Auto Enrolment update: SMEs fined while employee pension opt-ins exceed expectations

Recent analysis by Legal & General Investment Management has found that opt-out rates for workplace pension schemes haven’t increased as had previously been expected.

When Auto Enrolment first started in 2012, the Department for Work and Pensions predicted that opt-out rates would reach up to 28% as contribution levels increased. In fact, opt-out rates are only currently at 9%; with millions of low-income households reshaping their budgets to ensure they’re contributing towards their pensions.

What sort of impact has Auto Enrolment had?

It’s reported that 9 million workers in the UK have joined a workplace pension scheme since Auto Enrolment first began in 2012.

There was concern that the increase in contribution rate, from 1% up to 3%, would result in many workers choosing to drop out of the scheme – an option that was given should employees be unable to afford contributions. After the contribution rate increased, however, Now Pensions reported that their opt-out rate only rose by 0.2% - from 7.98% to 8.18%.

In fact, many workers have stretched to adopt these higher contributions. In illustration, Legal & General Investment Management cited one company with 30,000 employees – of which just 40 opted to reduce their contribution rate to 1%.

When looking at the bigger picture, the number of pension pots being filled has increased by 50% since the introduction of Auto Enrolment. The bulk of these pensions are from private sector workers, according to the Office for National Statistics.

The Department for Work and Pensions also report positively on AE’s adoption, stating that employees saved an extra £6.9 billion into workplace pensions in 2017 – 2018.

Are employees saving enough?

While employees are contributing to their pensions, Aviva have reported that contributions to private sector pensions are at the minimum levels required by Auto Enrolment.

In many cases, this actually represents a fall in the amount being contributed to pensions. Back in 2012, pension contributions were at a high of 9.7% of the average salary. In 2017, however, this had dropped to just 3.4% of salary – with 1.2% coming from employees and 2.1% coming from the employer. 

This will change again, with the minimum contribution now at a total of 5% (from April ’18) and rising to 8% in April 2019.

Are employers doing enough?

While employees seem to be adapting to the new AE system, it’s been reported that employers are failing to meet their obligations under Auto Enrolment.

A freedom of information request made to The Pensions Regulator found that the number of employers that were encouraging employees to opt-out of their pensions (so they could avoid making their employer contributions) had increased by 68%.

This comes at a time when audits on business owners are resulting in record fines and penalties. In an update published last month, it was reported that 27,219 compliance notices were issued between April and June – the most in any 3 month period.

Further to this, The Pensions Regulator also used a variety of disciplinary powers for the first time so that they could tackle pension scams, failure to comply with Auto Enrolment and also ensure scheme valuations were being properly performed.

How IRIS are set to help

These reports seem to indicate that while Auto Enrolment has been well-received, there’s still work to be done on educating both employers and employees on the finer points of the legislation.

At IRIS, we work closely with HMRC and various pension bodies to stay up to date with the latest legislation. This insight forms part of our world-class service in Managed Payroll. Every one of our Managed Payroll bureau members is either CIPP-qualified or working towards it, and together they provide an outstanding 99.9% accuracy rate for IRIS clients.

When you sign up to Managed Payroll, you’ll work with a personal Payroll Account Manager who will handle as much or as little of your payroll as your need to ensure that you’re complying with all of your AE, and general payroll, obligations.

To learn more about IRIS Managed Payroll, click here.