Early detection key to addressing the increasing risks of auto-enrolment

This is more serious now than ever, because auto-enrolment has now been in place for up to 12 years for some employers.  Any mistakes get compounded over time. It was in October 2012 that the largest UK employers became subject to the automatic enrolment programme, under which they must automatically enrol workers into a contributory workplace pension scheme.

However, the legal and regulatory compliance regime for auto-enrolment is extremely complicated – and it can be easy for employers to unknowingly fall foul of their obligations.

This can have significant implications – if small errors go unnoticed for long, they can become a material issue later, particularly if the error is multiplied across a big population of employees and as the sums at stake become ever greater as the legacy of auto-enrolment grows with each passing year.

Where employers sometimes go wrong

Pinsent Masons has teamed up with Mark Ellis, chief executive of Sanctum Software, a technology provider that helps employers check their compliance with auto-enrolment requirements, to provide some examples of where auto-enrolment compliance issues commonly arise.

Pensionable pay

There is often some misalignment between employment contracts, employment practice and what is actually paid to the workplace pension by way of contributions. There can be a discrepancy between the components of pay which are documented as pensionable, and what is treated as pensionable in practice. For an employer of any size, it doesn’t take long before this kind of misalignment can lead to a material underpayment or overpayment of contributions – as well as compensation for the associated lost investment roll-up. 

This can lead to long-standing underpayments of contributions and overpayments of contributions.

Overpayments might be less of an issue from a regulatory perspective but they are a business issue as they will result in higher pension costs, which are then difficult to recover. Overpayments can also give rise to potential unlawful deduction of wages claims.

Tax reliefs

We’ve seen instances where a change in payroll personnel has led to a change in the way contributions are paid – where they were paid on a net pay basis before being switched to a ‘relief at source’ basis, and vice versa. This causes all sorts of complications with tax reliefs and amounts that should, or should not, be in members’ pots. 

Tax authority investigations, ‘true-ups’ and other resolutions take up management time and money.  

Compliance paperwork

The recent case of The Pensions Regulator v Cofal provides a good example of how an innocuous failure to complete required paperwork can draw regulatory ire.

In that case, the owner of a small coffee shop successfully appealed a penalty notice imposed by the regulator in relation to its failure to make a declaration of compliance to it in respect of the company’s compliance with auto-enrolment requirements. The fine imposed was only £400 but a tribunal considered it was disproportionate because the breach was inadvertent and swiftly remedied. Other employers on the receiving end of regulatory penalties might now consider similar action. 

The £400 penalty in the Cofal case was, however, at the very low end of the scale. We’ve seen instances of what might be considered trivial non-compliance being inadvertently overlooked for months or even years. By the time those issues are properly acknowledged, the headline regulatory penalty that can be six figures for something as simple as failing to complete a form.

How problems are spotted

Changes to personnel, payroll or pension schemes can be the catalyst for auto-enrolment compliance issues and also bring historic compliance issues to light. It’s really important to test process and procedure when coming into a new role to avoid becoming part of the problem practice.

M&A activity can also expose auto-enrolment issues. Routine due diligence often highlights discrepancies in contributions, process or paperwork associated with auto-enrolment. Although this has not always been a major issue on deals, the costs of remedying what could now be long-standing issues can be very substantial. Although these legacy problems are unlikely to reach the scale of DB pensions liabilities, it is not uncommon to identify auto-enrolment problems of £1m or more.

What employers – and HR, pensions and payroll professionals – can do now

The main thing is that auto-enrolment problems can be nipped in the bud once detected.  The key thing is early detection. 

From a legal perspective, it makes sense to check definitions of pensionable pay in employment contracts and scheme materials and test that against what is actually paid to the workplace pension by way of contributions. This will highlight any discrepancies and also ways in which the employer can cap things off and guard against spiralling costs.

If there are issues to resolve, employers can also take comfort from an expert audit of past payroll data to help determine what, if any, remedial action needs to be taken in the past.

Although this can require HR, pensions and payroll professionals to grasp the nettle, it also helps employers to come through M&A activity unscathed – and also guard against what could become substantial tribunal or ombudsman claims, and even regulatory action.