From the TUC

The unknown territory of auto-enrolment enforcement

03 Jul 2012, by Guest in Pensions & Investment

From October 2012, the Pensions Regulator (TPR) faces the unenviable but crucial task of enforcing the law on automatic enrolment. Over time, most workers will become entitled to 3% of their salary (within a restricted band of earnings) paid into a pension pot by their employer. Yet the new law will be meaningless for many workers if employers persistently fail to comply with this obligation.

The compliance and enforcement strategy published by TPR last month seems robust, but enforcement of this nature, and on this scale, is largely unknown territory for regulators, and it remains to be seen how tough sanctions will prove to be in practice.

There are a number of measures employers must enact in order to become compliant with the law, including automatic enrolment of eligible employees into a qualifying pension scheme (and re-enrolment after three years in the event of opt-outs), providing information to scheme members, registering details of the scheme and members to TPR, and keeping accurate records.

Just as vital is what employers are not allowed to do: that is, induce workers to opt out of pensions saving, and indicate during recruitment processes that a worker’s decision on opting out will affect the outcome.

The set of measures at TPR’s disposal to ensure compliance and punish the employers that renege on their obligations ranges from written warnings and statutory notices (including orders to rectify unpaid contributions, which might include interest, but probably not the potential investment loss to individuals), to escalating penalties which could reach £50,000 for some employers. Persistent and wilful non-compliance may result in criminal prosecutions, and TPR can ultimately use the Proceeds of Crime Act 2002 to confiscate assets.

There is uncertainty, however, about how often such sanctions will be used. A quick comparison with HMRC’s enforcement regime for the National Minimum Wage might be helpful.

TPR will be reliant on whistleblowing for evidence of non-compliance. HMRC also utilises whistleblowing to gather intelligence, but would seem to be in a much stronger position in this regard. Awareness among workers of their legal entitlements around the minimum wage, and the role of HMRC as a government agency, are clearly much higher than for either auto-enrolment laws or TPR.

TPR will have inspection powers similar to HMRC (indeed these powers were already in place before auto-enrolment was approved, given its role in enforcing the law on stakeholder pensions) but it is not clear how and when reasonable grounds to enter workplaces and request information will be established. If TPR relies primarily on a failure of employers to register their scheme with regulators, there is a question of how long schemes that are registered, but non-compliant in other ways, will go unnoticed.

Inspections will presumably be permitted on the basis of risk-assessments alone, rather than direct whistleblowing (as in the case of the minimum wage) but such assessments will require evidence on the types of employers likely to be non-compliant and/or data on actual contribution levels. As such, we will have to ‘wait and see’ how employers respond to the new laws in practice before risks of non-compliance can be fully assessed.

TPR has suggested that they will be able to ‘name and shame’ employers that persistently refuse to comply. This contrasts with HMRC’s invisible enforcement approach. Naming and shaming firms that breach their obligations may serve as an effective deterrent to other firms. However, it remains to be seen how often this tool will be used, if at all.

It should of course be far easier for TPR to identify whether workers have been enrolled into a pension, and receiving contributions at the appropriate levels, than it is for HMRC to tell if workers are being paid at least the minimum wage for each hour they work. However, monitoring practices around opt-outs will be far more difficult. Unless recruits (or potential recruits) blow the whistle on new and prospective employers, and their case can be proved, it is likely to be very difficult to determine that firms are inducing opt-outs, even where opt-out rates are unusually high.

There is also the key dilemma regarding when non-compliance becomes ‘wilful’, a key threshold which will trigger more severe sanctions from TPR. Understandably, regulators will make every effort to help employers comply with their obligations, and will be reluctant to punish employers who fail to comply ‘inadvertently’. As the strategy document outlines:

There are some employers who will fail to comply whether because they have no understood or have not been able to comply. We will consider the circumstances of each case and, where it is appropriate to do so, we will work with the employer to get them compliant.

Ignorance of the law, it seems, is a valid excuse.

It is also worth noting that TPR has out-sourced some of its enforcement activities to business services supplier Capita. As noted above, TPR already has some enforcement functions, based on the obligation of many employers to offer stakeholder pensions. But its limited activities in this regard reflected the limited nature of obligations around employer-based stakeholder provision.

Under the new system, Capita will principally be responsible for administering compliance notices and fixed penalties, and TPR will retain ‘more complex enforcement activities’. It is not clear how this relationship will work in practice – it suggests, at first sight, that TPR expects that the occasions where sanctions beyond fixed penalty notices will be required will be quite rare.

We should not doubt that TPR is committed to enforcing automatic enrolment. And the coalition government’s decision to extend the phasing-in process, while regrettable, has at least helped to decisively undermine the credibility of any employer refusing to comply on the grounds of cost. But if TPR’s powers or available resources prove to be insufficient to securing full compliance, the success of the policy will be dependent on actual employers implementing it on ‘the front line’. The wide consensus that has shaped pensions reform in the UK over the past decade may be about to face its toughest test yet.