Key speechesWhat does compliance look like?
Graham Brammer, executive director of employer compliance regime, speaking at the NAPF ‘2012’ hot topic, June 2010
Well after all this morning’s discussions on NEST and the shape of pensions reform as a whole, I’m not going to dwell too long on the big picture.
We were of course pleased to see support for auto-enrolment in the coalition agreement and we are continuing to push ahead with our work to design and implement a compliance regime that will make it simple and straightforward for employers to comply with their new duties.
We continue to work towards our target date of 2012 and are on track to meet that deadline. The design of the regime is moving steadily forward, and although I have to tell you now that I don’t have all the answers you may want, what I hope I can give you is a clear flavour of our intentions around what compliance will look like, and the reasons that we’re heading in this direction.
Although we push ahead with our work, we are of course alive to any changes that may happen and again this means that details I talk about today must be taken in the spirit of the changing times we’re currently in.
So let me jump straight into the world of employer compliance.
Employer duty
Very quickly - as it stands at the moment - what are these new duties?
- first of all employers will need to automatically enrol all staff into a qualifying pension scheme - all eligible staff – within prescribed age bands and earnings bands.
And into a scheme that meets the qualifying criteria set out in the act – whether that be an existing occupational scheme, a group or stakeholder personal pension, or nest.
- second - make minimum contribution of a band earnings
There has been a lot of talk about the appropriateness of the total 8% contribution, (and this may well be part of the review) but to make our stance clear, this is a floor not a ceiling for contribution levels. We hope that all employers will look carefully at the value their scheme offers to their members and will set contribution rates based on that.
- thirdly employers will need to provide information to staff so that they understand that they have joined a scheme, what contributions are being paid by them - and by their employer - and that they have the right to opt out if they wish to.
- and finally, employers (and schemes) will have to maintain appropriate records about members, their contributions and their status within the scheme.
Record-keeping - as part of overall good scheme governance - is a particular focus for us at the moment. It is also is one of big pushes we are making in the run up to auto-enrolment so I’ll come back to it a little later.
Just before I move on I’d like to touch very quickly on non-compliance. I’ll talk more about enforcement later but just briefly…
The act clearly sets out some activities that employers must not engage in, including encouraging jobholders to opt out of the scheme, or discriminating against them during the recruitment process.
In enabling compliance which is our objective, we will also be making it clear that we will take a very dim view of such activity if it does happen.
But I won’t go into this too much now as I’ll talk about enforcement later.
Role for trustees etc
It’s the employer’s role that is the most talked about when we discuss auto-enrolment, but of course there will also be new and different challenges facing trustees and advisers too…
While it’s the employer’s responsibility to make sure that the scheme they auto-enrol their staff into meets the qualifying criteria, trustees will be at the front end of that process, responsible for making the changes to their scheme.
And of course trustees will need to manage the everyday issues that go hand in hand with an increase in membership - basic things like managing a bigger volume of records, as well as issues like reassessing whether the investment strategy remains appropriate for the new - and possibly very different - membership profile, and communicating with a new and potentially much less engaged audience.
Records are a particular focus for us at the moment…
And for the most basic of reasons. More members means more records, which means the issues we see now will only get worse.
The most simple of scheme functions, like knowing who to pay a pension out to and when, come down to accurate records.
Schemes need to know who is in their scheme, how long they’ve been in the scheme, how much they earn and contribute, and when they are due to retire.
I know it sounds simple but so often these basic details are absent or out of date.
The latest research we carried out shows that less than 20 per cent of the schemes we surveyed have checked they currently have all that really basic data like date of birth, address, date of joining the scheme, and whether the member is active or deferred.
And of those schemes, over half were missing more than one piece of that data.
I simply can’t underestimate how important it is for all members that this improves. It’s simply not good enough to enrol new members into schemes where data issues already exist and where there are no plans in place to deal with these issues
We feel so strongly about it that we’ve published updated guidance - just a couple of weeks ago - and in it have set recommended targets for data accuracy.
From now on we expect all new data to be 100 per cent accurate…which - though obviously strict - we do think is achievable and is absolutely necessary.
And for all legacy data - data which is already on file - we want schemes to reach 95 per cent accuracy by 2012.
We know that some concerns about these targets and about the associated costs linger within the industry, and we will work with individual schemes if there are significant issues that cannot be easily dealt with.
But what we really want to see is that where data isn’t up to scratch, trustees are taking a long hard look at the issue and working out how they can be sure that in the future no data is missing - and how they can fill in any gaps in their current data.
We are very specifically not being overly prescriptive about when, how or how often schemes need to review or reassess their data. Every scheme is individual and will have its own set of individual needs.
But what we do say is that schemes need to look sensibly at their own specific circumstances and act accordingly.
If there are a lot more deferred members than actives then there will be fewer transactions and less new data to keep, if it’s a small scheme with few members leaving or joining then you won’t need to review the data every month, once a year might do. But that does not mean that keeping data accurate should be allowed to slip down the priority list. It needs to carefully and appropriately managed.
A colleague recently told me about a meeting he’d had with the trustees of a very small scheme. One of the members in his scheme, he said, invested in 19 different funds every month… and they weren’t necessarily the same 19! That’s 228 transactions each year. While as yet it hasn’t happened, he always fears the day that that member’s salary changes, or the contributions change and the records aren’t updated. That could be hundreds of contributions to top up, or pay back, hours of work trying to figure out whether funds had done well or poorly, maybe even compensation to be paid. And that would only be one member.
So, though I digress a little, the point is that inaccurate or missing records can have a significant impact on a scheme, even more so in DC than DB even, so trustees really need to focus on getting it right, and especially as they look ahead to the prospect of auto-enrolment and significant membership growth.
Role for The Pensions Regulator
I’ll just trip through the next couple of slides as I’ve already alluded to the fact that our new role and responsibility is to maximise compliance with the new employer duties. And that we are working now to design the processes that employers will have to go through and the way that we enforce should we need to.
As I mentioned at the beginning I can’t give you all the answers now but as promised I will give you a picture of our current intentions.
So with the apologies aside, for the next few minutes I’m going to take a look at our approach to compliance, what some of the processes might look like and also how we plan to communicate the compliance requirements.
Our approach
On the slide now you can see the journey that we expect employers - and schemes to a certain extent - to go on … there should be no surprises – understanding the duty, enrolling members into an appropriate scheme, registering with us to show that they have carried out that duty, maintaining the membership - which includes things like communicating regularly and effectively and keeping accurate and up-to-date records - and finally paying scheme contributions.
What perhaps isn’t so clear here, but we hope is self evident, is that this isn’t a simple linear process that stops once the employer has started paying contributions. New starters will need to be enrolled, the employer will need to re-register with us every three years, communications and payment of contributions will need to continue and be monitored and of course new records will need to be collected, stored and monitored.
Employers can however remember three distinct phases that they need to go through, enrolling, registering, and maintaining the scheme.
Running alongside this journey, and in fact right through this whole journey will be our tried and tested regulatory approach of education, enablement and enforcement - used as a last resort.
Compliance for us will follow those three main stages…
So let’s start by looking at education.
Education
Education is at the very heart of compliance.
The processes can all be in place and the systems ready to go, but if you and everyone else in the industry doesn’t know what they need to do then it still won’t work.
So this is where we start – and events like this one today are an important part of that process.
Of course our biggest audience for the compliance messages is employers, the biggest challenge being that many of the million plus employers we will need to reach will never even have heard of us and will be unfamiliar with the world of pensions as well.
The eventual volume of employers we will need to communicate with will be in the region of ten times the number who we currently know.
To help us get a better picture of how to reach this new audience, we’ve carried out research into the attitudes and behaviours of employers - and their advisers.
The most notable thing for us is the value placed on advisers.
Almost without exception employers said that they would turn to advisers, be they IFAs, lawyers, accountants, business advisers or professional and trade bodies to help them to understand and carry out the new duties.
So for us it’s absolutely vital that education about compliance reaches the adviser and intermediary audience too.
What we really need to be careful about is that this doesn’t become a game of Chinese whispers. Our message needs to get out undiluted. So we’ve been in conversation for some time now with many of our major stakeholders – those representing employers such as CBI, EEF and FSB, as well as those representing the professions such as the accountancy bodies to make sure that we are all, if you excuse the cliché, singing off the same hymn sheet.
The message needs to be clear and there needs to be consensus over what we are trying to say.
Our message is simple.
You need to start thinking about whether you may need to change or adapt what you do now to meet the new duty requirements. And of course find out when the new applies to you. All of the duty dates are on our website – all you need is your PAYE number and number of employees.
Info already on our website – downloadable leaflet – simple guide for employers. More later this year – interactive tools etc…..
Then as we move closer towards the first and then ongoing duty dates, the communication will be more direct. We intend to contact each individual employer directly 12 months before their duty date to let them know what they need to do. Then again 3 months before their duty date to remind them that they need to take action if they haven’t already.
The final point which we have perhaps spoken less about is how our communications will impact your perceptions of us and our role.
We know that for everyone to sit up and listen we need to have an authoritative voice and to build our profile with our new audience - as well as build the profile of our new work with our existing audience.
You will already have seen us update the content on our website to make it easier to find and simpler to understand and you can expect to find more updates as we make more noise about employer compliance.
For instance later this year we will publish a set of interactive tools that will help employers to step through what they have will have to do.
We take this responsibility very seriously and will be as frank and clear as we possibly can.
Enablement
Alongside education comes enabling, by which we simply mean making it as easy as possible for employers to comply.
In developing the process that employers will go through to register we have looked at a number of similar projects to see what works and what doesn’t.
How simple the registration process is will be a significant driver of compliance. Registration will also be our main tool for monitoring compliance.
We intend to make registration an online tool.
Although I don’t have it here today we have already been out to share our registration prototype with some of our major stakeholders - the people who represent you - and they have given us some really positive feedback – as well as of course some constructive criticism which we have taken on board.
Another major strand in our drive to enable compliance is the building of contingent consent.
It’s based on the idea that behavioural change is achieved if there is mutual acceptance of the need for the change and the understanding that those who don’t or won’t take part in that change will be caught and penalised.
It’s like paying tax.
We all consent to pay our taxes because we want the services they pay for - like schools, roads and health services. But we do it knowing that everyone else has to pay tax too and that anyone who doesn’t should and will get caught. And therefore if we don’t pay our taxes we will get caught too.
The registration process will be an important part of achieving contingent consent because it will enable employers to demonstrate that they have done the right thing and be safe in the knowledge that we can verify whether all employers are doing the right thing too.
To make sure we know who should be complying and when, we will use HMRC PAYE data.
Enforcement
So finally what everyone wants to talk about do they??, enforcement.
Despite our best efforts to educate and enable the employer audience, whether because they haven’t understood, haven’t been able to, or are wilfully ignoring their responsibilities, we know that there will be some employers to do not comply with their duties.
We hope that this will be very much the minority but we will nonetheless have robust processes in place to detect non-compliance - through triggers in the registration system for example.
We will also work closely with other agencies to identify specific sectors that are more likely to be non-compliant than others. From this work we will create plans to focus our educate and enable messages in these areas to try and drive down non-compliance.
If and when we do see non compliance, the educate, enable and enforce loop will come into play again. Employers will be given the opportunity to put things right before we take any enforcement action.
In essence – though the details are still to follow - the process will be – 1. We send a gentle reminder…. 2. A warning notice…. 3. A compliance notice… and 4. If there is still no action, then we will resort to using our powers.
So, though I finish on enforcement, I hope today has also given you a better picture of how and why we are focusing our attention right now on education. This begins now with the adviser community but – in good time - we will be contacting all employers directly to explain what you need to do.
And that it’s clear that we are determined to make the registration process as easy as possible - online, quick and simple, so that it doesn’t take anymore time than it absolutely needs to.
And of course, though I do sometimes think we sound like a stuck record, that we will apply the educate, enable and enforce approach, giving employers ample opportunity to comply and providing as much support as we can.