Three years after its introduction for the largest companies, automatic enrolment is still big news. Although the focus for some is on capacity at the smaller end of the employer market as staging dates approach, the largest employers are also preparing for triennial re-enrolment - and others will soon follow.
First time around, the big challenge around auto-enrolment was aligning complex legislation to complex payroll arrangements and employment relationships. Much of that complexity should now have been addressed. Worker status will have been bestowed, or not, on atypical workers at the fringes of the employment relationship. Third party IT solutions will be assessing and segmenting the workforce each month into eligible jobholders, non-eligible jobholders and entitled workers. In theory, everything should be running like clockwork.
However, much has changed in the pensions arena over the last three years, and not all auto-enrolment arrangements were built to last.
Automatic re-enrolment occurs every three years and requires employers to re-enrol eligible workers into their auto-enrolment pension scheme if they are not currently an active member. This includes those staff that opted out of the pension scheme, those who ceased active membership of the scheme after the opt-out period and those who stayed in the pension scheme, but who reduced their contributions to below the statutory minimum.
But re-enrolment duties will not only be triggered by the three-year anniversary of the employer’s staging date – which, for the largest employers, will occur on 1 October 2015. Re-enrolment obligations can also be triggered by changes of scheme or scheme provider. Whilst also potentially giving rise to pension consultation requirements, this sort of activity often requires the same sort of disclosure and enrolment arrangements as the triennial re-enrolment obligation.
If this has been overlooked, then triennial re-enrolment gives employers a belated chance to put things right – albeit one that falls somewhat short of technical compliance. Indeed, if there are any persistent problems with your company’s scheme then re-enrolment really is the time to sort them out. The Pensions Regulator generally tolerates a swift remedy, but even its patience will wear thin as we approach the three-year anniversary of something having gone awry. The potential fines, penalties and bad publicity are worth avoiding.
Second time around, re-enrolment also gives employers another opportunity to consider whether their pension arrangements work for the business and its workforce. Is the scheme right? Are the associated services right? Is it time to equip workers with the tools to engage with retirement saving, through software solutions such as robo-advice, benefit adequacy tools or innovative, game-style member communications?
And we cannot ignore the fact that pensions themselves have evolved since auto-enrolment was introduced. In 2012, a DC scheme was essentially a retirement savings arrangement for the current workforce and any deferred members. Pensioners were taken care of in the form of annuities, a third-party retirement product which delivered a guaranteed income for life. Fast-forward three years and a DC scheme has become a savings arrangement which provides access to cash from the age of 55, whether in one fell swoop or in dribs and drabs. The DC scheme can therefore be both savings vehicle and retirement product.
However, employers and trustees should think very carefully about the cost and risk of taking on the retirement product aspect of the new pensions market. It is a good sign that employers want to look after the fortunes of their former workers throughout their retirement – but they will need to have their eyes open before doing so. Drawdown arrangements in particular, which allow savers to take an income while keeping the balance of their pension invested, are complex products and many third party providers offer them on an advised basis only. Unlike annuities, drawdown income is not guaranteed – and the claims could come if the money runs out.
More generally, re-enrolment brings an opportunity to sense-check pension scheme member communications, employment contracts and authority to increase any member contributions before you are required to do so by law in October 2017, and then again in October 2018. Where third party providers and solutions are used, think very carefully about the risk allocation in the contracts: this is now effectively a legal requirement for trustees, and the principle should not be lost on employers. Handing over the data and assets of your entire workforce is not a risk-free business, and risk assessment should be an on-going process.
Rather than a paper exercise, with a re-declaration of compliance at the end of it, employers and trustees should be thinking of re-enrolment as a good time to pause for thought and consider the purpose of your pension scheme – from a cost, risk and general HR perspective.
Tom Barton is a pensions expert at Pinsent Masons, the law firm behind Out-Law.com