Automatic enrolement's mid-year report

In 2014, the pension pundits prophesised, automatic enrolment will hit the rocks.

So far the implementation of `automatic enrolment has been relatively stress free. Employers have been doing what they’ve been told to do and enrolling their workers. And employees have also towed the line and stayed put in their pension schemes and paid their money. However, as the size of the employer staging began to get smaller, we all got a little bit jittery. Would employers comply? Would employees opt out? Would there be enough provider capacity?

As the end of 2014 draws into sight we are getting a better idea of how this year has gone. Or at least the first half of it. Evidence of employers’ non-compliance is starting to appear and the Pensions Regulator has issued its first fines – a £400 fixed penalty each for three employers who were April stagers but failed to meet their automatic enrolment duties. As the number of employers staging has gone through the roof this year, I think only three fines is impressive. It seems employers are getting to grips with automatic enrolment, although I am sure there will be more hiccups along the way.

And it also seems employees are also comfortable with the concept. The Department for Work and Pensions (DWP) has just released its qualitative research into employer compliance and opt-out rates. 46 companies were involved in the research. Their staging dates fell between January 2014 and July 2014 and the research covered 7,200 employees (the employers researched had between 90 and 499 employees each). But 44% of the workforces were already members of a pension scheme, and only 35% were automatically enrolled (the other 21% weren’t eligible for various reasons).

Out of those automatically enrolled 12% opted out. OK, that’s a rise from the 9% reported for the 2012/13 intake, but still in the great scheme of things a good solid result. Even when you take into account that a further 2% stopped contributions in the two or three months after the opt-out period closed, bringing the ‘real opt out rate’ to 14%.

Those who opted out tended to be older and/or part-time workers. The main reasons they gave were affordability, already having adequate retirement provision, being close to retirement, employer contributions being too low, or planning on moving jobs soon. So far, all very predictable.

But the research is also interesting for what it tells us about how employers are tackling the automatic enrolment problem, especially when compared to bigger employers last year. For example their implementation costs were a lot lower – usually between £200 and £700. That’s mainly because they did the work in house – the HR professional just added it to the long list of other work they had to do. Bigger employers last year employed consultants and got legal advice so pushing their bill skywards. Instead, the main cost for the employer class of 2014 was time. And their advice to other employers is to take six to nine months to prepare, rather than the three to six months they crammed the changes into. You have to feel sorry for the poor HR professional who got automatic enrolment dumped on their desk.

Of course, smaller employers enrolling later this year and over the next couple of years won’t even have the luxury of a HR professional. So, either the boss will have to do the automatic enrolment work or they will have to employ someone else to do it, which would add to their costs.

This year’s employers are comfortable they can cope with future administration costs. But the escalating cost of employer contributions worries them. The way they think they will cope is by adjusting salary, slowing recruitment or increasing prices. All obvious strategies. I would like to see - in time - a bigger study by the DWP into how employers coped with the costs, and the implications for the labour market.

Finally, the other major concern at the start of 2014 was if there was enough provider capacity to cope with all the employers staging. For our sample of employers that didn’t seem to be a problem. The majority used mastertrusts and the most popular by far was Nest.

So, what’s the verdict of the mid-year report into automatic enrolment? Well, all things considering, it seems to be going fine. Not too many employer fines and a nice low opt out rate. And Nest hasn’t fallen over. Yet. One cynical thought, however, is 46 employers is a very small sample out of the thousands who had staging dates between January and July, and so there are always going to be problems which the research hasn’t uncovered.

Another concern is these are still employers who are pensions savvy – almost half the workforce are already pension savers. Once we move onto employers who are pension virgins, however, a different picture might emerge.