Auto-enrolment sounds easy – all you have to do is make a monthly payroll deduction and pay for an off-the-shelf pension scheme. You don’t even need to run it yourself. Just don’t induce anyone to opt out, and you’ll be fine. What could be simpler? Well, the reality is very different. A decade in, many employers still encounter compliance-related challenges and legal advisers still time unpicking problems in the ways these schemes have been set up.
Here are some common bear traps – with advice on how employers can avoid them.
Postponement periods: A great way of getting AE wrong before you’ve even auto-enrolled someone. It sounds obvious, but make sure anyone being postponed is sent a postponement letter. If staff then opt in – which they must be told they can do -their employer must contribute too. And be careful with the under-22s. Thought needs to be given as to timing of this letter, and what to tell them about AE in the meantime?
Opting out: Lots of employers come unstuck here – particularly those who think ‘opt out’ means ‘not join in the first place’. It’s only legitimate after someone has been enrolled. However much a paternalistic employer feels for its low-paid staff, if it doesn’t enrol someone who says they can’t afford the contributions, it is breaking the law.
Qualifying earnings.: Another danger area, particularly with fluctuating salaries or payments. Make sure pay rises are processed in time. If you use a different pay definition, ensure you certify on the right basis and that this matches what payroll are ding. Be careful with additional voluntary contributions too – “an additional 2 per cent” must clarify 2 per cent of what One client faced a plethora of Pensions Ombudsman complaints, simply because people were talking at cross-purposes.
Pension holidays: I’m going to shock you — there’s no such thing! Somebody has either been auto-enrolled, or ceased to be a contributing member. Legally there’s no half-way house. There are exceptions (which keep lawyers in a job), particularly around family leave; but “pausing” someone’s AE membership can lead to trouble.
Re-enrolment: This needs to catch those on a pensions holiday (even though there’s no such thing), who’ve reduced contributions below the statutory minimum, or who’ve opted-out or ceased contributing. Re-enrolment dates can be moved (six months either side of the third anniversary) but please don’t forget to do it.
Certifying compliance: Don’t forget employers need to certify re-enrolment, even if they don’t certify anything else to the Pensions Regulator. One client did the full re-enrolment exercise perfectly, but then forgot to self-certify. TPR issued a fixed penalty notice followed by escalating daily penalties. By the time we were instructed the cumulative fine had reached a whopping quarter-of-a-million pounds.
Brighton Rock: Talking of our regulator friends in Brighton, it’s a criminal offence to falsely certify re-enrolment. It’s also a criminal offence to avoid (but not, arguably, to delay) making the right contributions to an AE scheme. But these things are rarely clear-cut – legal analysis may conclude no criminal offence has been committed.
Don’t Panic! Careful thought should also precede any self-reporting. The legislation only requires reporting breaches “likely to be of material significance” to TPR. Even if you do notify, consider the ‘when’ carefully. Not reporting is an offence, but doing so too soon might mean TPR takes too keen an interest.
Baby steps: Maternity can cause a lot of pain for employers too. Salary sacrifice turns all employee contributions into employer contributions, so if someone is paid (even just statutory maternity pay), her employer must contribute as if she was working normally. If there’s no salary sacrifice, employees need only contribute based on what they’re actually receiving, without obligation on the employer to top-up the difference.
The bigger picture: Technically not an AE breach, but make sure employment contracts match what’s being paid. We’ve seen clients contributing the statutory minimum but their contracts don’t mention “qualifying earnings”.