As we approach the tenth anniversary of the auto-enrolment requirements and note the Pensions Regulator's renewed efforts in making auto-enrolment inspections, we take a look at three common areas where errors are made by employers when discharging their auto-enrolment obligations and how these can easily be avoided.

Postponing auto enrolment (un)successfully

Employers can postpone the automatic enrolment of eligible employees by up to three months provided that they issue them with a postponement notice that meets certain legal requirements. Employers often confuse this with the operation of a contractual probationary period at the start of employment particularly where this will also last for three months (which is quite common). Just because there is a contractual probationary period does not mean that auto enrolment duties are automatically postponed for that probationary period. 

A postponement notice must be provided to the employee in question within six weeks and one day of the start of employment. The notice must inform the employee of the right to opt into auto enrolment during the postponement period, and it must be given to the employee even where they are still in their probationary period.

We have also seen that often where personal pension arrangements (such as group plans operated by an insurance company) are being used, employers rely on the pension provider to prepare and send out member communications. However,  the responsibility to give a postponement notice rests with the employer and not the pension provider. Employers should therefore send or take active steps to ensure postponement notices are being issued within the relevant time to each relevant employee on their behalf and that the notices are valid. In the event that auto-enrolment is postponed without a valid notice being issued, the employer will find itself in breach of its employer duties potentially resulting in a liability to pay missed employer contributions starting from the date the employee met the auto-enrolment eligibility criteria.

Top tip

Ensure postponement notices are issued to all employees within the relevant time, including those in a probationary period. However, where the probationary period is 6 weeks or less, the employer may want to consider further flexibility available under legislation around the timing of required notices.

Opt-out notices

Eligible employees who are automatically enrolled into a qualifying pension scheme have the right to opt-out of pension saving by completing an opt-out notice. The opt-out notice (for the employee to complete) will usually be issued by the scheme provider and it is often the case that the entire opt-out process is handled by the provider. As a result, we often see confusion during due diligence processes when employers are unable to provide copies of completed or standard opt-out notices.

Regulations specify that an employee may opt-out by a valid opt-out notice to the employer. While there is nothing preventing employees from sending opt-out notices to the employer via the pension provider, the notice must actually reach the employer who must then satisfy itself that it is in fact a valid notice containing the information required by law.

Confusing the matter yet further, we are aware that a number of large pensions providers do not require employees to give written opt-out notices but instead allow members the option of calling to inform the provider that they would like to opt-out.  It is open to question whether or not members can opt-out over the phone unless this is subsequently confirmed in writing to the employer; this is because the Regulations say any opt out will be "signed by the jobholder or, where the notice is in an electronic format, it must include a statement confirming that the jobholder personally submitted the notice".  Further, it it is not at all clear how the employer is able to satisfy itself of the validity of the opt-out in such scenarios, or inform the jobholder, as it is required to under statute, of any reason why a notice may be invalid  without more information.  ".

Where an employer does not receive a valid opt-out notice then pension contributions may have been underpaid from the date of the assumed opt-out and these may need to be made good.

Top tip

Ask your scheme provider whether opt-out notices are issued in written form or if employees have the option to opt out over the phone. Consider requiring opt-outs to be in writing or otherwise put processes in place so that you are able to  confirm the validity of opt-outs.

Certificates of compliance

Employers have some flexibility in deciding what pension arrangements to use to discharge their auto-enrolment obligations but the arrangement must be a "qualifying scheme" as defined in the legislation.  To meet this criteria, a scheme must use  "qualifying earnings" as a basis of calculating contributions at the required rate or it must use one of the 'alternative quality requirements' and must self-certify that the scheme meets an alternative quality requirement. In short, this means that contributions are being paid over at the correct rate.  The employer is able to decide the period to be covered by the certificate provided that self-certification takes place at least every 18 months.

We have come across scenarios where the employer either is not aware whether a certificate exists, or the certificate has been completed by the scheme administrator or benefit consultant and the employer does not hold a copy. In other cases, we have seen that a copy of the certificate is on file but is unsigned and a signed copy cannot be located.

The responsibility to complete the certificate rests with the employer or someone authorised by the employer to give it. This could well include a third party acting on the employer's behalf such as a benefit consultant. While the certificate does not need to be sent to the Pension Regulator, the employer is under an obligation to retain the certificate for up to six years after the end of the certification period in case the Pensions Regulator requires it for inspection.  Employers should also note guidance from DWP that a certificate must be signed by either the employer or the authorised person to be valid. 

Where the employer fails to self-certify (or mis-certifies) then any shortfalls in minimum contributions may have to be made good.

Top tip

Check whether self-certification is required or needs to be renewed, and by when. Ensure you have oversight of any certification processes or that your responsibilities have been delegated. Ensure that the form is correctly signed.

Enforcement action

In each of the above cases, the employer's breach of its auto-enrolment obligations creates the risk of enforcement action by the Pensions Regulator not limited to the requirement to make good any unpaid employer contributions, as the Pensions Regulator also has the power to impose fixed and escalating penalties. The Pensions Regulator may in addition require the employer to pay the missed employee contributions and add interest to unpaid contributions at a rate of 4.2% plus the increase in the retail price index.   It is possible the Pensions Regulator may view a breach as a technical breach, or it may be a one-off breach, and in that case it could decide to issue an informal warning letter rather than taking stronger enforcement action.  The Pensions Regulator's approach will likely depend on the particular circumstances of each case, whether the breach is a one-off and the materiality of the breach.

If you find yourself faced with any of the above scenarios, or if you need help with ensuring compliance more generally, please get in touch with any member of the Taylor Wessing Pensions Team.