Statistics show a recent rise in the Pensions Regulator's and the Pensions Ombudsman's activity relating to a failure to pay pension contributions to defined contribution arrangements. Here are our thoughts on what this could mean for trustees and employers, as well as the continued success of the auto-enrolment regime.
The scale of the problem
Towards the middle of last year, the Pensions Regulator announced its post-COVID agenda to investigate and bring to account employers falling short in their auto-enrolment duties. The risk of spot checks on non-compliant employers, and indeed the announcement itself, was expected to jolt employers into reviewing their auto-enrolment records and processes.
The Pensions Regulator's concerns are backed by statistics showing that in the six months to December 2022 it issued 17,962 notices to employers for unpaid pension contributions, compared with 13,604 in the previous six months. That is, out of a total of 72,531 times it has used its various auto-enrolment enforcement powers, 7,492 times involved the use of escalating penalties where employers had failed to respond to earlier enforcement action.
The figures above are unlikely to represent the full extent of the problem. The Pensions Regulator's finite resources will inevitably mean that it must prioritise cases, focusing on more significant breaches, both in terms of the size of contributions and number of affected employees. The Pensions Regulator's activity will also depend to an extent on schemes self-reporting issues, which may not always happen.
The Pensions Ombudsman is also involved in this area. The Financial Times has recently reported figures from the Pensions Ombudsman showing that complaints about unpaid workplace pension contributions rose by nearly 30% in the 2021-22 financial year, from 539 to 686.
However, whether or not the Pensions Ombudsman gets involved will depend on members identifying discrepancies and initiating complaints against their employers. This in turn assumes employees check information provided about their pensions savings in the first place. It can take some time for disputes referred to the Pensions Ombudsman to be resolved, and in addition the Ombudsman does not have the same "direct" enforcement powers that can be used against errant employers as the Pensions Regulator for whom encouraging auto-enrolment compliance is a key objective. These factors mean that it is in practice more efficient for complaints to be made to the Pensions Regulator (which can penalise employers for non-compliance) than to the Pensions Ombudsman.
Despite this, complaints to the Pensions Ombudsman appear to be increasing and are likely to continue to do so, and reported decisions have included complaints where employers have failed to pay contributions over to their pension scheme. That increase will contribute to the Pensions Ombudsman's workload, and it will also mean that employers have to incur costs and spend time dealing with these complaints.
It would also be a mistake to ignore the fact that employees and members often talk about their grievances amongst each other. In some cases, individual disputes may be seen as test cases by other members and employees. Given the risk of a ripple effect, trustees and employers would be advised to give careful thought to their management of complaints in anticipation of individuals taking their disputes for resolution to external bodies. Depending on the subject matter, they may also wish to consider the benefits of managed communications to the wider membership and employees, and of taking legal advice.
Employer fault?
The considerations above, in particular the reliance on self-reporting and employee complaints, suggest that on occasion breaches will escape through both the Pensions Regulator's and the Pensions Ombudsman's nets and so while the numbers of cases and complaints referred to above are substantial, in practice there may be more. That is not to say that employer breaches are always deliberate, though some may well be.
The findings of DWP's review, marking the 10th anniversary of auto-enrolment compliance, published in October 2022, alludes to this too. The report presents findings from a qualitative research study conducted by DWP between January to March 2022. One its findings was that "Employer pension engagement was often influenced by the amount of knowledge or resource they had. This engagement impacted on how invested (how much resource they allocated to pension provision) or involved (how engaged they were with their pension provision) employers appeared to be in their pension provision. They "took a more ‘paternalistic’ approach whereby employees are ‘looked after’, meaning they typically provided wider ranging support, and considered the impact of decisions on employees. These were often larger employers, or from more ‘professional’ sectors." This suggests that less resourced employers, and those with a less paternalistic approach to their employees, are more likely to be disengaged from the workplace pensions requirements, with their employees missing out as a result.
In many cases, compliance failures may be because of a lack of understanding about employer duties, as indicated in our previous note. The numbers, and the DWP review, strongly suggest more is needed to help employers understand their duties and the risks of non-compliance, particularly smaller employers that cannot afford expert support.
Moving forward
The Pension Regulator has stated at the end of last year that more than 10.7 million employees were paying into a workplace pension in 2021, with the proportion of women saving into a workplace pension jumping by about 50% since 2012. The numbers of individuals aged 22 to 29 saving into a workplace pension more than doubled in the same period.
Those numbers may suddenly increase if the most recent private member's auto-enrolment bill, supported by the Government and currently before the House of Lords for second reading, is successful. The bill implements two key recommendations made by the 2017 independent review of auto-enrolment: to widen the scope of employers' obligations by permitting regulations to reduce the lower threshold for auto- enrolment from age 22, and to introduce a power to reduce or repeal the lower limits of qualifying earnings with the result that contributions are payable in respect of the first pound of earnings.
This being the case, now may be the time for the Pensions Regulator to focus in on how compliance can be better promoted, monitored and enforced, and the resources that will be required to do that. Failing to do so could potentially result in a significant proportion of the working population not succeeding in building up their pensions savings in the way they should, which would undermine the goals of the mandatory auto-enrolment regime.
