'Defined' contributions - a mini series blog with LCP
Welcome to our new mini-series of blogs looking at current issues facing defined contribution pension schemes.
In conjunction with Philip Audaer from consultancy firm LCP, we will explore some of the current unseen issues on the consultancy and legal side of DC contributions that can significantly impact both trustees and scheme sponsors.
This September has a definite "first day of new term" feel to it, as many of us now face the prospect of going back into the office for the first time in months. So now seems the ideal moment to take stock of how your workplace DC scheme has fared, particularly since the onset of the pandemic and the unprecedented furloughing policy.
The statistics suggest that one of the many impacts of lockdown has been to exacerbate some common problem areas. In particular there is evidence of a concerning increase in the number of contribution errors. Research from the Resolution Foundation reveals that in 2019 between 1.6 and 1.7 per cent of auto-enrolled employees did not receive the employer pension contributions to which they were entitled, equivalent to 250,000 workers.
These figures have increased over the last few months and, unlike some other DC issues, this is not necessarily just a problem for smaller schemes, particularly in view of the impending additional complexities associated with the reduction in the furloughed grants this month and October, which is set to put HR systems and payroll bureaux under increasing pressure
This is particularly true where furloughed workers’ contributions are paid via ‘salary exchange’, where the sheer complexities involved in calculating the contributions, and in turn what is recoverable from the government furlough scheme, has meant that many members are receiving either too much, or not enough. If you also factor in the impact of how to deal with new employees joining your scheme through auto enrolment and/or re-joining if they have decided to opt out because of financial pressures since lockdown, then simply keeping on top of your scheme’s day to day administration is becoming increasingly challenging.
Our experience shows that many employers and trustees are simply not aware of the underlying errors that may be latent in their schemes. Whilst the Regulator has, to date, taken a reasonably pragmatic approach, pleading ignorance will not be good enough. Legally, despite all the disruption, employers remain on the hook for making sure the right contributions are made at the right time and complying with auto-enrolment. So, trustees and employers must continue to ensure they have robust processes in place to identify and address errors. We have been helping clients navigate contribution issues under the furloughing scheme and disputes between employers and members. The devil really is in the detail and mistakes may not be immediately apparent.
Whilst the measures brought in to support pensions through the pandemic has had an impact, the Resolution Foundation figures highlight that contribution errors can occur for a number of reasons. One such reason might be scheme mergers and transfers which can cause confusion because the new scheme might legally be required to continue an inherited scheme’s rules or terms and conditions. Specialists at LCP have helped clients to identify issues and resolve confusion around this, resulting in members avoiding a potential loss in their contributions due to wrong calculations – getting it right at the outset is far more effective than trying to correct errors.
Whilst government intervention to maintain pension saving is helpful, what it is does mean is that it is even more important for both employers and trustees to undertake a health check on the robustness of their governance. Those who don’t take action, or delay rectifying errors, face the fines and enforcement of action from the Pensions Regulator, as well as a rise in member (and union) complaints, not to mention reputational risk. The Pensions Ombudsman has recognised the scale of the likely errors emerging because of what has been happening over the last few months, and has put measures in place to deal with an expected increase in workload.
Getting the right advice early on will make a big difference, as well as making sure all the stakeholders involved in the process to fix the errors are clear on their roles.
We can help by explaining your legal obligations, assisting with member communications and devising the best approach to addressing any of these potential issues, as well as putting processes in place to reduce the risk of future errors
In our next instalment in October, we will look at the risks to schemes from cyber-attack, the complexities of dealing with an attack in practice, and how to prepare.
- Philip Audaer, LCP
- Rebecca McKay, Trowers & Hamlins