We are currently in the phase where ‘medium-sized’ employers, those with between 50 and 249 workers, are required to comply with the obligations. From 1 April 2015 ‘small and micro-sized’ employers, those with less than 50 workers, will be required to auto-enrol their eligible workers. This is likely to bring about a whole new challenge for the industry as hundreds of thousands of small businesses grapple with their new duties.
Indeed, the Pensions Regulator has just been quoted as saying that as the number of businesses reaching their staging date increases it expects to see a corresponding increase in the number of cases of non-compliance.
What does it mean for these businesses?
Businesses must ensure they comply with the legal requirement to auto-enrol their eligible workers by their specific staging date. That is a significant task in itself, probably more so for those businesses who have not previously made any pension provision for their workers. The work doesn’t stop there though…
There are certain potential knock-on effects of auto-enrolment which businesses need to be aware of. A key issue is the interaction of pension provisions in the employment contract and the auto-enrolment requirements. To be auto-enrolment compliant, businesses must auto-enrol eligible workers in a compliant workplace pension arrangement. Provided the individual does not opt-out of the arrangement, the business must also pay contributions in respect of that worker.
However, complications arise where the employment contract provides for pension contributions to be paid to alternative arrangements, such as the worker’s own personal pension plan. In such instances a business could be saddled with continuing to pay into the worker’s personal pension plan and, in addition, having to fund the statutory minimum auto-enrolment contributions to a workplace pension arrangement.
Reviewing and amending employment contracts appropriately before the auto-enrolment obligations apply to a business can help prevent doubling-up on the cost of pension-provision. For this reason we advise all of our clients to review their employment contracts and to engage with affected workers well in advance of their staging date to help make suitable arrangements to avoid this unintended situation arising.
What does it mean for the workers?
The DWP has published research which suggests around 9 million workers are now either making additional retirement savings or making retirement savings for the first time. This can only be good news.
Those workers who have not opted-out of the workplace pension into which they were auto-enrolled will have seen a reduction in their take-home pay as a result of pension contributions being deducted. In return for this they will see a pot of money, set aside for their retirement, grow.
This all sounds like good news, and indeed it is. Increased saving towards retirement is definitely a positive fashion. The concern is, however, that this may be breeding complacency amongst those workers who are diligently making these savings. The risk is that many workers may now think that this pension provision will guarantee them a comfortable retirement.
This is a major concern when you consider the amount of money being saved under auto-enrolment. Many workers will see a maximum of 8 per cent of their band earnings (earnings between £5,772p/a and £41,865p/a for the tax year 2014/15) being put away towards their retirement.
For a worker earning £30,000p/a this means an annual contribution of nearly £2,000 is being squirreled away. One online resource suggests that to achieve an income of £15,000p/a in retirement an individual would require a fund size at retirement of around £250,000.
At £2,000 per annum, even with significant investment returns, this would take far longer than the average person’s working-life to achieve. This illustrates that even despite unprecedented investment returns no individual would be able to solely rely on this level of savings to provide them with a comfortable retirement.
The key message is that auto-enrolment is a step in the right direction, but it is certainly not a cure-all!
Employers should carefully consider this point when discussing the new auto-enrolment obligations with their workers. Having a nation of workers who have been lulled into a false sense of security about their potential income during retirement as a result of auto-enrolment could have catastrophic consequences for the future.
Alison Hills is Senior Associate at Wedlake Bell LLP
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