Over a decade has passed since the introduction of auto-enrolment for pensions in the UK. At this milestone anniversary, we sat down with FreshPay founders Clare Haynes, Jennie Gillam & Nicola Hageman to look back on the past 10 years; has the scheme been a success, what was their experience in the early days and what could the next decade bring.
What is auto-enrolment and why was it needed?
Automatic enrolment was introduced by the UK government in 2012 in order to increase the number of people saving for retirement. Under the scheme, employers are legally required to set up a workplace pension for qualifying employees and contribute. It was rolled out in phases depending on the size of the organisation, and since its inception, more than 10.7 million people have been auto-enrolled with their employer’s help.
In 2019 the phased introduction was completed with the minimum contribution being increased to 8% of qualified earnings with 3% coming from the employer. Contributions are deducted from payroll and paid into the pension on the employee’s behalf unless they formally request to opt out.
How difficult was it to implement at the beginning?
Reflecting on what it was like when the scheme was first introduced, FreshPay Co-Founder, Nicola remarked, “There really was no support or guidance at the beginning. So much was in the dark on how everything would work in practice”, she continued, “There was legislation in place but companies were very much left to find their own way, especially the smaller organisations who had a little longer to get everything set up due to the staggered rollout.“
As accounting professionals, the team was stepping into the unknown. There was no information about setting up the workplace schemes, with only one provider mentioned in the initial stages which was the government scheme, the National Employment Saving Trust (Nest). Alongside figuring out the requirements, they would have to source the appropriate vendor options for their clients and make sure they were partnering with the best providers.
Initially, the team didn’t know who the companies were that they could recommend clients should set up pensions with. Co-Founder, Jennie recalls “I had companies contacting me to say “partner with us and we can do it for you”, however they were going to charge an astronomical fee to our clients for the setup. When we then figured out the process ourselves, it turned out that the mentioned fees were not even required.” She continued, “Thankfully we figured out what was needed and were able to ensure our clients got the best, and most cost-effective solution.”
What was the breakthrough moment?
Although the process contained several different steps – well known now – there was no step-by-step guide at the time. The communication shared wasn’t thorough, and there was no guidance on what communication needed to be given to the client. Co-Founder Clare shared, “As accounting professionals, we knew which employees needed to be assessed and how to assess them, but there was no help on how to put the results of that assessment into place.” She continued, “We initially had no idea how it would be handled in the process through payroll. The initial paperwork also included the Declarations of Compliance which seemed extremely complicated.”
Guidance came in the form of a couple of new vendors to the market. The introduction of auto-enrolment brought to the market some purpose-created companies such as Smart Pension and Now: Pensions, two organisations that were extremely helpful at the beginning with providing additional information outside of the government guidelines. Jennie also registered as an advisor for The Peoples Pension, with B&CE Holdings who shared their knowledge too.
As it turned out, the first implementation had to be done very quickly, with a third party having let the team down. Once one was set up, it was easy to follow the same process for clients down the line.
How has the scheme developed since the start?
In earlier days those organisations who were doing things themselves were more likely to move to a third-party provider for help, therefore payroll professionals became even more of a necessity and the market has become more stable.
Today, auto-enrolment has become a normal operating procedure with Accountants, Bookkeepers and Payroll Bureaus alike. There have been some additional rules and consolidation but the scheme has been built out with more robust guidance.
It’s worth noting that The Pensions Regulator has the power to fine organizations huge amounts of money for not complying with their obligations. Jennie shared that “in the past 12-18 months we’ve seen that they are definitely flexing those powers more than before.” Nicola added, “Those fined currently tend to be organisations who have not outsourced to a third party and potentially have missed a step.”
What has auto-enrolment meant in practice?
Jennie recalls, “When auto-enrolment was first announced, for most employers, the initial thought was about the additional cost they would see added to the running of their organisation, with the extra 3% minimum cost being added to their wages budget”. She continues, “However, all clients we’ve worked with have seen it as a positive move, with many employers working to use it as a benefit, matching a higher % or even improving on the base level of contributions.”
In terms of the payroll process, there is certainly an extra administrative burden created by auto-enrolment, but in most cases, this pain point can be relieved by software. Using a third-party tool, such as the Freshpay cloud system with automatic assessment and re-enrollment, can help your organisation to run a more efficient and accurate payroll.
Looking ahead, what do the next 10 years look like?
Although the last few years have certainly shown that we should expect the unexpected, areas of auto-enrolment that have been identified for review and also mentioned in the Work & Pensions Committee Report on Protecting Pension Savers:
- Changes to minimum age and contributions: A 2017 policy review recommended lowering the age of the auto-enrolment threshold from 22 years to 18, and removing the lower limit of the qualifying earnings, it is already set that this will happen in the mid-2020s
- Access to dashboards: it has been recommended that a view of individual-level data of pension provision across a number of automatic enrolment schemes be provided; specifically, the number of pension pots held by a member, contributions, and pension fund size.
- Support for self-employed and gig economy workers: The Department for Work and Pensions is undertaking a live research programme to determine how to increase support for persons in these categories, with Nest estimating that just 16% of self-employed individuals actively contribute to a pension scheme, a decline of 32% since the late 1990s.
The uptake from the past 10 years suggests that auto-enrolment can be considered a success based on the increase of those workers contributing to a pension increase, from 44% in 2012 to 88% in 2021. We will have to see how this works out with the changing political and economic landscape.
If you have any questions about auto-enrolment or would like to understand how a cloud-based payroll system can help you to improve your processes, FreshPay is payroll software built for all payroll professionals.
Contact us to arrange your demo.