17 January 2019

Commercial Risk Europe: Automatic enrolment – a pensions success, backed by increasing enforcement

Even though it has been declared a success, as with all legal and regulatory changes, risk managers still need to understand the regulatory regime that sits behind the process and the potential risks of non-compliance.

In the UK, automatic enrolment into pension schemes started in October 2012. Phased in for five years, all employers must ensure that their workers/employees – aged between 22 and state pension age and earning more than £10,000 a year – are now enrolled into a suitable pension scheme.

Contribution rates required have gradually increased since 2012 and, from April 2019, a minimum 8% must be paid, of which at least 3% must come from the employer.

In terms of increasing the numbers of pension savers, it is a success: in December 2018, the Department for Work and Pensions reported that 17.7 million employees were participating in workplace pensions – an increase of 7.7 million since 2012.

However, there remain concerns over whether enough is being saved to meet retirement expectations. It is intended that the age threshold will reduce from 22 to 18 and the lower end of the earnings band removed, which will increase participation and contributions. A review of the contribution rates is also due to take place. The government has also committed to pilot trials to improve pension saving by the self-employed who are not covered by auto-enrolment.

When automatic enrolment was introduced, The Pensions Regulator adopted an “education, enable and enforce” approach, with the emphasis on the first two. The emphasis is now very much on “enforce” as the regulator adopts a tougher line with non-compliant employers.

Risk managers need to be aware that, during the year to 31 March 2018, The Pensions Regulator issued more than £42m of fines concerning automatic enrolment, up from £12.6m the previous year.

More than 100,000 enforcement actions were taken by the regulator in the same period – double the number from the previous year and almost two thirds of all enforcement action taken since 1 April 2013. The indications are that 2018-2019 will see a further increase in the regulator’s enforcement action.

The number of whistleblowing reports also increased by about third, which suggests that The Pensions Regulator’s publicity drive of recent years – to ensure employees are aware of their rights and employers are aware of their obligations – has been paying off.

There is no doubt that automatic enrolment has added a burden for employers, but with The Pensions Regulator continuing to give the very clear message that it expects all employers to comply with automatic enrolment and backing it with robust enforcement, employers have to simply accept that burden as part of the cost of doing business.

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