Avoiding pensions auto-enrolment is costly for SMEs

published 16 November 2018

922_MW_P34_SB — Paperwork may seem a chore but it's vital to keep up to date with auto-enrolment

A Derby-based recruitment agency has earned the dubious distinction of becoming the first company with members of staff given custodial sentences for breaking auto-enrolment pension laws. Last month, four senior employees of Workchain were given suspended prison sentences for illegally plotting to opt staff out of the company pension scheme, while the company itself was fined more than £280,000.

The case underlines the determination of the Pensions Regulator, which led the prosecution, to crack down on businesses not complying with auto-enrolment, which requires all employers to offer a staff pension scheme and to pay into it on behalf of employees apart from those who have specifically opted out. In addition to targeting those wilfully breaking the law, the watchdog is now taking a much tougher approach to firms that make a mess of auto-enrolment.

Get to grips with your duties

The vast majority of such cases concern small and medium-sized enterprises (SMEs) that have not fully grasped their duties under auto-enrolment, including many firms that have given responsibility for complying with the law to individuals and advisers not qualified to do the job.

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Each quarter, the Pensions Regulator publishes details of the regulatory interventions it has made in such cases, including fines for non-compliance and in many cases court orders for unpaid fines. Such penalty notices now cover hundreds of SMEs that have fallen foul of the rules typically unwittingly and racked up penalties sometimes running into tens of thousands of pounds as a result. At a national level, the regulator levied total fines of £42m in the 2017-2018 financial year, when the auto-enrolment regime expanded to include hundreds of thousands of smaller businesses. That's more than three times the total for the previous 12-month period. One common problem for SMEs is poor record-keeping. While firms may be using specialist payroll software to calculate what pension payments to make on behalf of staff (or paying an accountant for the service), getting it right depends on detailed and accurate information about employees' personal circumstances and earnings.

Another issue is that having put their auto-enrolment arrangements in place last year, many SMEs think they can now sit back. But the regulator has exacting requirements covering employers' ongoing responsibilities, demanding regular updates and data submissions, as well as communication with members and pay reference period reviews.

Catch problems early

These problems are compounded by the fact that auto-enrolment errors may go undetected for an extended period, with no audit of employers' compliance taking place on a statutory basis. Instead, the regulator makes spot checks on employers such compliance visits may uncover longstanding issues that are expensive to put right, and which lead to larger penalties from the watchdog.

SME owners concerned about their compliance with auto-enrolment may want to seek independent advice on their arrangements before they receive a visit from the Pensions Regulator. One analysis of 10,000 schemes over the year to July 2018 found errors in half of the cases, according to auto-enrolment data platform pensionsync.

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.