Government should not use major firms as auto-enrolment guinea pigs, says expert

Pensions law specialist Tom Barton of Pinsent Masons, the law firm behind Out-Law.com, criticised comments made by Pensions Minister Steve Webb in which he promised to deliver a simplified auto-enrolment compliance framework for small and medium-sized businesses based on the lessons Government learn from the way the regime has operated for large firms.

"There have been a number of stages over the years in relation to the development of the auto-enrolment framework in which the Government has had an opportunity to make auto-enrolment compliance easier," Barton said. "The last big opportunity was over two years ago when the independent review into 'making auto enrolment work' gave the Government the opportunity to address the complexity - and introduce easements for smaller employers. However, the consistent message has been that there should be a 'one size fits all' approach to auto enrolment."

"For the Government to say now, after implementation is already underway, that big companies are to be the testing ground for making things easier for SMEs is an admission that the auto enrolment regime is too complex in the first place," the expert added.

In a speech earlier this week, Pensions Minister Steve Webb said that the Government will make compliance with auto-enrolment rules easier for small and medium-sized businesses by reviewing whether systems used by "the big guys" were unnecessarily complex.

"What we will do, is practice it on the big guys, learn our lessons, and then do a round of simplification so that by the time we get it to small and medium sized firms those irritating things that don’t really need to be there and the things that don’t make sense we can iron out," Webb said, according to a report by the New Model Adviser.

Barton said that Webb's comments would come "too late in the day" for many businesses, including pensions providers.

"Large employers and many smaller companies too, have already installed new systems to cope with the complex nature of auto enrolment compliance," he said. "A lot of time, effort and money has gone into ensuring that payroll processes are aligned with auto enrolment requirements".

"Providers of pension schemes and the services required to get auto enrolment off the ground may find that they have developed unnecessarily complex systems for their target market," Barton added. "Webb's announcement will be frustrating for big employers and providers who have been saying all along that this is all too complicated."

Barton said that the comments could "potentially signal good news" for smaller employers which have yet to move towards auto enrolment compliance as they may find they have to "contend with a less onerous system". However, he said that the companies will remain partly "in the dark" about what standards they have to comply with under the auto enrolment regime until the Government issues more detail about the system 'simplifications' it will deliver.

Since 1 October last year companies with more than 120,000 employees have had to automatically enrol 'eligible jobholders' aged between 22 and the state pension age who are earning more than £8,105 a year into a workplace pension scheme. Work pension schemes must meet minimum regulatory requirements in order to be suitable for auto-enrolment. From 1 February all companies with more than 20,000 employees will have had to have implemented auto enrolment.

Other firms will have to start auto-enrolling their workers into a pension scheme which meets minimum requirements, or the NEST scheme instead, from later 'staging dates' running into 2018. By the end of 2013, all companies with 500 employees or more will have begun automatic enrolment.

Once the process begins, employers will be legally obliged to make contributions towards the pensions of automatically enrolled workers who do not opt out of the scheme. Between six and nine million of the 11 million people expected to be eligible for auto-enrolment will be new savers or saving more than before, according to Government estimates.

However, while the principle is simple the method of implementation and compliance is anything but, according to Barton.

"What we have is a legal framework that looked okay in the abstract, but as soon as it was tested against the way employers operate all the tensions became obvious," he said. "Payroll arrangements, data protection, high earners and salary sacrifice have all become a huge headache in the context of auto-enrolment."