24.The process of extending AE compliance requirements to small and micro-employers (SMEs) began in June 2015 and will continue to February 2018. As we noted in chapter 1, this will be the most challenging phase of AE implementation. The DWP explained that this is because SMEs do not have the same resources as their larger counterparts:
Small and micro employers are likely to find automatic enrolment more challenging because they will not have the same level of infrastructure to manage their finance, payroll and HR functions, or sufficient time to acquire knowledge of pension schemes and study the details.
The Minister said it was “crucial to help these 1.8 million small employers to know that they need to do it, and then to cope with it”. This chapter considers what more the Department should do.
25.The TPR writes to employers 12 months, six months and one month before their staging date, from which they are required to auto-enrol employees. They receive further letters just after their staging date and immediately before they are required complete a declaration of compliance. In October 2015, the Pensions Regulator launched an online step-by-step guide to auto-enrolment, specifically designed to help SMEs comply. Mike Cherry, Policy Director at the Federation of Small Businesses (FSB), said the guide gave businesses “a much clearer and easier understanding of what their duties may be”. TPR also holds regular meetings with professional bodies for bookkeepers, accountants and Independent Financial Advisers.
26.In addition to these targeted communications, DWP has run advertising campaigns to raise general awareness of AE. At the launch of AE, it ran a campaign called We’re all in but found it “did not resonate well with small and micro employers and their employees”. In October 2015, it launched a new campaign called Don’t Ignore the Workplace Pension which featured a giant and psychedelically decorated furry creature called Workie (shown in Figure 2). The DWP described the campaign as
deliberately disruptive and specifically designed to raise awareness, prompt small and micro employers to find out about their duties and start the auto enrolment process.
Following the launch of the campaign, visits to the Pensions Regulator’s website quadrupled.
Figure 1: Workie
27.We heard concerns from small business representatives, however, that awareness of AE was not tantamount to a readiness to comply. The Chartered Institute of Payroll Professionals (CIPP) told us that “it is too late for awareness-raising to be the primary purpose of the government’s communications”. The Workie character, they said, gave the impression that auto-enrolment was
soft and fluffy and in some way optional—the characters in the TV advertising choose to ignore Workie—with no apparent consequence, whereas the reality will be for them to run the risk of subsequently being fined a great deal of money that they may not be able to afford.
Ian Cass, Managing Director at the Forum of Private Business, concurred that as SMEs faced fines for non-compliance, it was time for the message to “get a bit stronger”.
28.If an employer fails to complete a declaration of compliance five months after their staging date TPR issues a compliance notice. If the employer does not respond then a fixed-penalty notice of £400 is issued. TPR can then issue escalating penalty notices, described by Mike Cherry as “draconian” and having the potential to “easily bankrupt a small business”.
29.CIPP said a better understanding of the fines that could be levied would motivate small employers to take action to comply. TPR statistics show that nearly 8,000 compliance notices have been issued since 2012, and nearly 70% of them were issued in the six months to March 2016. TPR noted levels of non-compliance were far lower than they had initially forecast, though they predict further increases as AE requirements extend to more SMEs. It was suggested that SMEs would respond well to more direct messages. Salvus, a master trust, said
perhaps Workie can grow some sharp teeth and point out the consequences in blunt terms, of not complying. Many small employers we talk to really do think that auto enrolment is an issue that will go away and therefore are not prepared to engage”.
TPR acknowledged they had adopted a more direct approach in a radio advertisement because “employers want to be told what to do and they responded positively to the message ‘It’s the law’.”
30.DWP and TPR have taken positive steps to engage with smaller employers. Communications campaigns have successfully raised awareness of AE. The priority now must be for small and micro businesses to understand their AE duties and the consequences of non-compliance. We recommend that DWP and TPR adapt AE communications to focus on the financial consequences of non-compliance and emphasise that AE cannot be ignored.
31.Employers are responsible for selecting the appropriate AE pension scheme for their employees. Employers are free to choose any qualifying pension scheme that is willing to accept their custom in order to comply with their automatic enrolment duties. TPR told us that selecting a scheme is one of the most significant challenges for smaller employers:
Concerns include finding a scheme that will accept them, ensuring they make the best choice of scheme for their employees, addressing the risk of challenge from their staff if the scheme is not well run, and making sure that the scheme they choose works with their payroll software.
32.CIPP highlighted a particular concern among employers about future legal action against them by employees if it appears they selected an inappropriate scheme or could not demonstrate they had taken adequate steps to choose an appropriate one. The Minister told us that anyone advising an employer would “be ill-advised” to formally recommend a scheme. For the smaller employer, reliant upon their payroll bureau or external accountant, there is a distinct lack of clarity regarding where a potential liability for “advice” would fall. They assured us, however, that employers themselves would not be liable for poor scheme performance. Charlotte Clark said
If you are an employer and you have made a decision, there is no liability—that is clear in the legislation. If you have decided to go with NEST rather than NOW: or People’s, there is no liability that can fall on you as an employer.
33.Whilst this answer appears definitive, legal experts suggested the situation may be more complicated. Tristan Mander, a pensions lawyer at Ward Hadaway, said “it would be unwise to interpret such a statement as providing a safe harbour for employers, as it only addresses one source of legal obligations”. His view was that employers will need to be able to demonstrate that they took adequate steps to ensure they selected an appropriate pension scheme:
The courts are very unlikely to decide that arrangement B ought to have been chosen over arrangement A, as that is qualitative decision that is outside of their remit, but they are now likely to find that an employer failed in its duty to follow proper process in taking its decision and hence they will find the employer liable for any loss suffered directly as a result.
34.Catherine McKenna, Global Head of Pensions at law firm Squire Patton Boggs, told us that there was uncertainty about who would compensate employees for poor scheme performance:
For example should it be the fund provider, the IGC [Independent Governance Committee] if they failed to identify and report poor governance or the employer for failing to appraise the IGC’s adequate monitoring of the default fund?
She said that clarity was needed on where liability would fall and that DWP should confirm to employers that “engagement and compliance with the minimum governance standards is sufficient to discharge them of liability for poorly performing or failed default funds.”
35.In her evidence to us the Minister said that employers needed to be very careful to choose a decent scheme for their employees. Tristan Mander told us that “the need to suggest such due diligence implies by itself the potential for liability.” He told us that employers need not go to extreme lengths in choosing a scheme but that they should
exercise good decision-making hygiene, take proportionate steps and record their genuine attempts at finding the most appropriate arrangement to utilise, should anyone challenge their decision in future.
36.The Department have stated unambiguously that employers are not liable for their choice of AE pension scheme. Legal experts, however, have told us there could be grounds for legal action if employers cannot demonstrate due diligence. We recommend DWP use their response to this report to make a clear and comprehensive statement about an employer’s potential liability. DWP should also confirm where liability will fall if a scheme performs badly or fails. This would provide reassurance to small and micro-employers choosing a scheme.
37.TPR told us that it was important that all employers had payroll software compatible with AE to automate processes such as “working out which members of staff must be automatically enrolled and calculating the pension contributions that are due”. For this to work most effectively, that software should be compatible with that used by the employer’s chosen pension scheme, enabling the efficient and reliable transfer of data. NEST said they were working with payroll software providers, such as Sage and IRIS, to ensure compatibility. The People’s Pension, however, told us that “not all employers are willing to pay for the latest package so more needs to be done to simplify the processes for small employers”.
38.In December 2015, approximately 400,000 employers were using HM Revenue and Customs (HMRC) software called Basic PAYE Tools (BPT). BPT were introduced to help small employers deal with the Real Time Information (RTI) payroll reporting requirements introduced in 2013. They are free and designed for businesses with nine employees or less. Stakeholders suggested that the BPT should be developed to support AE, in some cases questioning why this had not already happened. Sara Graff, who runs the payroll agency Taxing Nannies, told us “an all-integrated system […] would make everything much simpler”.
39.Charlotte Clarke explained that DWP and HMRC had discussed building on the BPT to support AE but decided that this was not the right approach as the BPT will not be available in the longer term. Mark Dearnley, HMRCs Chief Digital and Information Officer, clarified:
HMRC Digital’s view is that we will not rebuild or evolve the Basic PAYE Tool, but instead we’ll be working on delivering APIs to replace functionality of Basic PAYE Tool to software applications chosen by employers so that external software developers can build integrated products for businesses, agents and payroll bureaux.
The Forum of Private Business told us that free alternatives to BPT “may take time to appear” and questioned whether they would be trusted as much as the current tool.
40.TPR has recognised the need among BPT users for “some form of automated support” for AE. Following a consultation in March 2015, they found that a high proportion of BPT users would not seek the use of commercially available software and that some employers would have “concerns about free commercial software with functionality to support automatic enrolment”. Though employers favoured extending the BPT to support AE, TPR said this was “not an option” and instead developed a separate Basic Assessment Tool (BAT).
41.The BAT is available free of charge from the TPR website. It has limited functionality and is a downloadable Excel spreadsheet rather than an online tool. The BAT is able, for up to 15 members of staff, to:
The BAT cannot:
42.The decision not to develop the HMRC Basic PAYE Tools (BPT) to support AE was a mistake. The BPT are trusted by small and micro employers, many of whom will not be able or willing to use commercially available software. TPR has acknowledged that small and micro employers need automated support to cope with AE. Its solution has been to build an entirely separate Basic Assessment Tool that has limited functionality and cannot send information to pension providers. This risks undermining AE. We recommend that DWP work with HMRC to expand Basic PAYE Tools to support small businesses in meeting their automatic enrolment obligations.
39 Department for Work and Pensions ()
40 (Baroness Altmann)
41 (Mike Cherry)
42 (Charles Counsell)
43 Department for Work and Pensions ()
45 PLSA ()
46 CIPP (), (James Lowman)
49 (Ian Cass)
50 (Mike Cherry)
52 (Charles Counsell)
53 The Pensions Regulator, , 1 October – 31 December 2015
54 (Ian Cass)
55 Salvus Master Trust ()
56 The Pensions Regulator ()
58 CIPP ()
59 (Baroness Altmann)
60 Ibid (Charlotte Clark)
61 Tristan Mander () Other sources of legal obligations might include implied terms in employment contracts
63 Catherine Mckenna ()
65 (Baroness Altmann)
66 Tristan Mander ()
68 The Pensions Regulator ()
70 NEST ()
71 The People’s Pension ()
72 Salvus Master Trust (); Forum of Private Business ()
73 (Sara Graff)
74 (Charlotte Clark); Department for Work and Pensions ()
75 HM Revenue and Customs (). An API is a set of routines, protocols and tools for building software and applications.
76 Forum of Private Business ()
77 The Pensions Regulator, , August 2015
Prepared 13 May 2016