Auto-enrolment compliance; can we trust ourselves to be good?

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I like to tease the Financial Times journalist Jo Cumbo that she can trust no-one because of her heritage! Jo is Australian and this blatantly xenophobic comment is based on a British prejudice that Australians find compulsion acceptable as compliance is in the blood. A second prejudice, that the British can trust one another, falls into the same category as the phrase “it’s just not cricket”.

Neither cricketers or Brits can be trusted not to cheat and Australians are not just a bunch of third generation criminals.

And yet…..

The Australian Superannuation system compels savings behaviours and demonstrates gross inefficiencies while the British auto-enrolment system, relies on nudge and honesty – and appears to be working very well indeed. Could we cope with a mandatory system – I suspect the answer is “no”, would the Aussies cope with auto-enrolment – I don’t know. My innate xenophobia prevents me proceeding down that track!

large amounts of the data recorded is recorded wrong

Auto-enrolment compliance relies on trust!

The Pensions Regulator has recently published its “Auto-Enrolment; Commentary and analysis: April 2017-March 2018”. These are the highlights.

At the end of March 2018, more than 9.5 million workers had been automatically enrolled into a workplace pension. 1.1 million employers had completed their declarations of compliance. Only a year earlier it was half a million employers.

The proportion of UK staff in a workplace pension is 84%, up from 77% last year Total amount saved in workplace pensions in 2017 was £90.3 billion, up from £86bn last year.

In 2017, the Regulator received 90 whistleblowing reports alleging an employer was trying to induce a worker to opt out of the workplace pension. Of those, 53 resulted in cases

The number of cases opened by the Regulator to investigate possible breaches of AE rules by employers more than doubled to 4000 in 2017. being created for further investigation.

Between April 2017 and March 2018, the Regulator used its formal powers on 102,497 occasions, a 52,429 increase in the use of its powers from 2017. The number of compliance notices issued rose from nearly 34,000 last year to nearly 61,000 this year

The number of £400 Fixed Penalty Notices issued when an employer fails to comply with a statutory notice for failing to meet its AE duties doubled to 28,864 in 2017/18 from 12,181 the year before.

The Regulator said initial data indicates that employer compliance with the first increase in contributions (2% to 5%) has been “very high”.

Jo Cumbo, commenting on twitter – summarizes the situation.
Employers self-certify compliance with their workplace pension duties.
The Regulator does not check each individual employer to see if this is true.
The Regulator (700 staff) is not resourced to do this.
There are more than 1m employers who have declared compliance
We are left to draw our own conclusions as to whether the Pension Regulator’s approach is fit for purpose. The implication is that there is not enough regulation to go round.
Is Auto-Enrolment compliance sufficiently resourced?
Certainly, Jo Cumbo is not alone in suggesting that it mightn’t be
Recent research from PensionSync, suggests that large amounts of the data recorded is recorded wrong and that some mis-collection of funds and even mis-claiming of double tax-relief is going on.

Certainly, we know that there is systemic non-claiming of HMRC incentives for those on low-earnings who are auto-enrolled into net-pay schemes and get no incentive (despite it being part of the deal).
I would divide non-compliance into the categories of the confessions
Ignorance
Some employers and payroll officers aren’t very good and many providers assume they are.

Weakness
It is easy to allow bad practice to persist, for fear that exposing it – will lead to trouble, both to the whistle blower and the employer

Own deliberate fault
There is a steady stream of employers who deliberately lie about auto-enrolment and set out to keep money in the company, rather than in their employee’s pension pots.

TPR’s regulation is – to me – proportionate to my perception of the problem. Most non-compliance is through ignorance and incompetence, some is through weakness and should be whistle-blown and a small part is deliberate.
Any sensible strategy from the AE enforcement team ought to aim at educating the ignorant, empowering the whistle-blowers and coming down with an iron fist on employers who steal from staff.
In my opinion, this is what TPR are trying to do. The numbers of people they are finding in these categories is small, the issue is not in their method, but as to whether sufficient resource is being allocated to dealing with these three issues.
How much is enough?
We yearn for perfection. Actuaries, pension administrators and regulators have yearned for GMPs to be reconciled and equalized for decades. We know that had everyone levelled up initially, the cost of putting things to a median state today, would never have been incurred. It is cheaper to do things right first time, and in the case of GMPs – it would have been cheaper to have produced a simple system that gave everyone full shares.
No doubt we will look back at the initial stage of auto-enrolment with its various contribution basis’, phasing and self-certification of compliance as equally over-complex. And yet, most payrolls see AE as BAU and most employers now count pension costs as part of their financial model. Were we to seek perfection, we would look at all the consultants we have employed and agonize over whether we should have included them. We could look again at our pro-rata allocations against AE periods and we could try to unravel the complex contribution histories to ensure that there were no winners or losers – but absolute compliance.

TPR could audit on this basis. The cost of regulation could outweigh the benefit of increased compliance and the cost of increased compliance could prevent employers ever contributing beyond the AE minima to staff. Regulator’s talk of proportionate regulation; they know that resources are finite. There is an efficient frontier out there between enforcement and engagement. The more that TPR can encourage engagement, the more efficient that frontier becomes.
The British philosophy of “natural compliance”.
To my mind, natural compliance (engagement) beats enforced compliance every time.

We have in auto-enrolment, something of a success story, even with the employers for whom pensions has become a compulsory part of business life for the first time. There is a natural link between work and pensions, it’s in the title of the department and it’s in one of my favorite synergies “work is boring, pensions are boring”. But boring is good, just like exercise and not smoking weed or tobacco. Boring is good because it leads to exciting later. Deferred gratification is something we all think is good, especially when we know that getting old is tough! I will continue to applaud the Pensions Regulator, as I think Jo Cumbo is doing. We could treble the compliance teams in Brighton, but would we cut breaches by 2/3 – or make auto-enrolment more of a success – I doubt it.The Pensions Regulator is in a good place on auto-enrolment; it’s good – not perfect. Philosophically – I think it’s good enough for now! Practically, I think it’s good enough for now.We are learning to trust auto-enrolment and that is the first step for 10m of us – for whom pensions have been – till now – a rich person’s play thing. To fulfil on auto-enrolment stick, the workplace pensions have to deliver; that will require a new level of compliance and a new order of trust.

 

 

 

 

 

 

 

 

 

 

 

 

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11 years providing financial advice to individuals directly and through employers. 14 years within insurers working with advisers to provide better DC and DB outcomes. 25 years left to make a difference!

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