PRESENTER: With hundreds of thousands of employers set up on workplace pension schemes, and millions of employees now saving through auto-enrolment, the market offers plenty of opportunity for adviser involvement. In this Akademia unit we’re going to be looking in more detail at this issue with Jamie Clarke, Business Development Manager from Royal London. There are three key learning outcomes: the scale of auto-enrolment market and opportunities it represents; what happens when an employer fails to pay auto-enrolment fines; and how to approach moving a scheme. But first let’s go to Jamie for an overview of the scale of the auto-enrolment market.
JAMIE CLARK: As you might remember in 2012 the largest employers staged under auto-enrolment, and now we’re getting to the stage where the very last employers, the very smallest employers are staging. In fact, it’s only employers who set up in business after April 2012 who have their final staging date in February 2018. Since 2012 when the first employers staged there have been about 940,000 employers who’ve staged under automatic enrolment, covering about nine million employees. Many of whom will have been saving for the first time in pensions.
So it’s difficult to argue that automatic enrolment hasn’t been a complete success, especially when you consider opt-out rates which were expected to be in the region of 15 to 30%, are now in about 9 or 10% instead. And indeed our own research amongst millennials suggest that a lot of these people will not opt out when the contribution rates increase in 2018 from 1% up to 3%. We think there’s a massive opportunity here for advisers. Given that there’s about £612bn now under management in DC schemes, and that’s expected to double by 2030, we think there’s an opportunity for advisers to review automatic enrolment schemes going forward.
What happens when employers got to their staging date in a lot of cases is that they just used their existing pension scheme, just to get through automatic enrolment, so there was no consideration at that point as to whether another scheme available in the market would be more suitable for them. We think it’s time that employers reviewed their pension scheme. At the moment there’s no requirement for employers to review their automatic enrolment scheme if it’s a contract-based scheme like a group personal pension; whereas trustees of occupational trust based schemes are required to review the scheme to make sure it is still suitable for the membership going forward. We think advisers could help employers to review those schemes. For example that might be on a cost basis. Automatic enrolment schemes have a charge cap of 0.75% in the default funds. But many schemes can operate at a lower charge nowadays, given the efficiencies that have been put in place by pension providers because of automatic enrolment.
There are other areas you can look at as well, such as administration. Is the employer spending too much time dealing with problems in the automatic enrolment scheme? What about the investment, is it actually suitable for the type of worker that that employer employs? What about at retirement, does the scheme provide all the options? Does it provide flexible access drawdown, does it provide UFPLS, is that something the employer is concerned about and wants to look at going forward? So, all these aspects can be looked at by financial advisers to help employers make sure that their scheme is suitable and tailored to suit their workforce going forward under automatic enrolment.
Of course it isn’t just about the group personal pension plans, there could be directors and partners involved in that company as well. They might not be part of the group personal pension, they might have personal pensions or SIPPs elsewhere. And again the normal process for client reviews, for high net worth individuals, or any client reviews for that matter, can be used for these automatic enrolment schemes, and the directors and partners who own these companies. So we do think there’s a massive opportunity for employers to look at their automatic enrolment scheme to make sure it’s suitable for them and their workforce going forward, and for advisers to get involved in that to help the employer through that process.
It doesn’t have to be onerous anymore; it’s not a difficult thing to do to switch schemes. Providers like Royal London have nowadays got streamlined processes in place, they’ll implement the scheme properly, effectively, everything done so that the worker barely notices, and the employer barely notices as well. The key to all this is adviser involvement. It might not be the case that the scheme you look at actually does need reviewing, because it’s fine, it’s working fine and it’s suitable for the membership. But the one or two that do need changing can make a significant difference not only to the worker in their pension pots, but to the employer as well, and of course to your business going forward.
So, just to recap, there are about 940,000 employers who have staged so far. A lot of them will not have looked at their scheme since it was set up. And with £612bn in DC schemes under management, you can see perhaps the opportunity this presents to advisers.
PRESENTER: So certainly some big numbers that you were just talking about there, Jamie. So when auto-enrolment is authorised, is everything done, is the work done?
JAMIE CLARK: Not really, no. I mean the employer has ongoing duties. For example he has to monitor the workforce. When they reach aged 22 they have to be automatically enrolled. When their salary goes over a certain amount they have to auto-enrol them. So there are things that the employer has to continually monitor. Such as making sure the contributions are paid on time as well, making sure they’re deducted properly and paid over to the pension provider within the timescales provided by the legislation. So there’s always ongoing duties. Recordkeeping as well, making sure that if someone opt out they keep records of that, if someone does opt in they keep records of that as well. So it isn’t just about a one shot on your staging day and that’s it finished; there are ongoing duties to be going on with again.
PRESENTER: So that, I mean it sounds like a lot of organisation is needed, do you have any advice on the best way to keep up to date with that so you don’t forget about things if somebody turns 21 or somebody gets a bigger salary?
JAMIE CLARK: In reality normally the payroll or the pension provider will take care of that for you. But there are some employers who think they can do it themselves, and those guys really need to make sure that all this is directed properly and people are trained up properly to make sure it’s done on time, and to make sure everything runs smoothly.
PRESENTER: So what happens then if it goes wrong?
JAMIE CLARK: If it does go wrong, there’s certain actions that the Pensions Regulator, who are the employer police with automatic enrolment, they can take action against the employer. Now, normally, I mean the vast majority of employers are completely compliant with automatic enrolment, so there’s no action to be taken at all by the regulator. But there are some who do get it wrong. And in that case the regulator has various powers under the Pensions Act it can take against employers. So the first thing they’ll normally do is a warning notice, and that basically sets out what the regulator’s concerns are. In most cases that’s missing their staging dates, so they haven’t set up the scheme properly on time.
Normally they sort it out within a couple of weeks, and they tell the regulator and it’s sorted out. If they don’t do that then they could get a fixed penalty notice, and that’s a £400 fine for failing to comply with any of the legislation under the Pensions Act, under the auto-enrolment rules I should say. If they still fail to do that and they completely ignore everything, they could get an escalating penalty notice. Escalating penalty notice is, as their name suggests, is an increasing penalty every day if they don’t get it right.
PRESENTER: So what happens then if an employer fails to pay the auto-enrolment fines? Do you have an example you can give me?
JAMIE CLARK: Yes. There’s recently been two cases actually that the regulator has highlighted. One of the things the regulator can do, and they’ve started to do this, is name and shame employers on their website that do get it wrong. And if you work for one of those employers I’d probably be quite worried. If you do get it wrong, there’s a bus company that’s recently been taking to court and has pled guilty to 16 charges of non-compliance with the regulations, and they’re due to be sentenced very soon. They could face an unlimited fine for that breach. And there’s another company who have recently been taken to court for not providing information on time, and again that’s been taken to the magistrates’ court and they could face an unlimited fine potentially for failing to comply.
So the regulator is using its powers, and employers need to understand that they need to get it right. They need to get it properly done in order to avoid these penalties.
PRESENTER: And what companies really are the ones that get the fines? Are we looking at the whole spectrum, or are we just looking at the big and very visible companies?
JAMIE CLARK: It’s not really. It’s a kind of combination; it’s a range of companies. There are taxi companies. There are care homes. There are chip shops, hairdresser firms, ranging from that up to solicitor firms and IT firms as well. And the regulator has published details of all these firms on their website. When I looked this morning there were about 170 firms who’d failed to pay escalating penalty notice and they’re now subject to be taken to court to pay those fines. So it’s quite important that they do pay those fines, because if they don’t it goes on their credit record, which could affect their ability to borrow.
So the company could potentially face issues in the future if they need to borrow money, because that’s on their credit record. And also there’s reputational risk. If you can see it on the website, and you see that particular care home for example has been fined by the regulator and they haven’t paid it, it would worry me if my parent or my grandparent was in that care home, because that’s money that could be spent on the individuals within the care home, rather than the fines issued by the regulator.
PRESENTER: Absolutely, and these fines you speak of, are they nominal or are they sizeable fines?
JAMIE CLARK: They can be substantial. They range from £50 a day up to £10,000 a day for the biggest employers. But again if you look on the regulator’s website on the page where these companies are listed, some companies are being fined £52,500 and still haven’t paid it, and are being taken to court to get that penalty out of them. So it can be substantial. It’s not a small amount of money, especially if it’s relatively small firm, relatively few employees.
PRESENTER: Well what happens then if an employer completely ignores auto-enrolment in the hope that it might go away, does this happen often or what happens?
JAMIE CLARK: Again it doesn’t happen that often, but if they do they will be taken to court and they could face unlimited fines. Ultimately if the regulator wants to pursue it further, they could take it to the higher court, and it is a criminal offence under certain sections of the Pensions Act auto-enrolment rules, which means that you could get sent to prison for up to two years. Unlikely that’s going to happen unless there’s a really obstinate employer. It’s usually they end up in the magistrates’ court, unlimited fine, but it could end up with two years in prison if it’s taken further potentially.
PRESENTER: So how then can employers avoid action by the regulators, just do everything right, is there?
JAMIE CLARK: That’s essentially what it is. It’s making sure there are processes and systems in place that manage this. Auto-enrolment rules are largely driven by the worker’s salary and specific dates. That’s really all it’s about. So it’s getting the processes in place that do that is the way to do it, is the way to be compliant I guess going forward. And again payroll providers and pension providers very much will provide that system and those processes to make sure everything works smoothly and properly.
PRESENTER: And often with situations such as this it is a little bit complicated for people, especially when new things are coming about. How much wiggle room is there if people do break the rules inadvertently, are the regulators still going to come down like a ton of bricks?
JAMIE CLARK: Yes, I mean the best thing to do if you’re aware that something’s gone wrong is try and sort it out with the payroll provider or the employer or indeed the financial adviser involved. If you can’t do that and you get a warning notice from the regulator, or they phone you up or they send a letter saying you’ve not done this right, the best thing to do is to get in touch with them right away, straightaway, and try and get it sorted out. They’re very helpful in helping employers through this process. They will only really take action if employers ignore it, and try and do something different or just ignore it completely.
PRESENTER: So how then can an employer check to make sure their scheme is fit for purpose?
JAMIE CLARK: Yes, that’s an important point I think. A lot of employers set up their scheme on the staging date with the pension provider they happen to be with at the time. Some employers didn’t have a scheme and had to go with a provider at the time as well. And because employers tended to leave it a bit too late they went with providers that provided a certain type of scheme that could cope with a late starter effectively. Our argument is at Royal London that we think that these schemes need to reviewed, because it isn’t necessarily the case that the employer’s going to be in the exact same position as they were at the staging date, and certainly the worker profile might have changed as well. So the scheme they chose at that point might not be suitable now for the type of worker they employ now, or the employer might have expanded or contracted or something like that might have happened. So we think that needs to be reviewed.
PRESENTER: So if they decide the scheme they’ve chosen isn’t suitable, how easy is it to go about changing it, and how would they go about that?
JAMIE CLARK: If employers do want to change their pension scheme, the most important thing is to get I think an adviser involved to look at the whole market and see what’s out there. There are various aspects of the pension scheme that need to be looked at, and we think they need to be reviewed on a regular basis anyway, because at the moment there’s no statutory requirement for employers to look at their auto-enrolment scheme to make sure it’s still compliant. And we think that should be the case. If advisers want to get involved in this, what they should look at is really four areas.
There’s the area of engagement for example. Is the scheme communicating with the members properly, is it communicating with the employer properly? What does that look like, what does it feel like to the workers to be involved in that pension scheme? If the employer wants to pay more contributions in, can the employers go online and see that, and see what that means for them, and can they do that quite easily? So the engagement piece is very important.
There are statutory communications that have to go out, but there’s also the feel good factor, the stuff that employers like to see about their pensions on a regular basis as well. Even simple things like the annual statement that everyone gets, is it five pages of jargon, or is it a single page that explains exactly where that worker is at that particular point in time? So engagement is very important we think going forward. Other things that can happen there is things like introducing things like salary exchange into that workforce, into the pension scheme to build up a bigger pension fund at the end.
Engagement at investment is very important as well. There are requirements set out by the Department for Work and Pensions for the default pension investment within auto-enrolment schemes. In some cases that might not be suitable again for the entire membership or just for part of the membership, so is it worth looking at that? I’m not saying it always will be the case, but it’s something that needs to be looked at I think. So another area for example is administration. Is the scheme being run properly, is the provider doing everything correctly and on time? Is it costing your HR department or the person that runs the pension scheme time and money to keep the pension scheme up and running because they’re dealing with mistakes all the time? So that’s the type of thing you can look at as well.
And finally at retirement, what are the options for the members at retirement? Some schemes for example will not offer drawdown from the pension scheme that they’re in, so they’ll have to switch that out. What does that mean? It means they might have to get advice to do so, and that costs them money to do that. Other schemes out there will provide all their retirement options for the members when they get there, so that’s something else that they could potentially review for the pension scheme.
PRESENTER: So how can advisers get involved?
JAMIE CLARK: I think essentially the first thing to do is look at your existing clients. If you have any existing schemes have a look at them, and what you could do is we would suggest a two-stage process, or even a three-stage process. The first thing to do is just to send a letter to the employer and say your automatic enrolment scheme was set up in 2013, 2014, whenever it was. It’s time to review that to make sure it’s still up to speed. This is a quick look at it to see the areas I’ve talked about earlier; administration, engagement, these are the areas where we think it could be improved, give us a call. And if they do that then you could do a full review of the scheme. So you’d look at all the areas, and try and look at all the market and decide which scheme might be more suitable for the workforce, for that employer at that particular time. And if they don’t, if the scheme looks okay and actually is running okay and there’s no need to change it, there’s no need to go through the hassle of changing it, then that’s something you take a diary note for two years, three years down the line to look at it again, to make sure it’s still suitable.
PRESENTER: So when it comes to moving a scheme just talk me through the process initially, how it’s done, and then we can talk about how it’s done best.
JAMIE CLARK: Essentially the employer would instigate the move. So it’s up to them to decide that their current scheme isn’t really suitable, they need a new scheme. The key to all this is really making it as smooth as possible. The last thing an employer wants is the upset of changing a pension scheme, and the cost and the time involved in doing that. So what we’d suggest to do is try and make that process as smooth as possible. And we’ll talk about that I guess in a second. So the way it works in practice is the employer would say I want to move scheme, and the individual workers would then get a letter saying we’re moving scheme because of this particular reason, or that particular reason, or this scheme’s no longer suitable. And then the new scheme would be switched on at a future date.
Now as far as a worker is concerned that should be a seamless process, and it needs to be a seamless process otherwise it just causes hassle for the worker and the employer as well.
PRESENTER: But what if they don’t want to move schemes? Do they have any say in this, or is this just down to the employer?
JAMIE CLARK: For the automatic enrolment scheme the employer really has, they can opt out of course of the new scheme, they do have opt-out rights when they join the new scheme, they do have a three month opt-out window to come out again if they decide to do so. The reality is however most employers will just carry on, because if you make it as seamless as possible and you don’t put barriers in the way, then that does mean that people will stay in essentially. And if the employer doesn’t get any hassle either, then that makes it a bit easier for them as well.
PRESENTER: So then you send out the letters, and then what happens next?
JAMIE CLARK: So the scheme would be set up by the pension provider. All the members would be switched into the new scheme. They would get a letter just saying you’re now a member of this scheme instead. They can then transfer their old money and the old scheme into the new scheme if they want to do so, but they must be given a choice there. That might require advice as well, depending on the size of the transfer value, but we can nowadays make that process really streamlined. So again the member doesn’t really notice it, it just happens in the background, and all the money is in one place in the new scheme, in the more suitable scheme that the adviser has chosen in conjunction with the employer.
PRESENTER: Now you talk about making it streamlined and smooth, how can you do this, what’s going on behind the scenes to make this flawless?
JAMIE CLARK: So what we would say is that you should really get the provider to do most of the work for you, and indeed at Royal London we would do that. So if the scheme was to switch we will appoint someone to look after that for the employer. So they will contact the employer, they will speak to the payroll people, they’ll speak to the adviser, they’ll speak to the employed as well. There will be a schedule of events set out, setting out who has to do what and when that has to be done. And that will be monitored continually to make sure the process runs as smoothly as possible. So again what we want is a process where the worker doesn’t really notice it, and the employer doesn’t really notice it, and the experience for them is better than it would be otherwise if we haven’t appointed someone to look after that transition.
PRESENTER: So talk me through transferring retirement savings, what do we need to be aware of there?
JAMIE CLARK: So when transferring from one automatic enrolment scheme to another, it’s highly likely that both types of benefits will be defined contribution. So that makes it a bit easier than if it was a defined benefit scheme for example. What happens in the background is we have now streamlined processes in place where the member can give implied consent for that transfer to happen. So in other words what they’re saying is by not saying they don’t want it to be transferred it can be transferred over. And that again looks, as far as the member’s concerned it doesn’t really touch them. It’s just a matter of the money going over and all the pension pot’s in one place, which is good for them, I guess.
PRESENTER: So looking ahead, what sort of challenges does auto-enrolment face do you think?
JAMIE CLARK: The main challenge I think next year in 2018 is the increase in contribution rates for individuals going up from 1% to 3% gross. It’s quite a jump. And the danger there is that people will see that increase up to 3%, which is quite a lot for some people, especially if they’re lower paid, and they might opt out. Our own research amongst millennials suggests that they actually won’t opt out, and they value the increase in contributions and think they should be saving more. So it will be, it could be a turning point for auto-enrolment if opt-out rates increase significantly when the contribution rates increased. It should be remembered of course that the employer contribution rates also increase to 2% as well, so that might have an effect on them. And in fact arguably that increase in contribution rates from 1% and 1% to 3% and 2% might be a catalyst for employers to look at the pension scheme, because they might see it as actually providing more value, and maybe we should look at perhaps switching it to make sure it is still suitable for that employer and for the workers that are in that scheme.
PRESENTER: So just to pick up on something you’ve mentioned a couple of times, which is opting out. What happens if an employee opts out, but then decides to opt in at a later date? Does that cause a headache or is that pretty easy to manage?
JAMIE CLARK: Again it’s relatively easy, because it’s just about timing and it’s just about getting the timing correct. If someone does opt out there is the option not to re-enrol them within a year if the employer wants to do that. But again that’s the type of thing that the pension scheme provider should really take care of. So for example we would do that for you. We would set up the scheme rules in such a way that suits the employer’s business. So if they didn’t want people to opt in within that 12-month period, we could put that rule on the system in the processes to make sure it doesn’t happen. If they do want people to opt in within that 12-month period after they’ve opted out, then we could put that process in place to make sure it does happen.
PRESENTER: So looking for the right provider then, I mean is there a check list of what people should be looking for?
JAMIE CLARK: Financial advisers really should have access to the whole market, so should look at every single scheme on the market to see what’s most suitable. It comes down to all the things I’ve mentioned: engagement, administration, investment and at retirement, but also cost as well. Again, when employers first set up their schemes at their staging date because they were with the existing provider that cost might be higher than it is nowadays. Although there’s a cap in auto-enrolment schemes of 0.75% in the default fund, a lot of schemes we run for example are at lower rates than that nowadays. So employers could potentially get better value for money as well going forward. Those rates are available, the charging rates are available, you can look it up on the provider’s website. But advisers could do that comparison by themselves if they want to do so.
PRESENTER: And just to recap for opportunities for advisers, because I think obviously when changing schemes, how common is it for people to want to do that, or do they just have one in place and think oh that’ll do?
JAMIE CLARK: Yes, I think that’s part of the issue, is that they set up the scheme and they just leave it, so it’s a fire and forget attitude. So for example in trust-based schemes there is a requirement for trustees to continually monitor the scheme to make sure it’s still suitable for the membership. With contract-based schemes like group personal pensions, there’s no requirement to do that. And I think this is the problem with the fire and forget attitude, you set up the scheme and you leave it. It’s never monitored; it’s never looked at again. We think employers should do that to make sure it’s still suitable. We’d like to see in fact legislation introduced or a statutory requirement for employers to review their schemes going forward to make sure it’s still suitable. But that doesn’t exist just now. I think there’s a risk there that there could be hundreds if not thousands of people in automatic enrolment schemes that aren’t receiving the best value that they would get had they look at the whole market now and switched schemes.
PRESENTER: So coming into the New Year how do you see auto-enrolment developing, is there anything there that we should be aware of for 2018?
JAMIE CLARK: At the moment there is an auto-enrolment review going on, and we’re due the results of that quite soon; the type of things that that’s looking at is for example making it easier for employers to administer auto-enrolment. So for example I think I mentioned earlier if you reach 22 you’re automatically enrolled, why not just change that to when you start work you’re automatically enrolled, to avoid that trigger, that extra bit of work that has to be done when someone reaches their 22nd birthday. So things like that I think to make it easier for employers.
The other thing we’d like to see is for the self-employed to be brought into something like an automatic enrolment system. The way we would see that working for example is on the self-assessment, where people would tick a box saying you don’t want a pension contribution if they don’t want that to happen, but it does happen automatically at the self-assessment stage. So that will say something like on the self-assessment form 2% of your profits will go into a scheme of your choice unless you opt out. And we’d like to see a government incentive as well on that, because there’s no employer to make an additional contribution. We’d like a government incentive there as well. So things like that going forward.
Eventually we’d like to see contribution rates increasing as well. I think everyone across the industry and wider than that understands that the minimum contributions under auto-enrolment aren’t quite enough to provide people with a decent income in retirement. So arguably those rates have to increase at some point in the future. Probably not soon, maybe let auto-enrolment bed in a wee bit after the final staging date next year, but eventually we’d like to see that happen as well.
PRESENTER: And how does sentiment stand towards auto-enrolment, do people see it as a bit of a headache or are they quite positive about the whole thing?
JAMIE CLARK: If you look at the opt-out rates for example, they’re far lower than people expected. So it looks like people are reacting to auto-enrolment in a relatively positive manner. Because it is automatic and the deductions are just taken from pay before you really see it effectively, then I think a lot of people have just accepted it. And the idea of automatic enrolment, the behavioural nudge behind that, seems to have worked.
PRESENTER: So then what are your final thoughts for people to take away from this session, a summary if you will?
JAMIE CLARK: I think we can’t let afford to let schemes, automatic enrolment schemes just stagnate after they’ve been set up at the staging date, and they’re left, fire and forget, leave them forever. Because that will eventually I think provide poor value for thousands of people in these automatic enrolment schemes. I’m not saying every single scheme should be switched, what I’m saying is they should be at least reviewed to make sure they are still suitable. And that way the employer could be satisfied that they’re providing a decent scheme for their employees, the employees will get a better outcome at retirement, and everyone’s happy.
PRESENTER: Jamie, thank you.
JAMIE CLARK: Thank you.
PRESENTER: In order to consider the viewing of this video as structured learning, you must complete the reflective statement to demonstrate what you’ve learned and its relevance to you. By the end of this session you’ll be able to understand and describe the scale of the auto-enrolment market and the opportunities it represents; what happens when an employer fails to pay auto-enrolment fines; and how to approach moving a scheme. Please complete the reflective statement to validate your CPD.