A BUMPY ROAD TO

A BRIGHT NEW

PENSIONS SYSTEM

A decade on from launch, auto-enrolment is being hailed as a great success. But there were plenty of bumps along the road to implementation.

John Greenwood reports

Today auto-enrolment pensions are such a well-functioning component of the workplace landscape that it is easy to forget the many problems, challenges and concerns that troubled the minds of those charged with implementing it.

Regulators, providers, advisers, payroll professionals, policymakers and other stakeholders can look on today’s auto-enrolment systems with a sense of ‘job well done’. But the delivery of this giant policy was not without its birth pangs.

Will we have the regulations in time? Will the tech fall over? Will employers refuse to pay up? Will employees opt out in their droves? All these issues and more occupied pension professionals for years before and during the rollout of auto-enrolment.

Regulatory complexity
Final regulations on certification, thresholds and band earnings were left late, and concerns around certification of pay periods were a preoccupation for many in the industry. At the same time, many schemes in existence back in 2012 needed tweaks to eligibility criteria and contribution structure, the processing of new entrants and the way contributions were to be made.

In the early years of the project, experts called for a softly, softly approach from The Pensions Regulator around issues such a lack of clarity of how temporary staff, contract staff and zero hours workers would be treated, even as large employers were reaching their staging dates.

“The biggest concern I recall was that government was not going to tell us in time how it was all going to work. They left it very late,” says Steve Herbert, wellbeing and benefits director at Partners&. “I remember sitting in the DWP offices with a group of corporate advisers asking what the rules were in the year of implementation, and the answer was we’d just have to wait. Staging dates for the big companies had already started and we did not have all of the details. But somehow it all managed to work.”

The Pensions Regulator took what has been seen to have been an even-handed approach with employers – cutting slack where genuine mistakes were made, while making an example of pre-meditated attempts by that very small minority of employers looking to avoid complying with their duties altogether.

”In the early years of auto-enrolment, helping employers to become compliant with a minimum of effort was seen as a priority.

Middleware or payroll
In the early years of auto-enrolment, helping employers to become compliant with a minimum of effort was seen as a priority. Those pension providers that could present an easy way for employers to engage with their system would, it was argued, get significant amounts of new business through the door.

At the time, some industry experts were even suggesting tardy employers might struggle to find commercial providers, who might be suffering capacity constraints and unable to take their business. There is little evidence that this fear materialised.

As the scale of the challenge of assessing and collecting contributions for complex workforces became increasingly apparent, fears that the system could fail started to materialise. One answer backed by some providers and tech firms was ‘middleware’ – software that would operate between pension providers and employers. At the time, providers and employee benefits consultants debated which of them was responsible for managing all this data. Department for Work and Pensions estimates of a cost of £100 per employer to deal with the extra administration of auto-enrolment were understandably considered well wide of the mark, and several organisations marketed software to manage the process.

CanScot Solutions principal Robert Reid says: “A lot of people thought payroll would not be able to cope, and some providers thought putting some middleware in between the parties was worth doing. But by the time these systems were up and running most payroll providers had a system in place to deal with auto-enrolment.”

”The readiness of employers to implement the reforms was also a concern for many in the industry right up to the time the biggest employers’ staging dates arrived.

Tech challenges
The emergence of solutions from payroll providers did not, however, mean that tech problems were laid to rest.

“Several of the big providers had systems that didn’t work and they had to go and pay people to sort them out for them,” recalls Reid. “There were problems where if the system did not pick up one month’s data, the new contributions were not collected. In some cases contributions were not collected for several years.”

The most high profile example of the tech falling over was Now: Pensions, set up by Danish pensions giant ATP, with a high profile trustee board that was chaired by former Conservative shadow pensions minister Nigel Waterson and included the former Government Actuary Chris Daykin and former TUC general secretary John Monks. Now: Pensions, which had been the third-largest master trust by number of members, failed to collect member contributions for five years in some cases, and was given multiple fines and enforcement notices by TPR. Its admin problems have been resolved and it has subsequently been acquired by Cardano. Fortunately for the workplace pensions industry, the issue caused few waves in the national media, meaning trust in the rollout of auto-enrolment was largely unaffected by it.

Employer and Treasury reluctance
The readiness of employers to implement the reforms was also a concern for many in the industry right up to the time the biggest employers’ staging dates arrived. Auto-enrolment may have been launched in October 2012, just as the world was recovering from the financial crisis, but Adrian Beecroft’s report on the policy for Number 10 led to the postponement of AE staging dates and contribution increases for 5 million employees of smaller companies.

Herbert says: “The cost implications for employers was a big concern. Would they be prepared to pay up? But the problem never materialised. I’m not quite sure why the employers took it on the chin, although the phasing of contributions made is a lot more acceptable and the pause in contributions probably did help.”

Some employers were believed to be holding back on the generosity of their pay rises to contribute to the cost of making their pension contributions, and evidence of existing more generous schemes ‘dumbing down’ to auto-enrolment minimums was widespread.

”Predictions of opt-out rates over 20 per cent were widespread, but today they stand at less than half this level.

Advisers’ role
By virtue of nudging millions towards financial services products they hadn’t actually asked for, the Government had a lot of skin in the game when it came to ensuring the quality of the pensions being enrolled into. This has led to a massive improvement in the standard of schemes offered, including very low prices and significant steps forward in the transparency of investment management charges. December 2012’s Retail Distribution Review deadline saw the end of commission for pensions and investments, including workplace schemes. The FSA created consultancy charging, only to abolish it months later. That year also saw a ban on short service refunds.

Cavendish Ware director Roy McLoughlin recalls predictions that auto-enrolment and the RDR would effectively cut advisers out of workplace pensions, predictions he saw at the time as unfounded. “The reality couldn’t have been anything further from the truth. Auto-enrolment was always going to need explanation. Smaller companies actually needed more help than bigger ones because they have no HR department.

“There was also a concern that young people would not be interested in auto-enrolment, and there would be a general lack of appetite for it from both employers and staff.”

Predictions of opt-out rates over 20 per cent were widespread, but today they stand at less than half this level.

That said, a pensions communication challenge remains to this day, and the passive nature of auto-enrolment’s nudge does nothing to change this. It is worth recalling that 2012 also saw IBM develop a blueprint for a consumer-centric ‘citizen’s pensions portal’ that can aggregate details of all of a person’s retirement savings on a single screen, proposing that the project could be set up as a public utility and funded by selling product providers market information and access to consumers. The concept would slowly gain ground and ultimately evolve into the still under development pensions dashboard project.

But advisers at the coalface talking to employees in workshops within the workplace see auto-enrolment as a genuine game-changer, particularly amongst younger generations.

McLoughlin says: “The reality is, young people understood the demographics of what government was dealing with. There is a real sense that young people now understand they are going to have to save for their future. A plus side of this is that their auto-enrolment pension has been their first financial services product. This has made communicating the value of other products to them easier. Auto-enrolment has been a resounding success.”