Automatic enrolment: how the regulator will enforce the regime

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CBI conference
Sept 2011

Automatic enrolment: ‘How the regulator will enforce the regime’

Good morning, welcome and thank you.

It’s a pleasure to be here today and to have this opportunity to share some thoughts with you about our work at this busy and exciting time, especially around automatic enrolment – which has moved from a theoretical issue to a real one for many employers and providers over the last few months.

I have been asked specifically to talk about automatic enrolment and the enforcement of the regime. And I will come to that.

But before I do I’d like briefly to set this work into context. 

Overview of TPR work

This has been another busy year and a year of ongoing changes and challenges in the pensions industry. We have three major jobs to do:

1. Continue to improve the position of DB schemes;
2. Work with the industry to support a uniformly high standard of DC provision;
3. Ensure maximum compliance by employers with the new duties.

Many of the DB schemes we work with are facing a range of challenges that keep them, and us, busy. Continued market volatility and an increased focus on de-risking present many schemes with difficult questions on risk and funding. But we are also seeing a growth in corporate transactions and restructuring in a world of weaker employer covenants and a continued trend towards more DB closures – both to new members and to future accrual which can exacerbate both challenges.

This shift away from DB also highlights the growth of DC provision, and the risks that members of this type of arrangement face. In turn that shines a spotlight on issues like governance of investment practices, the charges levied in DC arrangements and the protection afforded to members of DC schemes. Given the diversity in the design of DC schemes and the governance arrangements of DC provision, the regulatory challenge is to focus on the key issues that will improve member outcomes.

Our discussion paper (PDF) published at the beginning of this year set out the areas where we think the industry can make progress in creating a safer and more stable environment for members, and our work alongside our industry partners is in full swing.

Automatic enrolment is accelerating many of the current trends, which makes this not only a very busy time, but also an interesting and exciting time to be working in pensions, and to be working in pensions regulation.

Over the next few years all UK employers will be subject to new pension duties.

With this significant growth on the horizon, the pensions industry as a whole has a responsibility now to make sure that the pensions on offer are fit for purpose. That is they provide an environment that affords members a safe place to save and an environment where the choices they make – or are made on their behalf - actively contribute to them receiving a good outcome from their savings.

That brings me back to our automatic enrolment challenge: to ensure that every employer plays their part in making this a success - complying with the new duties, to enrol their employees in a pension scheme; provide them with the right information; and not engage in any prohibited practices in recruitment or inducement. 

The employer landscape

The scale of this regulatory challenge makes it a new experience for us. Over a million employers - of all shapes and sizes - will eventually register with us.

And we need to be ready to communicate and support them all.

To help us target our communication to this very diverse audience it helps to think of the employer landscape as three overall groups.

The 600 largest employers - those with a very large workforce who will be staged in during the first 6 months following October 2012

The 45,000 or so large and medium employers who will be staged in before Aug 2014 – many of whom already offer a pension and will need to review it in light of the new duties.

And finally the million plus small and micro employers - those who will have staging dates towards the end of the 2014 and beyond

These employers on the whole have very little existing knowledge of pensions, have mostly never had any direct dealings with us, and do not universally have access to pension specialist advisers. 

The Pensions Regulator, DWP and NEST roles

Just quickly before I talk about each of these groups and how they can expect to interact with us, both as we prepare and as we implement automatic enrolment, it is worthwhile me setting out where we are now.

Firstly I want to set out the different roles that exist – because there is ongoing misunderstanding, partly attributable to the way that automatic enrolment is usually reported in the media.

Building on the work started by the Pensions Commission, DWP makes policy decisions and has overall responsibility for the shape of the workplace pension reforms. DWP will also run a communications programme, explaining the policy to individuals, so they are aware of why this is happening, and aiming to convince small and medium sized employers that providing a pension is a key component of an employer’s role.

Our role is to ensure that every employer complies with their new duties, including the duty to automatically enrol their staff into a qualifying pension scheme.

We also, of course, have the statutory objective to protect members’ benefits. This includes members of DC schemes and involves ensuring that all schemes available for automatic enrolment are well-run and are capable of delivering good outcomes for members. Confidence in pensions is a critical component of the success of automatic enrolment. A credible regulatory regime is a requirement to build and restore confidence.

NEST is a pension scheme, designed specifically with the needs of low to medium income earners in mind.

NEST has a public service obligation so must accept any employer, but it is important that employers do not think of automatic enrolment and NEST as synonymous. NEST is one of a number of new or existing pension schemes that employers can choose to fulfil their new duties.

What is most important is that employers look closely at the schemes on offer and choose the one which best meets the needs of their workforce.

We will regulate NEST by the same principles as every other scheme.

And like every scheme we will expect NEST to meet our expectations about standards of governance. We also expect that like every other scheme NEST will enable all those automatically enrolled into it to achieve a good outcome from their savings. 

Current employer awareness and knowledge

Secondly I want to set out the current situation regarding employer knowledge and awareness - which I’m sure won’t be a surprise to any of you.

This research, carried out at the beginning of the year, gives us a benchmark upon which to measure our activity from here on in.

In total 87% of large employers (those with more than 250 employees) are aware of the key elements of workplace pensions reform. This is encouraging.

However the figure drops to 69% of medium employers (those with 50 – 249 employees) and to only between 30 and 40% of small and micro employers (those with fewer than 49 employees).

60% of large employers have started to plan for automatic enrolment. But only 25% of medium employers have started planning. And, as you would expect, only 5% of micro employers have begun making plans

One of the more concerning figures is that 12% of large employers said they would leave it as late as possible before thinking about how to comply. And almost half of micro employers said the same.

Encouraging timely engagement with the reforms is a particular challenge – and a situation we need to be very aware of.

However:

81% of large employers and 58% of micro employers agree that the introduction of automatic enrolment is a good idea for their employees, and

74% of large employers and 58% of micro employers believe that it is their responsibility to look after their employees’ long-term future, irrespective of legal duty.

This shows that we have a good base to start from but we clearly have a long way to go in ensuring that employers are ready, and willing to comply.

It’s important to remember also that we have time to ensure that employers are fully engaged, especially in terms of the small and micro employers who will not reach their staging date until 2014 or beyond.

So for the remainder of my session today I want to talk about what we will be doing to ensure that employers are ready and that they comply with the new duties when they are required to. 

The largest 600 employers

 The first group of employers we have focused on is the group of 600; those very large employers who collectively represent around 1/3 of the working population, about 10million individuals.

We are taking a very proactive approach with this group, working one-to-one with key representatives from these employers.

All 600 will have the opportunity to meet with the regulator’s specialist large employer engagement team, either face-to-face or at least by phone.

And all 600 will have access to this team until their staging date. In some complex cases this support may extend well beyond the initial staging date.

This group of employers are so important to the success of automatic enrolment, not only because they represent such a large number of individuals, but also because the way that this group responds to automatic enrolment and to our processes will influence the way that all other employers will respond.

We will learn important lessons from this work, and this experience will inform the work we do with employers further through the staging profile.

But with only around 300 staff at the regulator – to carry out all of our roles - we can’t possibly account-manage every one of the 1.3 million employers who will be affected by the new duties.

So we have to look to the industry. 

Large and medium employers

There are already a large number of employers who offer a pension but who are not themselves experts, or who do not employer their own pension specialists.

As now these employers will rely heavily on the pensions advisory community.

Our latest research shows that, in total, around 75% of all employers will seek advice from an intermediary or pension professional.

Around 40% of medium employers will speak to their pension provider, and around 15% will turn to a pension consultant or EBC.

So already we are working closely with these advisor groups to make sure that they are ready to support those employers who turn to them.

Our detailed guides, which are specifically designed for pension specialists will be a key source of information for many advisers and we trust that they will use them as reference material on an ongoing basis.

Pension providers will also be a vital source of support for many employers – especially employers in this medium group.

This is why we are calling on all pension providers to ensure that their products are fit for purpose.

Employers will need to ensure that the scheme they select meets the basic qualifying criteria, but we also want to see employers choosing a scheme that has the necessary features to enable members to achieve a good outcome from their savings.

For this to happen the industry has to consistently deliver products with the right features – but employers and those working on their behalf, also need a framework for selecting a scheme that is designed with the members’ best interest in mind.

To help employers make a better choice we will shortly publish information that sets out what we think good looks like. This information will set out the principles that underline a ‘good’ DC scheme and the features we believe best enable members to achieve a good outcome.

This is not a speech about DC pensions so I won’t dwell on this for too long, but it is worth me saying that we wholeheartedly support the ongoing debate about the need for better value for money where DC pensions are concerned. The charges levied on members make a significant difference to the outcome of their savings and can cause mistrust and a lack of confidence in saving into a pension.

We highlighted appropriate charges as one of the key elements of DC that enables the member to get a good outcome and we are interested to see how the industry will respond to calls for greater clarity and transparency around DC pension charges.

Small and micro employers

But these reforms will touch people beyond our industry too.

It’s not only the traditional advisers who we are working with. We are also focused on making sure that the many non-pension specialists, like accountants, book keepers and IFAs understand what employers have to do, and are ready to offer support.

Almost half of micro employers and a quarter of small employers are expected to turn to their accountant for advice.

That’s over 500,000 employers, many of whom to-date have had little, if any, dealings with pensions.
At the moment we know that many accountants still feel it’s not their role to give advice on pensions reform, but the numbers suggest they are unlikely to avoid being asked for support.

We are therefore encouraging all accountants, but also IFAs and book keepers to take some time to consider the impact of these changes on their clients and to look at the information about the new duties on our website.

The majority of the employers who will turn to this audience will not reach their staging date until 2015 and beyond and this of course means that their detailed preparations are unlikely to start now. At the moment for this group, and in fact for all employers, the most important message is ‘Know your staging date’.

If you don’t know when the duties will apply to you, you can’t possible know when you will need to prepare.

Any employer can easily find out their staging date on our website. All you need is the number of people in your PAYE scheme, or if you have fewer than 50 employees, then your PAYE reference number.

I urge you all, if you haven’t already, to go to our website when you leave here today and find out your staging date. This is a big change for many employers, especially those who have not previously had any interaction with pensions, so it will take planning. But with enough time to work through the process we believe that all employers will be able to comply on time.

We will make it as simple as possible for employers to comply, and we will provide all the support we can.

There is already an easy online tool which takes you through a simple journey: understanding when you need to comply; recognising which members of your workforce you will need to automatically enrol; knowing how to automatically enrol those staff into a pension scheme; and getting an idea of how much it will cost you in terms of contributions.

This set of tools has been designed with non-pension specialists in mind, so it does not give all the answers. But it does give a good idea of what to expect. Again I encourage everyone to take a look. 

The communication challenge and Capita

 
The scale of this regulatory challenge is new to us and requires a new approach.
In the first six months following October 2012 around 600 employers will reach their staging date. These are the employers with whom we have already been working and who should be fit and ready to comply.

But the nature of the staging profile means that this very quickly increases

By October 2013 around 1,000 employers each month will reach their staging date.

By the time we reach October 2014, upwards of 50,000 employers every month will reach their staging date.

And by October 2015, almost 200,000 small and micro employers every month will reach their staging date.

The task of supporting employers through this requires the ability to manage scale as well as peaks and troughs in activity, and it requires specialist expertise in technology, wide scale customer support and extensive daily web-based communication. And this is why we have decided that the best way to achieve our goal is to work with a partner who can bring this experience to our operations. This partner will enable us to reliably and very quickly increase the scale of our operations, whilst maintaining our existing focus on running a pragmatic and proportionate regulatory regime.

Just this morning we have announced that Capita will be that partner.

Capita will work with us to carry out much of the high-volume transactional work that is central to this new role, and will be responsible for the engagement with employers from the first letter through to issuance of penalty notices.

They will, for example, be responsible for communicating with employers ahead of their automatic enrolment duty dates. They will also help us to distribute campaign messages to employers, intermediaries and advisers. In the longer term they will also operate the customer contact centre.

We look forward to working with Capita to make it as easy as possible for employers to comply.

Paul Pinder, CEO of Capita is in the audience. 

The communication steps

 
Having spoken a lot about the different needs of employers and advisers, let me now explain the basic process as it will appear to an employer - of any size.
Every employer who is subject to the new duties will receive at least two direct letters from us. One 12 months before their staging date, and another 3 months before.

The 12 month letter is a prompt for employers to make sure their plans are in a good place. It will also be accompanied by a checklist that spells out the steps employers should go through as they prepare.

The three month letter is a final reminder; if employers don’t have plans in place when they receive this letter, they really need to get moving.

We have already sent out letters to the very largest employers 18 months before their staging date. This reflects the complexity of the challenges they face in integrating the new systems into their existing processes.

Every employer will also need to register with the regulator once they have completed the automatically enrolment process to show that they have complied. 

Enforcement

 
But the title of today’s session is ‘How the regulator plans to enforce the regime’ so before I finish I must also talk about the way we will deal with non-compliance.
Importantly no employer should find that their staging date comes out of the blue. They will have had two at least two letters from us and they will have had access to information about what to do and when.

But we do know that no matter how much communication we (and Capita) carry out, there will be some employers who will fail to comply.

We will work with these employers to help them comply.

We are currently developing a set of risk factors that will help us recognise potential non-compliance early. We will apply these both proactively and reactively.

Our proactive assessment of risk will include measuring and assessing emerging trends, working in partnership with other regulators who are also engaged in employer compliance, and creating a whistle-blowing channel that will provide a way for individuals to report suspected non-compliance directly to us.

Where we see non-compliance, we will consider the circumstances of each case and, where it is proportionate and appropriate, we will intervene.

This may involve us using our powers.

But as now, we will exercise our powers only where other courses of action have not resulted in a positive solution.

We want employers to know that we will be tough but fair where we see non-compliance.

Our aim is to build a pro-compliance culture, based on the principle of contingent consent - where employers recognise that complying is the right thing to do and that there are consequences if they don’t.

Although all of the details are not yet finalised we can give you an idea of what the compliance and enforcement process might look like.

What we are sure of is that our approach will be graduated.

Following the 12 month and 3 month letters, any employer who does not comply with their duties will be issued a compliance notice. This will direct them to comply with the relevant duties by a certain date. At this stage they have the opportunity to contact the regulator and explain why they have not complied – and to rectify the situation.

In some cases we will also contact the employer during that period to ascertain whether they are taking action.

We encourage employers to tell us earlier rather than later if they are having problems complying.

If the compliance notice or any other communication prompts no action from the employer, we will have no other option than to use our powers to ensure compliance.

At this stage we will usually issue a penalty fine.

Where we issue a Statutory notice the employer will have a minimum of 28 days to comply – or to request a review. If they are disputing a penalty notice and are dissatisfied with the outcome of the review, they can also appeal to the First Tier Tribunal.

And finally, if following the issuance of a fixed penalty fine the employer still does not act to comply, we will consider further enforcement options, such as escalating penalties. 

To sum up

 That gives you an idea of how we will deal with non-compliance, but I hope that you also take away today that any enforcement activity will only come into play at the end of a long journey where employers – all employers – are supported, encouraged and given every opportunity to do the right thing.

We will do everything we can to provide that support for employers. Every employer will have access to tools and information through our website, information that is designed to suit employers with different levels of pensions knowledge.

And every employer will have direct contact from us at least twice, in plenty of time to prepare.

We know that this will be a significant change for many employers, but we also believe that with enough planning and support, it will be possible for employers to be compliant and to play their part in the overall success of these reforms.

Thank you.