Pensions Regulator's plans for payment monitoring are costly for pension providers and the benefits are unproven, says expert

Out-Law Analysis | 25 Oct 2012 | 11:03 am | 1 min. read

OPINION: The biggest overhaul of pensions provision in a long time has begun – the largest employers must now automatically enrol workers in pension schemes, and smaller companies are to follow. 

To support auto-enrolment, the Pensions Regulator is consulting on plans to get providers to ensure employers do what is required, but the benefits of this plan are not proven and the costs are potentially significant. A less radical approach is called for.

The Regulator has published a consultation document (35-page / 153KB PDF) on plans to make pensions providers partly responsible for ensuring that employers keep up pension payments.

Asking providers to do more is understandable - employers do not all have the time, skills or commitment to get on top of pensions. But the plans demand complex and costly action from providers that may not be worthwhile. Ultimately, pension savers will bear any additional costs.

Current legislation requires defined contribution occupational pension schemes to have an up-to-date payment schedule, setting out contribution rates and due dates for payment. Personal pension scheme providers must monitor the payment of contributions. Trustees/providers must also report materially significant failures to pay contributions on time. Trustees of occupational pension schemes are not under a direct duty to monitor payments, but the Regulator infers this from the duty to report payment failures.

The Regulator now proposes to require trustees/providers to carry out a reconciliation of contributions paid. Providers would need to obtain the pensionable pay information from each employer in a suitable format, and they would need software to check that information against contributions received and contribution rates.

To do this, pension schemes will have to make software changes and they will have to do this just after they have invested heavily in auto-enrolment compliance.

If necessary, such investment should be made, but the case for this investment is not made out. Pensions providers already monitor, and alarm bells ring when there is a payment failure. They may not reconcile figures for each pay period, but they can spot late payments or significant drops in amounts paid.

To reconcile payments for every pay period would involve a significant investment by providers and there is no evidence that this would achieve much.

Detailed information will not usually help. In many cases where there is a payment failure it is down to the employer simply not having the money and being in financial trouble. While knowing this is important, reconciling payments exactly does nothing to improve the chances of getting payment out of a company that is tottering on the edge of insolvency.

The Regulator should recognise that this proposal comes with a cost and should only go ahead if the cost brings a worthwhile benefit. Otherwise, an unnecessary cost will simply be passed on to pension savers.

Simon Tyler is a pensions expert at Pinsent Masons, the law firm behind Out-Law.com