Who Carries the Risk With Auto-enrolment: Employer or Employee?

As auto-enrolment looms ever larger on the horizon, much has been written about the risks employers face, and about the risks the new regime may bring to employees too.  It is rare, however, to find a synthesis of the risks facing both stakeholders together, or indeed any analysis of on whom the burden predominantly falls.

CEO of NOW: Pensions Morten Nilsson

It is employers who are faced with the administrative burden of organising pensions for millions of people who have never had them before, and of monitoring the on-going eligibility of staff for auto-enrolment.  This may represent a considerable commitment of financial and human resources, and one which will peak again every 3 years as opt-outs are re-enrolled[1].

Coupled with these data and payroll issues are the compliance risks facing employers.  The Pensions Regulator has the power to fine employers for failure to comply either with managing and recording auto-enrolment processes, or with making timely payment of contributions[2].  And then there is the need to communicate all the changes to employees.

And all this with the knowledge that employers should be planning well in advance of their staging dates, or face what could be a huge bottle-neck of employers looking to sign up to schemes at the same time, and all the delays, compromises and errors that could bring.

Not that employees get off lightly either.  One set of risks employees face relates to the decisions made by their employers. Employees may find themselves in a scheme unsuitable for them if their employer has chosen poorly, which could mean employees are unlikely to receive decent returns, or are charged too much, or both.  This wouldn’t necessarily be the employer’s fault so much as an inevitability, given the complexity that still pervades most of the industry in terms of investment options and fees.

Should the employer have chosen NEST for their auto-enrolment scheme, employees may also find themselves restricted by the caps on contributions and the bans on transfers in or out which NEST currently carries.  Employees would then be at the mercy of government and the likelihood or otherwise of their decision to lift these restrictions.  Either way, the rules aren’t up for review until 2017.

Lastly, employees themselves may make poor decisions in the face of auto-enrolment.  A pension scheme may not be the best savings vehicle for some people’s circumstances.  But, without sufficient explanation they may fail to opt out.  Equally, and perhaps more commonly should the press coverage[3][4]be believed, employees may opt out of schemes and forgo the considerable benefits of scheme membership due to insufficient information provision.  This probably represents the greatest risk of all to employee outcomes.

Overall it is employers which carry the greatest burden in terms of decision-making and operations, but employees that ultimately risk poor retirement outcomes should poor decisions be made.  Only some of these decisions will be theirs to make; many will be made by employers or government.  This disconnect between decision-maker and end user is necessary but must be handled with care.

[1] HR Magazine, 5th March 2012.  Planning for pensions auto-enrolment: are you ready?  A & D Media Limited

[3] Money Marketing, 29th September 2011.  Labour warns tough conditions will increase auto-enrolment opt-outs.  Centaur Media Plc

[4] FT Adviser, 7th March 2012.  One in three will opt out of auto-enrolment, Napf data show.  The Financial Times Ltd

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