Help your staff plan for a comfortable retirement
Monday, March 26, 2018
Statistics from the Office for National Statistics published last September (2017) show that we’re living longer.
Data for the period 2014 to 2016 suggests that a new-born male could expect to live to 79.2 years while a female should hopefully see 82.9 years. In comparison, males born in 1961 were expected to live 68.1 years versus 74 for females.
This increasing life expectancy has been causing concern within governments of all political persuasions for years. Tom McPhail, head of policy at investment firm Hargreaves Lansdown, thinks that governments were right to have been worried: “The country faced a retirement saving crisis. Pension membership was dwindling and failure to turn the tide would have resulted in huge numbers of people arriving at retirement without enough to make ends meet in the years after work and relying on the state to support them.”
The 2017 Drewberry Wealth & Protection Survey backs this up. It found that one fifth of the population has no pension at all and another fifth have a pension pot valued at £10,000 or less.
It’s for these reasons the government of the day passed the Pensions Act 2008. It mandated the creation of workplace pensions where employees had to opt out of a workplace pension rather than opt in. Better known as automatic enrolment (AE), it was rolled out between January 2012 for the largest of firms and January 2017 for the smallest and was completed by the newest of the UK’s employers by February 2018. While this might be seen as ‘job done’ as far as the government is concerned, it’s far from that for employers.
AE does seem to be getting individuals saving. Darren Ryder, the Pensions Regulator (TPR) director of AE, says that since its introduction, the proportion of individuals saving into a workplace pension has risen from 55% in 2012 to more than 78% now: “More than 9 million more people are saving into workplace pensions. While some of those saving may not currently be putting a large amount away each month, it’s a start.”
But while pensions are a concern for government, they’re not all bad news. Robert Lockwood, group chief executive at Taylor Bloxham, views pensions positively as part of an employee’s total benefit package. However, he sees the commercial issues: “Whilst we don’t see [AE] as a financial burden to-date, it has introduced a level of administration complexity effecting those involved in payroll and HR, which has involved additional training and software upgrades.”
The subject of pensions is less popular with Julie Sachno, KMS Litho’s accountant. While KMS offers staff the NEST (government-backed) workplace pension there is no other individual or company pension “as this has not been a high priority for the business and the staff have not requested it.” Sachno considers AE to be “another obligation forced” upon business by the government and “it’s left us having to limit the annual salary increase, or in some cases, take the place of salary increase and this has been a disappointment to some members of staff.”
Charles Jarrold, chief executive of the BPIF, offers the harsh reality, that in “one way or another, employees have to save for retirement, and, the earlier they start this process the better”.
He adds: “AE is the government’s response, and as a way of overcoming individuals’ inertia it makes sense.”
AE means that employers must automatically join staff aged between 22 and state pension age into a company pension scheme and make contributions to it if they earn £833 per month or more. AE is intended to catch even micro-businesses; as long as there is just one employee, the regime applies.
McPhail notes that currently the minimum contributions are 2% of ‘qualifying earnings’ with at least 1% coming from the employer, but the minimum level is due to increase.
He says: “Employers need to be aware that from April 2018 the minimum contribution rises to 5%, with at least 2% coming from the employer, and from April 2019 the minimum climbs to 8%, with at least 3% coming from the employer.”
He adds: “But not all income counts towards the contributions that must be made. Qualifying earnings includes all pay but excludes the first £5,876 of earnings as well as any income from employment over £45,000.” Staff can opt-out, but they must be enrolled into the pension scheme first.
The increases aren’t welcome though. Sachno suggests that after April 2019, KMS may have to consider its staffing levels and pay awards. “Should the cost to the business increase substantially over time this may cause some unrest amongst the staff, particularly if the business is not able to offer annual salary increases on top of the pension contributions.”
In contrast, Jarrold is more understanding. He says that they’re never welcome, “especially with the pressure on costs and uncertainty around Brexit, however they apply to all businesses, and is part of the answer to a very real problem”.
Print’s participation rate is good. Lockwood says that Taylor Bloxham promoted the benefits of AE to all staff through briefings and workshops: “The take up rate is around 90%, but it’s not high on our employees’ agenda.”
And Jarrold is seeing an even better response. “Within the Printing Industry Pension scheme, which is used by many printing companies, the opt-out rates have been very low – currently less than 5%. This is significantly lower than the national average of all pension schemes which is estimated to be around about 10%.” However, he says it will be interesting to see if the number of employees choosing to leave the pension schemes increase as the minimum contribution requirements increase.
AE is overseen by The Pensions Regulator, which, as McPhail notes, “has had a tough job on its hands, ensuring all employers across the UK, large and small, irrespective of what they do, comply with these rules”. He says the regulator has successfully managed the process pragmatically focusing predominantly on providing easy access to information, whilst simultaneously raising awareness through advertising and information on their website.
But critically, the regulator has, as McPhail comments, “also proven to be no pushover and has used its powers to crack down on employers that have stepped out of line. No fewer than 96,790 actions had been taken by September 2017”. This includes fines that rise by the day and court action for enforcement.
The powers of the regulator vary based on the severity of the rule breach as well as the size of the company. It may impose fines and can prosecute. Stotts Tours of Oldham, a coaching firm, became the first company last November to have its day in court. The company should have begun pension contributions for staff from 2015 but didn’t and ended up with fines and costs awarded against it of more than £39,000.
Of course, Lockwood can see the need for enforcement but says that the rules do need careful monitoring to make sure they are applied correctly: “I can see some companies unintentionally failing to implement AE 100% correctly, so it will be interesting to see how companies that have made genuine mistakes are penalised.”
This is a point echoed by Sachno. She accepts the need for compulsion and has found the duties not too onerous thus far. “However,” she adds, “the legislation is such that it is not always possible to be certain that the business is complying.”
For Jarrold it’s a question of fairness. He says small companies still need to comply with any legislation. However, “they are typically less well-resourced administratively, and shouldn’t be excessively penalised. Where there are genuine mistakes or oversights, these should be rectified without excessive penalties, which may risk damaging the company’s future viability.”
As noted earlier AE is not a one-time task – it’s ongoing. McPhail says that employers must enrol new members of staff, those who rise up to earn enough and also manage the requests of those who opt out of the pension scheme: “Employers also need to ensure they are paying across the right level of contributions to the company pension, this is a point that must be assessed by way of an internal audit and self-certification.”
But there’s more. Around the three-year anniversary of each employer’s staging date, its start date for AE, the staff who have opted out, or left the scheme previously must be re-enrolled – even if they opt out again.
The biggest concern for McPhail is knowing the unknowns, that is staying abreast of changes: “We have seen regular tweaks to the rule book to tidy up some of the loose ends, but December (2017) saw the announcement of some more significant changes, and longer term we expect the amount that employers have to contribute for their staff to increase further.”
The changes that McPhail talks of are several, two of which will have quite an impact on employers and their staff, although they won’t be implemented until the mid-2020s. In essence, employers will eventually have to enrol staff from age 18 as opposed to the current age of 22, and contributions will accrue from the first pound of income earned and not income above the qualifying earnings threshold. McPhail reckons that this will mean each employee will cost an extra £176.28 to employ when fully rolled out – “however, these changes are transformative for employees, with an additional £60,000 in their pension when they reach retirement”.
But what McPhail describes as “transformative” will, reckons Lockwood, be seen differently by staff. “I don’t think our employees would consider that an increase in employers’ pension contributions is an acceptable alternative to a pay increase; especially as employees’ contributions also increase reducing their net pay.”
Jarrold is well aware of the frustration coming from employers but says: “The simple fact is that we’re all living longer and must make more provision for that, or face penury. There’s only one answer to that - save more.”
To Ryder goes the last word: “Employers cannot ignore the rules and there is no excuse for denying staff the workplace pensions they are entitled to. It’s vital that employers do everything they should have done to comply with their legal requirements.” He adds that AE is not an option, it’s the law and the very worst thing an employer can do is to stick its head in the sand and hope that it will go away because “ignoring your duties simply gives us, and possibly the courts, the impression that you have no intention of doing what you should”.
Automatic Enrolment: the basics
Choosing a pensions provider
Choosing a pension requires an investment in time rather than plucking a name out of the ether and hoping for the best. The Pensions Regulator (TPR) maintains a list on its website (thepensionsregulator.gov.uk) of schemes that have passed its Master Trust Assurance Scheme test.
There are a number of elements to successfully choosing a provider including cost (a number of providers offer schemes that are free to employers); transparency in ongoing administration fees; whether schemes have a Defaqto rating (another sign of quality); funds that are within the ambit of the Financial Conduct Authority; the red tape required to join (the process should be simple and not onerous); scheme compatibility with existing payroll systems (automatic processes which connect to existing software); and likelihood of acceptance (knowing that the employer will be accepted before it expends time and effort on the application process).
It’s also important to select a provider that assesses staff, and which communicates with them automatically.
Choosing a trusted advisor
Employers may need an independent financial advisor (IFA) who can provide advice about getting the right pension scheme for the business and employees. IFAs can also provide advice to employees about investing in pension schemes and expected outcomes. The Pensions Advisory Service (pensionsadvisoryservice.org.uk) offers guidance on how IFA’s work. The Money Advice Service (moneyadviceservice.org.uk) offers links to relevant organisations with detail on IFAs.
There are a number of key questions to ask candidates – their charging structures and likely costs; services they offer; their independence; if they hold qualifications above the minimum required to operate; if they serve clients in similar sectors to print; if ongoing advice will be offered and the cost of this.
Auto enrolment costs
TPR experience suggests that pensions advice can cost a company anywhere between £200 to £1,000. However, while procedural costs are one element to consider, it’s just as important to budget for the employer contributions that need to be made - 1% of employee pay at present, 2% from April 2018 and 3% from April 2019. Some employers view pensions as an investment – an incentive – in staff, others through economic necessity find that they have to offer lower pay rises instead.
AE is not a one-off task, it’s ongoing and compliance with TPR rules is mandatory with a responsibility placed on employers to monitor matters going forward. In essence, employers need to continually check for staff ages and incomes in case employees become eligible to be automatically enrolled; manage requests to join, opt out of or to leave the pension scheme; generally keep good records; and undertake three-yearly cyclical re-enrolment where eligible staff must be enrolled again and those that opted out, offered the chance to join.
Declaration of compliance
A Declaration of Compliance must be completed and submitted to TPR within five months of ‘the staging date’, the date of joining the process. The declaration is completed online and can be accessed through TPR’s website. This form needs completion even where a scheme has been set up and all staff have opted out. Employers who tick the box on their Declaration of Compliance to say they have done everything that they are obliged to do (even when they haven’t) are unlikely to succeed in their goal. TPR says that deliberately lying on a declaration is a criminal offence and one which can lead to prosecution.
The data provided on the declaration – such as the number of staff employers have automatically enrolled – is checked against data held by other agencies to see if it ties in with the number of people on the payroll. Any difference could indicate that they have not enrolled everyone that they should have included. TPR also speaks to employers, carries out spot checks and takes seriously and whistleblower reports of allegations of wrongdoing. TPR has said that all suspicions of non-compliance are investigated.
In the first instance, non-compliant employers are spoken to by TPR with a view to moving them towards compliance. Those that fail, or refuse, to comply are likely to be issued with a fixed penalty notice of £400. They are also told that if they do not become compliant, they could be made the subject of an escalating penalty notice (EPN) from a set date. EPNs increase each day that the employer remains non-compliant. For micro employers it is set at £50 per day. For the largest employers it is £10,000 per day. These sums are pursued via the county court. If an employer pays the fine but still remains non-compliant, TPR will consider prosecuting.
Employers running out of time until their compliance deadline or facing problems afterwards with compliance are advised to make contact with TPR. There’s a vast volume of information available on its website (tpr.gov.uk) to help employers. In particular, employers should look for TPR’s The essential guide to automatic enrolment. It’s a 20-page guide which outlines the key points, process, considerations, duties together with tick-sheets and links to online tools.