-enrolment. In December 2011, TPR wrote to payroll software providers asking them to share details of their products with employers.[126]

113. Given the concerns that employers' representatives have expressed about the administrative implications of auto-enrolment, we believe that it is important that TPR takes the steps necessary to ensure that payroll providers are supporting employers towards a smooth transition to the new arrangements.

Ensuring employer compliance

114. TPR's approach will focus on educating employers about their duties and helping them to comply. It has been given a range of powers to ensure that employers comply with their duties, including the ability to issue compliance notices and fixed or escalating penalty notices, and in the most serious cases, to prosecute employers. TPR will take a "graduated" approach to enforcement, which can involve using warnings. Employers will have opportunities to appeal against any financial penalties and criminal prosecution will only be used in the most serious cases, for example wilful failure to auto-enrol.[127]

115. Some witnesses expressed concerns about TPR's capacity to perform its regulatory role effectively. The Society of Pension Consultants noted that it faces "a very significant challenge" in monitoring compliance with the auto-enrolment requirements, which they suggested would be much more complicated than compliance with the existing stakeholder requirements. They also suggested that TPR would need to rely heavily on whistleblowing.[128]

116. The Chartered Institute of Personnel and Development warned that, in time, TPR would be dealing with a very large number of small employers, and was not confident that it would have the resources to be able to cope when small and micro employers started to become involved.[129] Friends Life also suggested that TPR's success would depend on the extent to which it had the resources to follow up non-compliant employers.[130]

117. DWP funding for TPR fell from £33.27 million in 2010-11 to £31.20 million in 2011-12,[131] although the Minister highlighted that the Government has provided additional funds to enable TPR to engage Capita to undertake compliance work on its behalf. The Minister told us that TPR had been given "a significant budget for the employer compliance regime, a big chunk of which has been spent on the subcontract with Capita". He also believed that resources for employer compliance would fall following the implementation phase: "Clearly, the employer compliance regime is focused initially on the roll-out period, but then there will be a watching brief, obviously on a more limited scale."[132]

118. TPR assured us that it would have sufficient resources. It outlined Capita's role in undertaking high-volume administrative tasks and explained that TPR would use spot-checking and whistleblowing to monitor employer compliance, rather than checking every individual company's registration.[133]The Minister accepted that there would be employers who did not comply straight away, and that these employers might not be picked up immediately:

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119. It is interesting to note that in New Zealand, all KiwiSaver contributions are collected by the Inland Revenue, mainly through the "pay as you earn" (PAYE) tax system. The Inland Revenue then allocates these contributions to the respective pension provider and carries out enforcement activities to ensure contributions are received from employers. We understand anecdotally that employer compliance is high in New Zealand as a result, although we are not aware of any published statistics.

120. In the UK, contributions will not be collected by a single Government agency, but instead will be paid by employers direct to pension providers. As a result, the onus will be on pension providers and TPR to ensure that contributions are delivered on schedule. Lawrence Churchill explained the process that NEST would follow if employers fell behind on their pension payments:

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121. TPR confirmed that pension providers would be expected to follow up with employers who fell behind with their payments. Charles Counsell said that TPR would not follow up with an employer if they had failed to pay their contributions due to an administrative error. However, it would pursue employers where there was a "consistent wilful failure to pay".[136]

122. Charles Counsell also explained how the regulator would also use whistleblowing and spot-checks to monitor employers who coerce employees to opt out:

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123. However, it is not clear how whistleblowing can work effectively, in terms of offering confidentiality to the employee reporting the breach, in the smallest businesses. In firms which employ only two or three people, an employee might feel there is too great a risk in reporting a non-compliant employer when they can be easily identified as the person making the complaint.

124. TPR has examined HMRC's enforcement of the national minimum wage in designing its own employer compliance arrangements. Charles Counsell suggested that, if employers that were not complying with the national minimum wage or other employment laws, they may be more likely to neglect their responsibilities under auto-enrolment. TPR will be working with HMRC to gather intelligence on employers who are not fulfilling their auto-enrolment duties.[138]

125. Ensuring employer compliance is critical to the success of auto-enrolment and the programme could suffer reputational damage if a large number of employers are seen not to be fulfilling their duties. The resources that the Government makes available for TPR to address non-compliance must reflect emerging evidence on employer awareness and compliance levels, particularly during the implementation phase for medium and smaller employers.

126. Relying on whistleblowing to identify non-compliance has inherent problems, particularly in respect of small firms where the fact that a business has only one or two employees will make it impossible for TPR to guarantee anonymity to the person making a complaint. TPR needs to consider very carefully how it will address this issue and whether it needs to use more proactive methods to check compliance amongst small employers. We therefore recommend that, by the end of 2013, TPR provide a written update on its plans for dealing with non-compliance among small and medium employers, drawing on its latest research on employer awareness and preparation.

127. The Government should take steps to ensure that HMRC, the Health & Safety Executive and other relevant enforcement bodies are working closely with The Pensions Regulator to promote compliance, including sharing relevant information where employers are found to be in breach of their auto-enrolment requirements.

103 Ev w9 Back

104 Department for Work and Pensions (2010), Employers' attitudes and likely reactions to the workplace pension reforms 2009 Back

105 Ev 160 Back

106 Ev 143 Back

107 Q 408 Back

108 Ev 160 Back

109 Q 35 Back

110 Q 35 and Q 36 Back

111 Ev 134 Back

112 Ev w26 Back

113 Making automatic enrolment work, Cm 7954 Back

114 Q 39 Back