Auto-enrolment compliance: Regulatory enforcement is on the rise

INTRODUCTION

The most recent “Compliance and enforcement” bulletin from The Pensions Regulator (“TPR”) shows an increase in the use of its powers to enforce compliance with employer duties in relation to auto-enrolment and workplace pensions.

We are grateful to Kelly Beattie and Chris Brown of Burges Salmon for setting out the key headlines and points for employers to consider as regards auto-enrolment compliance.

AUTO-ENROLMENT

Brought into force by the Pensions Act 2008, employers have statutory duties to automatically enrol employees into a qualifying pension scheme, provided they meet prerequisite age and earnings criteria.

Irrespective of the financial position of the employer, auto-enrolment minimum pension contributions are compulsory. TPR will take enforcement action if it discovers that an employer has erroneously delayed or even missed payment of pension contributions.

Furthermore, employers also face the risk of penalties for non-compliance if TPR finds errors in communications to eligible staff. Every employer has up to 6 weeks from the start date of their duties (usually an employee’s first day of employment) to explain in writing how the enrolment applies to employees. Whilst the pension provider can do this on the employer’s behalf, it remains the employer’s responsibility to ensure staff are properly informed.

It is therefore vital that employers monitor the compliance of their internal HR and payroll teams, and also the compliance of their external providers of outsourced services, to ensure auto-enrolment requirements are being met.

ENFORCEMENT POWERS

TPR has numerous tools, varying in severity, that it can deploy to force errant employers to adhere to their mandatory automatic enrolment requirements. This includes issuing:

o          a Compliance Notice;

o          an Unpaid Contribution Notice; and

o          an Improvement Notice requiring a specific individual or company to take specific actions.

Additionally, TPR has authority to impose fines, usually following non-compliance with one of the above statutory notices by the deadline set in the notice.

A Fixed Penalty Notice can be issued where there is sufficient evidence of a breach of the law. The fixed penalty is currently set at £400 for all employers irrespective of their size. An Escalating Penalty Notice can only be issued for failure to comply with a statutory notice. However, it will attract a fine ranging between £50-£10,000 per day depending on the size of the employer (with the highest prescribed daily rate of £10,000 reserved for employers with 250 or more persons). Larger employers should therefore be particularly careful to adhere to the auto-enrolment requirements and remedy any issues as soon as they arise.

ENFORCEMENT ACTIVITY

An increasing number of employers are facing enforcement action for failing to comply with their auto-enrolment requirements. It is not clear if this is because more employers are failing to meet their obligations, if TPR is being more proactive in its enforcement of breaches, or if breaches are being more widely reported.

In any event, TPR’s most recent “Compliance and enforcement” bulletin (covering data from January to July 2024) shows a continuing increase in TPR exercising its enforcement powers. For context, the bulletin highlights the extent to which there has been intervention to enforce compliance with the various employer pension duties.  This does not even cover the number of employers who may be non-compliant and have not yet had Regulator intervention.

Over this six-month period, TPR exercised its main auto-enrolment powers on 77,800 occasions. This is up from the 75,052 times in the preceding six-month period. This increase can be further analysed through examination of each enforcement power:

o          30,688 Compliance Notices were issued, up from 29,489 in the previous period.

o          Unpaid Contribution Notices have had an even larger increase, with 18,589 being issued in comparison with the 17,451 over the previous period.

o          20,677 Fixed Penalty Notices were issued, this again is up, from 19,538 in the previous period.

o          However, Escalating Penalty Notices saw a fall in number, from 8,400 in the previous period to 7,682 in the most recent six months.

Typically, the risk of enforcement action is greater for employers who have not enrolled their employees or fail to pay contributions into a pension (particularly when they have deducted contributions from employees’ pay). Those employers may face Fixed Penalty Notices and Escalating Penalty Notices from TPR, in some cases in excess of £20,000 where the breach has not been promptly remedied.

There have also been complaints to the Pensions Ombudsman where employers have been ordered to pay the money owed into the pension scheme plus any investment loss. The Ombudsman has also awarded fixed sums for non-financial injustice to be paid to the employee who raised a complaint (typically of around £1,000 but it can be higher in severe and exceptional cases).

Employers have the right to appeal Penalty Notices from the Regulator to a Tribunal within 28 days from receiving the decision. The Tribunal will consider whether there are any mitigating circumstances surrounding the employer’s breach. However, considering past published decisions, the Tribunal will only revoke or vary TPR’s notice in exceptional circumstances and the option of appeal should not be relied upon by employers to avoid paying penalties.

LOOKING FORWARD

The willingness that TPR has demonstrated to employ its arsenal of compliance enforcement tools should not be of concern for many employers who are complying with their duties.

However, it still seems that there are a significant number of employers who are not complying with their legal obligations – either because they may not know or understand their obligations or due to administrative errors that are not being promptly or correctly rectified.

It is important to keep up to date with legal changes in this area too.  In the last couple of years there have been increasing calls coming from across government and the pensions industry to alter, and ultimately widen, the net of those caught by automatic enrolment requirements. The most common changes put forward are:

o          lowering the minimum auto-enrolment age from 22 to 18;

o          a removal or reduction of the £10,000 minimum earnings trigger; and

o          an increase in minimum contributions.

Any changes are likely to have a material impact on employers (in some cases they could result in a considerable financial and administrative impact). Following the recent appointment of Torsten Bell as the new Pensions Minister, some think that the appointment may become the necessary push for a review of, and changes to, the automatic enrolment regime.

As the number of employees captured by auto-enrolment increases, so too does the potential risk of failing to properly comply with the requisite statutory duties. It is therefore vital that employers regularly review their obligations and ensure that all compliance requirements are adequately met.

NEXT STEPS

The data reported in this article relate to TPR’s most recent compliance and enforcement bulletin which covers January to July 2024. We look forward to seeing if the enforcement trends continue when the July to December 2024 data becomes available.

Either way, employers should ensure that any chosen pension arrangement provided to their employees and their internal administrative and payroll systems comply, and continue to comply, with auto-enrolment legislation.

Employers also need to understand the impact of any corporate activity (like mergers, acquisitions and restructuring) on their auto-enrolment duties.  Burges Salmon can assist in advising on all aspects of auto-enrolment compliance.

This article was written by Kelly Beattie (Senior Associate) and Chris Brown (Partner) both in Burges Salmon’s Pensions & Lifetime Savings Team.

MHM VIEW

In our experience, TPR is approachable and will support employers to achieve compliance with their duties. Where failings are identified, whatever the cause, enforcement action may be unavoidable and could result in employers being fined. Prompt attention to any Compliance Notice is essential to avoid the prospect of further regulatory action being taken.

If you are worried that your workplace pension systems may not be fully compliant, or if it has been a while since this was last reviewed and you would like an update, please get in touch.

Contact David Hodgson on 01423 229029 or by email to david.hodgson@sandccarsalesharrogate.co.uk