Forget Osborne's freedoms, auto re-enrolment is the next industry challenge

Almost five million additional workers have been captured by workplace pension saving as a result of auto-enrolment (AE). Launched in October 2012, AE will celebrate its third anniversary later this year.

More pressing, however, is the fact that the largest employers are now facing the first phase of re-enrolment. This occurs on three-year cycles to ensure eligible jobholders who opted out in the previous round are nudged again.

The government has made amendments to draft legislation to reduce the burden of AE on employers. It has agreed that people who are set to leave the business, or who opted out within 12 months of re-enrolment, do not have to be re-enrolled.

Exemptions were also made for people with tax protected status to prevent them from making future contributions that would leave them liable for a big tax charge. Quantum Advisory partner Stuart Price describes the amendments as "common sense". He says: "It was ludicrous that they had to be put into a pension arrangement within a couple of weeks of leaving the employer."

The challenges

AE is hailed as a major success story, with the average opt-out rate among FTSE 350 firms just 6%. But October 2012 was merely the starting point and employers face new challenges in the re-enrolment process, which will begin as early as July.

Punter Southall head of defined contribution (DC) consulting Alan Morahan (pictured) warns that payroll and software systems may not be ready for re-enrolment. As such, employers need to ask their providers if there will be any additional costs for system upgrades. They also need to ask when the system will be ready for re-enrolment.

Morahan adds: "The real danger is that any inconsistencies, non-compliance, or any mistakes that have been made, will just become further entrenched into the process when a company goes through re-enrolment. They would be perpetuating the problem to an extent that might mean it is nigh on impossible to unravel, and probably very expensive."

Companies can carry out re-enrolment on any date three months prior to, or after, their original staging date. This gives them a six-month window for completing the process. They must be careful to not to confuse the staging date with the actual date they auto-enrolled, however.

This flexibility means companies can plan the project around their other business commitments. Sackers senior associate Ferdinand Lovett says: "If you're clever about it, you can tie it in with something that works for you. If you're very busy in your business at a particular point in that six months, the idea is you don't have to do the re-enrolment process until a time that suits you, provided it is within that window.

"A positive message from this is there is at least the potential to give yourself as much lead time as possible to make it work for your business."

Now Pensions chief executive Morten Nilsson thinks one of the biggest challenges will be communication. He says: "Many employees will be completely unaware that they will be re-enrolled and it could be a cause of confusion and frustration."

Although there is no obligation to write to workers about the re-enrolment deadline, Morahan thinks it is a good idea. He adds: "We're going to recommend to our clients that they do because I think it will come as quite a shock to people who were auto-enrolled and opted-out. Most will have forgotten they were going to be re-enrolled at the anniversary date."

Employers undertaking re-enrolment will have to make a new declaration of compliance to The Pensions Regulator (TPR). But figures suggest many companies have already struggled with this obligation. The regulator issued 1,139 compliance notices in the final quarter of 2014, with the majority related to a failure to complete the declarations on time.

A TPR spokesman told PP: "In the coming months, the first of the large employers who implemented automatic enrolment in 2012 will be approaching re-enrolment. The Pensions Regulator continually reviews all of its communications and has met with a selection of employers to ensure the re-enrolment information we will provide will be suitable.

"Engagement so far has shown that large employers view re-enrolment as ‘business as usual' and understand what they need to do in order to comply with their duties."

Although most small to medium-sized employers (SMEs) will not face re-enrolment for another three to six years, experts are concerned about their level of awareness. Morahan says: "I think it's probably dropped down the ‘things to do' list because there's been so much other stuff done. A call to action isn't a bad thing so it gets it back on the agenda."

Price adds: "It's quite frightening how quickly the time has come around. Some SMEs might forget about re-enrolment or put it to one side until it jumps out at them a bit too close to the date. Again, employers need to think about it carefully."

It also remains to be seen how ‘freedom and choice' will affect future opt-out rates. Price says: "Maybe these new flexibilities and the fact people can take all of their pension as a one-off lump sum, or a number of lump sums over a period of time, could make pension schemes more attractive than they were three years ago.

"But again, I think the reason people didn't join three years ago was because of the cost. Contribution rates won't have gone down; in fact they've gone up. So what would change that person's circumstances to re-enrol and join the pension scheme three years' later? I don't know."