Between April 2014 and April 2015 nearly all employers with 50 to 249 workers will become obliged to automatically enrol eligible workers in to a qualifying pension scheme as defined in sections 20 to 27 of the Pensions Act 2008.
In preparation for this significant change in the structure of the UK workplace pension market the Pensions Regulator (“tPR”), the Department for Work and Pensions (“DWP”) and the Office of Fair Trading (“OFT”) have been monitoring the effect of auto enrolment to date and the changes brought about by the Retail Distribution Review. In July 2013 tPR published its first report on the impact of automatic enrolment (“AE”) and on the 19 September 2013 OFT issued its “Defined contribution workplace pension market study” (the “OFT Report”).
It is far from clear, from these reports whether the drive for all employers to automatically enrol their employees in time, with the subsequent increase in competition between providers will result in employees benefiting from quality pension schemes that offer real value for money. What is clear, however, is that many employers who have reached their staging date have struggled to meet their statutory obligations and that many small and medium size employers who are preparing for auto enrolment do need advice.
As of July 2013, 1,153 of the UK’s largest employers had completed the auto-enrolment registration process with many of them having incurred significant costs to ensure that they fully complied with the AE legislation. Not all preparations went smoothly and as of 31 March 2013, tPR had opened a total of 89 investigations into possible non-compliance with the reforms and in a response to a freedom of information request tPR confirmed that 38 informal “warning letters” had been issued to companies up to the 17 July 2013. In addition tPR has confirmed that it has issued its first compliance notice to an unidentified employer who has failed to comply with the AE requirements.
If a breach of a compliance notice under the AE legislation is not remedied the Regulator can order two levels of penalties:
- a fixed penalty notice if an employer or other party fails to comply with a compliance, contribution or improvement notice. The penalty notice imposing a flat-rate penalty of £400;
- or an escalating penalty notice for more serious or persistent breaches with escalating penalties varying according to employer size. These penalties range from £50 a day for employers with 1 to 4 workers to £10,000 a day for those with 500 or more workers.
Whilst tPR’s stated goal is to maximise compliance through employer education, enablement and engagement we anticipate that a significant number of medium and small size employers will encounter difficulties in meeting their AE obligations, and that significantly more warning letters and compliance notes will be issued.
To avoid these difficulties we recommend that employers prepare well in advance of their staging date and that they do seek guidance in those areas where they do not have the necessary in-house expertise.
The Office of Fair Trading Report – Value for Money
The OFT Report set out to determine whether the defined contribution workplace pension market works in the best interest of current and future employees to provide value for money pension schemes and to make recommendations where necessary to protect the interest of the pension savers.
OFT considers that the key elements of “value for money” to be
- the charges that the scheme member has to pay
the quality of the Scheme, which includes
- the design and execution of the investment strategy,
- the administration of the scheme and communication with the members,and
- the governance of the scheme, which should involve assessments at regular intervals of how well the scheme is delivering on each of the key elements of value for money.
What is clear from OFT’s findings is that Automatic Enrolment (“AE”) is a unique opportunity for pension providers to win business and increase the total value of pension funds that they manage and that there is a real risk that the competition to obtain this business may not be entirely beneficial to pension savers. OFT has also identified that a significant proportion of employers are primarily concerned in setting up a new pension scheme or adapting an existing scheme for AE that complies with the regulatory requirements, is simple to administer and that minimises the costs to both employers.
Due to these factors the value for money that schemes offer employees is often a secondary consideration and something that employers are not reviewing when looking to meet their AE obligations.
There is a risk that employers will not seek advice due to cost factors and that they will go direct to one provider without shopping around for the best value for money scheme for their employees. This is despite the fact that there is evidence to show that those employers who did seek advice can get a better deal for its employees. OFT quote that:
“Several providers gave estimates of the typical reduction in the annual management charge that advisers renegotiate on behalf of employers with schemes already set up. These range from 0.05 to 0.30 percentage points.”
In its July 2013 tPR has recognised that “medium size employers are generally less likely to have experience of pension provision according to DWP research. Our research indicates that they are less likely to seek external advice, but may lack the necessary in-house HR, payroll, finance and project management expertise to prepare for automatic enrolment.”
OFT has also seen evidence that employer’s will want to use their existing scheme for AE , regardless of whether it offers the best value for money currently available in the market. This is a particular concern in some existing schemes where adviser commissions remain built in to the scheme’s annual management charge.
In failing to consider the value for money of the scheme in to which it is automatically enrolling its employees an employer is taking a risk that its employees may make a future claim against it on the grounds that it did not undertake sufficient due diligence when choosing the best pension scheme for its employees. We recommend that an employer who does not intend to compare the pension options available to it in relation to AE should record the reasons why it has made this decision.
The Ban on Consultancy Charges
Between November 2012 and May 2013, the government carried out a review of consultancy charges which found that the measures to prevent advisers deducting high charges from members’ pension pots were inadequate. It also found that consultancy charges can have a disproportionately negative impact on people who move jobs regularly.
In light of these findings the Minister for Pensions – Steve Webb announced that he intended to introduce a ban on consultancy charges on the 10 May 2013. This ban came in to force under the Occupational & Personal Pension Schemes (Automatic Enrolment) (Amendment) Regulations 2013 on 14 September 2013. From the 10 May 2013 any pension scheme that contains a provision allowing for any amount to be deducted from contributions or investment returns, or for the value of a jobholder’s rights to be reduced by any amount, if that amount is to be paid to a third party under an agreement between the employer and the third party, will not be a qualifying scheme for the purposes of automatic enrolment.
The DWP has also announced that the government will consult on whether it should extend the ban to cover a small number of schemes which already had an agreement in place before the 10 May 2013.