Pensions: TPR issues auto-enrolment warning

A decade on from the requirements of the automatic enrolment (“AE”) regime coming into operation, the Pensions Regulator (“TPR”) has issued a “timely” warning to employers that they must comply with their duties under the regime.

That warning is understood to follow on from a series of in-depth inspections carried out earlier this year of 20 large employers based across the UK and covering nearly 1.5 million staff.

Those inspections apparently highlighted a number of common errors in relation to the calculation of pension contributions and communications to staff. While the inspected firms had successfully enrolled eligible staff into an appropriate AE scheme and had made contributions, administrative errors in complying with their ongoing pensions duties were identified – putting staff at risk of missing out on benefit and employers at risk of unintended non-compliance, with all that might follow.

TPR reports that the relevant employers have either now corrected or are working to correct errors (including making backdated contributions).

Common errors

Key errors identified included:

Using incorrect earnings thresholds for the calculation of contributions

Broadly speaking, under defined contribution type pension schemes the minimum contributions required are a total of 8% of “qualifying earnings”, with the employer paying at least 3% and the employee making up the shortfall. For those purposes “qualifying earnings” are earnings between the lower level and upper level as reviewed annually by the Secretary of State (tax year 2022-23: £6,240 and £50,270 respectively), with earnings being gross earnings, including sick pay and statutory maternity, paternity and adoption pay.

Alternatively, minimum contributions can be made on the basis of one of three alternative sets:

Set 1 – 9% total (with minimum 4% employer) where pensionable pay is subject to a minimum of basic pay;

Set 2 – 8% total (with minimum 3% employer) where pensionable pay is subject to a minimum of basic pay and constitutes at least 85% of total pay across all relevant jobholders; or

Set 3 – 7% total (with a minimum 3% employer) where all earnings are pensionable.

Clearly, given the complexity of the different contribution bases, care requires to be taken by employers in first of all selecting the most appropriate basis to apply and then regularly checking that contributions are being calculated and paid over appropriately and in line with that.

Incorrectly calculating maternity pay, leading to incorrect calculation of contributions

While maternity pay calculation was specifically identified, clearly for the purposes of AE compliance it is important that any calculation which might impact on the pension contribution calculation is completed correctly.

Inaccurate/inadequate communications to staff

These included inaccurate wording, and using online portals or communicating general pension information, rather than emails to staff about how AE affects them.

On this aspect TPR reminds employers of their guidance about communications to staff, which guidance helpfully includes template letters that employers can use (including where writing to staff about whether their scheme uses relief at source or net pay arrangements).

Care of course should be taken that any template letters provided by TPR (or for that matter any AE scheme provider) are appropriately tailored, to ensure they accurately communicate what is intended and are in line and consistent with AE and employment contract requirements and whatever arrangements (including under payroll) are in place or to be put in place.

Consequences

While TPR recognises that certain of the errors identified were technical in nature, TPR’s stated position is that these types of compliance oversights can indicate to them broader non-compliance issues.

Furthermore, aside from exercise by TPR of its AE powers (including compliance notices, unpaid contributions notices and penalty notices), correcting such mistakes can prove costly for employers. Even where any identified shortfall in contributions is small, the cost of identifying and calculating that shortfall and any loss to staff can be significant. Additional cost to employers in taking advice on appropriate methods of correction and the overall cost of implementing correction (both hard cost and staff/management time and including communications to those staff affected) should not be underestimated.

Review processes

TPR highlights that when completing re-enrolment, which employers must carry out every three years, employers should check their systems are up to date and running smoothly.

However, depending on their circumstances, it would seem sensible for employers to complete a review more regularly to ensure ongoing compliance with the requirements and with a view to ensuring that in the event of any error arising, correction costs are minimised.