Monday, 30 April 2018

Autoenrolment is a success - the data proves it! But data also reveals a few other things...

Autoenrolment is a success. A very small percentage of employers are initially failing to comply with the law. Approximately 6.5% to be exact. Not bad, given that well over 1m employers are now running a pension scheme.

But did you know that approximately 65% of all SMEs perform ongoing AE duties themselves in-house and that 80% of all SMEs do not suffer any costs for meeting their ongoing duties? (Source : “Employer automatic enrolment ongoing duties survey 2018 (Published March 2018).”

This feels like a minor miracle. How did it occur? Several reasons:

  1. It’s the law. 93.5% of business owners respect the law (the remaining 6.5% get served a Compliance Notice, then 50% of those get served a Fixed Penalty Notice, and then 25% of those 50% of the 6.5% get served an Escalating Penalty Notice... and then they respect the law).
  2. The DWP and TPR and NEST are doing a good job. NEST have dominated the provision of pensions to the SME market. They had the resources and the remit to get the job done, and never turned an employer away. A majority market share rarely seems like a good outcome but in this case it very much looks like HM Gov thinks it’s better to have all eggs saving into in one NEST than not saving at all. (Apologies for the pun).
  3. Technology (in the form of payroll software upgrades, pension provider portals and integration-APIs) has helped the smaller employers.
Technology is the telling factor. It’s the unsung bit, generally speaking. There’s no way automatic enrolment could have been successful thus far without internet technology: no direct access to pension provider portals for example. There’s no way AE would work without payroll software and benefits-middleware streamlining the assessment calculations and tax arrangements. Increasingly, technology is being used to make the fiddly bits of AE even easier: 100,000 employers are actively benefiting from NEST integration; payroll software is able to automate manual data loading via direct integrations like Sage’s own Pension Data Exchange, or via intermediaries such as pensionsync.

So AE is a success.  Done and dusted, right?

Probably. But there are a few aspects of autoenrolment which need some ongoing attention.

Firstly, no one knows whether the hundreds of thousands of SMEs who are administering their own pension are remaining compliant.

Initially, to avoid being sent a Compliance Notice, an SME needs to submit a Declaration of Compliance within 5 months of their staging date. That’s all. There’s precious little ongoing monitoring of SMEs thereafter. Pension providers should be monitoring whether or not an SME submits the minimum contributions required by law, and then reporting to The Pensions Regulator any SME who fails to maintain contributions. But autoenrolment compliance goes deeper than just submitting contributions. The only real way to determine if an SME is failing to remaining compliant is if The Pensions Regulator audits them in a spot check, or if an employee blows the whistle.
Thinking about the sheer size of the SME autoenrolment market, it’s more likely to be the risk of employees blowing the whistle, than a spot-check by the regulator, which motivates employers to stay on top of their pension duties.

Autoenrolment is complex legislation and for many SMEs there is a lot of new terms and new rules to learn. Eg Who is assessed, and by what criteria? Are staff communications being sent out? What needs to be done for cyclical re-enrolment? Are the contributions being calculated accurately, especially with regard to the pay arrangements? 

Its entirely possible for an SME to think they are compliant when in fact they are not.
Technology is the only hope the majority of SMEs have of being able to actually maintain compliance. Good technology will support the SME through re-enrolment, creation of accurate letters, adjusting the assessment criteria as and when they are adjusted by HM Gov, and ensuring tax is calculated correctly.

The concern is, though, that autoenrolment technology is very new and in most cases is only doing “the essentials”. Rarely is it “artificially intelligent”. It does not automatically adjust itself to ensure the SME remains compliant at all times, or proactively warn SMEs if it thinks they have made an pensions administration mistake. The investment of software engineering time required to enhance payroll software to that level of sophistication is significant. The challenge the payroll industry faces is that SMEs don’t like paying for technology when a free version is available. The risk for employers is that a free payroll tool may not have all the same features as a paid-for tool.

Secondly, it looks as though the rate of Compliance Notices (CNs) being issued by The Pensions Regulator is increasing. 

The ratio we've examined is between Compliance Notices and employers who staged 5 months earlier. (What’s a Compliance Notice? A Compliance Notice under section 35 of the Pensions Act 2008 is a Letter sent by the regulator to remedy a contravention of one or more automatic enrolment employer duty provisions).

Our analysis of TPRs data reveals that between October 2016 and June 2017 the ratio of Compliance Notices issued by The Pensions Regulator to the number of employers staging 5 months earlier was consistently 7.5%. Put another way, for every 1,000 employers staging on 1st January 2017, 75 Compliance Notices would be issued 5 months later (when those employer’s failed to declare their compliance with TPR).

But since June 2017 the ratio of Compliance Notices to employers has started to creep upwards.

  • Quarter ending September 2017, 13,752 CNs issued within a pool of 164k employers. A rate of 8.4%
  • Quarter ending December 2017, 17,949 CNs issued within a pool of 182k employers. A rate of 9.8%
There’s a clear upwards trend over a 6 month period. Given the fact that the majority of small employers are DIY-ing, perhaps we should not be so surprised that the Compliance Notices are on the rise.

The future of pensions technology

Its clear that technology, in particular free technology, is key for SMEs with regard to autoenrolment. However, the next technology innovations are not likely to be in the space between payroll software and pension providers, but instead between pension providers and their members. Autoenrolment could very well be the event which changes the employee engagement game. 

Pension member engagement rates are historically bad. Providers are compelled to provider annual statements but nothing else. Would there be so many lost pots if providers were better at member engagement? Would members reconsider leaving a scheme if they were appropriately engaged, and fully aware about the long term ramifications of not saving to a pension? 

DWP’s pension dashboard initiative is firmly aimed at the soon-to-be retiring members who don’t know what their pension will be. But automatic enrolment has hoovered up millions of younger workers. Digital-native workers.

If the digital natives all know where their pots are, then would they be bothered to use a dashboard to find them? Would digital natives seriously consider moving their pension pot to an alternative provider, with a slightly lower annual management charge, if the alternative provider had no mobile app or online wealth management tools?

Mobile apps, tablets, interactive TVs, smart speakers, talking avatars, social media. These are the channels through which members will engage with the companies they have trusted with their future wealth. Smart Pension fully understand this and have already started to go where no pension provider has been before.

Alexa, “what will I live on when I retire?” 

-- Epilogue --

At pensionsync we love our data. And we love building software. So we could not help but plug the TPR’s data into a little app we created called “Nostradamus” after the great soothsayer himself. Based on the trends Nostradamus has identified in the TPR’s historical data we predict that during period between January 2018 - March 2018, the Pensions Regulator will have issued:

  • 24,611 Compliance Notices (we predict the rate at which Compliance Notices are issued will have risen to over 10% between January and March 2018).
  • 9,704 Fixed Penalty Notices
  • 1,932 Escalating Penalty Notices.
We’ll know how good Nostradamus is when TPR issues their next Enforcement Bulletin. The results will be published as a comment to this blog. If you “like” this blog then you will get an automated update when that happens.

There's an anomaly in the regulator’s data

Whilst we were geeking out on TPR’s data, we noticed something odd. In the 3 months between July 2016 and September 2016, The Pensions Regulator issued 15,073 Compliance Notices.

What’s so surprising about that?

Well, the surprising thing is that in the 3 month period before (e.g. April 2016 - June 2016) TPR issued only 3,392 Compliance Notices. And in the 3 months after (e.g. October 2016 - December 2016) TPR issued only 6,296. In fact, the total number of Compliance Notices issued by the TPR up until July 2016 was 11,151. A spike of 15,073 means that something happened. There was an event which caused the spike. But we cannot figure out what it was!

Can anyone shed any light on this? Answers by comment on this blog please. (Clue - it’s not because of the increase in employers who had to stage in the preceding months. Or at least the published data does not support that theory).

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