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Auto enrolment: the terrible twos?

As auto enrolment celebrated its second birthday earlier this month, we take a look at what we can expect from this toddler in the next few years.

On 1st October 2012, the life of workplace pensions changed for good. For the UK’s largest employers the new arrival was auto enrolment and employers bid farewell to their ‘freedom’ as far as workplace pensions were concerned. (Let’s be honest – for employers, the demands from the Stakeholder regime were more akin to getting a pet than having a child.)

It was the beginning of a brave new world, one that will eventually see workplace pension saving for many of the UK’s workers for the first time. Like many parents though, the Government had a day job too so it left its ‘baby’ in the capable hands of the Pensions Regulator, who has so far played a major role in auto enrolment’s upbringing.

Off to a good start

Employers knew this was coming and had time to plan (more than nine months) and given they understood its importance, most made sure that they prepared for this major change.

The first outfit would have been decided well in advance – perhaps the sparkling new NEST, or the family heirloom such as the long-running occupational pension scheme. Default investment options – another potential decision. Much like choosing the car seat for your new addition, it’s not easy – some are simple to understand, others are more complex. They also vary in terms of cost and safety rating.

And on the whole, it appears those challenging early months of auto enrolment’s life got off to a good start. Sure, employers had to clean up some mess that they weren’t used to, get used to new routines, and there were some tiring days no doubt, but employers soon figured it out and before we knew it auto enrolment was up and on the move.

Naturally, there have been a few challenges along the way. The Regulator’s latest quarterly compliance update confirming that 23 statutory notices has been issued to July 2014. These were mostly compliance notices which require an employer to remedy a contravention of one or more of its auto enrolment duties (rather like a lesson in why to not eat play dough, or ‘hide’ your keys in the bin).

But overall, it’s reasonable to say that it’s been a good start for auto enrolment, especially given the context of these numbers against the 33,660 employers that had registered compliance with their duties to September 2014.

The terrible twos

But now, auto enrolment has hit that infamous age – two.

And you don’t have to be a parent to be familiar with the term ‘terrible twos’. But for those in any doubt, this is when things start to kick-off – the tears, and the tantrums about what may seem the most trivial of things to you, but the end of the world to a toddler. It’s hard work.

Likewise, the Government (more so the Regulator) will have its hands full as its ‘baby’ reaches this milestone age. On 1st October 2014, auto enrolment began for employers with 60 workers, and whilst between October and December the Regulator only expects 1,200 employers to ‘stage’ (i.e. reach their auto enrolment deadline), this is the calm before the storm.

A growth spurt waits in the wings as we move into 2015, with over 17,000 employers staging in Q2, and by Q1 2016 we reach the unprecedented number of 110,000 employers staging in a quarter, nearly doubling to 215,000 in Q1 the following year.

The numbers are staggering, and the answers to some key questions remain unknown. How will pension providers cope with this level of demand for setting up new schemes? How will smaller employers manage with what for some will be an entirely new aspect to its legal obligations? Will the advice sector cope with the huge demand for support? Will the Regulator be able to police such a far reaching piece of legislation effectively?

Simple, packaged solutions and technology will play a major role, but the truth is that no one has the answers to all of these or the many other questions regarding the sheer scale of auto enrolment. Nonetheless, the point is this – auto enrolment is coming, and employers can take the first step to prepare for auto enrolment right now, no matter what their size. They can, at the very least, find out when their staging date is by using the Regulator’s staging date tool which can be found here.

Once an employer’s staging date is known, then the business can at least understand when it should start preparing for auto enrolment, for which the Regulator’s guidance is 12 months ahead. That way, they aren’t left wondering where to start as they approach their statutory deadline, in what could be a very busy marketplace.

The naughty step

The Regulator is taking its auto enrolment compliance strategy seriously.

Although the number of compliance notices issued are low relative to the number of employers already subject to auto enrolment duties, these employers have generally had more resource committed to putting in place a compliant solution. It’s a commonly held view that the issuing of compliance notices will increase significantly as we move into the smaller employer staging dates, and at some point it’s inevitable that an employer will continue not to comply and receive a penalty.

We are yet to see the Regulator hand out a penalty as the compliance notices issued so far have appeared to have had action taken to address the issue, but as a reminder, the penalties can be significant.

  • Fixed Penalty Notice – £400 for non-compliance with a statutory notice
  • Escalating Penalty Notice – Daily penalty of £2,500 for those with 50-249 workers, £500 for those with 5 – 49, and £50 for those with 1-4. This can be issued for more serious non-compliance.
  • Further penalties are available to the Regulator to impose in specific circumstances.

Clearly, these numbers could have a severe financial impact for smaller businesses.

They grow up so fast

By the time we reach July 2018, the rollout of auto enrolment will be complete for UK employers, regardless of size. Auto enrolment will be heading towards its sixth birthday, and hopefully it will have grown into a popular character and go on to be a success in the future.

There’s no doubt that with the revolutionary changes in pension freedoms currently underway, that pensions will be a more attractive long-term retirement savings vehicle for most people. And auto enrolment will have played its part in bringing that vehicle to the masses through workplace pensions.

Of course, as auto enrolment matures, there will be plenty more new challenges and changes ahead – the teenage years perhaps? We’ll just have to see what they are, but by then we’ll have got through those difficult toddler years, and if we make it through them, then I think the pensions industry and UK employers can take on whatever’s thrown at us.

Now, where are my keys…?