Pensions Regulator enforcement action on auto enrolment

Employers could be forgiven for thinking that auto enrolment is old news, now that even the smallest employers will have reached or be approaching the third anniversary of their staging date. At this point, they will have a window of time in which to re-enrol any individuals who have previously opted out and complete a re-declaration of compliance to state that this has been done.

However, we should avoid complacency, as there are still numerous breaches of the requirements taking place. The Pensions Regulator is taking enforcement seriously, and is carrying out inspections of employers where, through targeted use of data, it has identified a risk of non-compliance. This approach appears to be paying off for the Pensions Regulator, with 74% of inspections revealing breaches of pensions legislation. This high proportion does not surprise us as we frequently see evidence of automatic enrolment breaches when carrying out due diligence on corporate transactions.

Fines for non-compliance can be large – a London-based services company with 5,000 employees was recently required to pay a fine of £350,000 arising from multiple failures, together with over £100,000 of backdated pension contributions. The lack of compliance initially came to light when the employer failed to re-declare within the required timescales, and subsequently failed to provide documentation to show that it had completed its re-enrolment duties. Ultimately, the Pensions Regulator unearthed numerous failures, including incorrect opt-out processes, communication failures and incorrect contribution calculations.

Following the employer's failure to re-declare, the Pensions Regulator issued the employer with a Compliance Notice (a written notice requiring the employer to comply), then a £400 Fixed Penalty Notice, followed by an Escalating Penalty Notice, which grew at a rate of £10,000 a day. One lesson that can be drawn from this is the importance of engaging with the Pensions Regulator promptly. It is important to make sure it has up to date contact information for the employer, so that issues can be put right at an early stage and important communications (such as notices of escalating fines) do not get lost.

Clearly, it is best to comply fully with the requirements from the outset, and we are very happy to assist clients who want a review of their auto enrolment processes. Where there have been breaches of the requirements, we can work with clients to devise a solution acceptable to the Pensions Regulator. In our experience, when employers proactively identify and resolve issues, and inform the Pensions Regulator of the outcome, the Pensions Regulator will not generally take further action.

If the Pensions Regulator does become aware of a breach and decides to take enforcement action all is not lost. By engaging with the Pensions Regulator, fines can often be avoided. If the Pensions Regulator does issue a fine, there is a process whereby an employer issued with compliance notice or fine from the Pensions Regulator can request a review of that decision. Of 1,757 reviews completed in the period from April to June 2019, 1,217 were revoked, substituted or varied.

One reason for the high proportion of reviews resulting in a change to the outcome for employers may be that the Pensions Regulator has a high degree of discretion with regard to the level of fines issued. For example, where an employer has failed to submit a postponement notice, the Pensions Regulator could potentially fine the employer in relation to both the failure to provide the notice, and the failure to enrol the employee on time. The employer could argue that it is more proportionate to treat this as one breach, resulting in a reduced fine. Situations like this can give employers the opportunity to argue that the penalty initially applied by the Pensions Regulator is not appropriate. If you find yourself the subject of regulatory action by the Pensions Regulator, our Pensions team can help you with any review process to seek to revoke or reduce any penalties that will apply.