SMEs face challenging times when it comes to auto-enrolment

By Paula Warnock, Partner, Hill Dickinson

The introduction of auto-enrolment is certainly a step in the right direction to boost pension saving among employees.  However, with over 100 sections of primary legislation, 12 sets of regulations, 14 detailed guidance booklets from the Pensions Regulator accompanied by 19 appendices, auto-enrolment compliance can be challenging even for employers with the best intentions.  This issue is amplified for smaller employers who do not have the spare capacity to get to grips with the exceptionally prescriptive requirements of auto-enrolment.

The complexity of the auto-enrolment legislation can lead to employers just ‘ticking the boxes’ and providing the headline minimum requirements rather than taking that extra step to implement a bespoke pension arrangement for their workforce. There are various alternatives to achieve auto-enrolment compliance depending on whether the employer is providing a defined contribution, defined benefit or a hybrid scheme.  Assessing whether your scheme is compliant with the non-standard alternatives does however require some detailed consideration of the relevant pension scheme provisions.  For this reason, unless smaller employers are able to access specialist advice, the less risky approach is often just to provide the auto-enrolment minimum.

The issue of complexity is made more acute for employers with a high turnover of staff or large numbers of casual and seasonal workers due to the need to continually assess staff against their category of worker for auto-enrolment purposes.  The same applies to employees with a high proportion of lower paid staff, younger workers and part time workers because they are more likely to switch between the different categories more frequently which is administratively burdensome.  The key for these employers to have any chance of full compliance is having a robust and reliable system which links payroll data together with the employer’s auto-enrolment obligations.  Testimonials from existing customers of a new system should be obtained and challenging questions raised with the provider to ensure the system can deliver what is required for the particular employer. These systems do however come at a cost which imposes a greater burden on smaller employers than larger ones who can benefit from economies of scale.

Despite the above comments small and medium sized firms should not fear auto-enrolment or its complexity.  The Pensions Regulator is a risk based regulator which seeks to educate and enable employers to comply before enforcement action is contemplated. With this in mind, the Regulator will give employers the opportunity to correct any non-compliance before penalty fines are levied, particularly for those employers who may not have fully understood their auto enrolment duties but have clearly shown a desire to comply.

Harsher treatment should be expected for any employers who simply ignore their auto enrolment duties given that the Regulator has made it clear that non-compliance will not be tolerated.  For these employers the Regulator will look to use its enforcement powers to obtain information and impose penalty fines.  The escalating penalty notice is certainly one to avoid as the fine increases on a daily basis until compliance is achieved meaning the fine can quickly outstrip the cost of putting in place compliant auto enrolment arrangements. With this in mind it is advisable to engage fully with the Regulator if you come under its spotlight to resolve any issues at the ‘educate’ and ‘enable’ stage rather than through enforcement.