As October’s historic milepost is reached most employers still have far too much to do, warns TPR chief executive Bill Galvin. John Greenwood asks him how he is going to get them in line
As auto-enrolment finally starts, the man charged with ensuring 1.2 million employers comply with the new rules believes organisations still have a long way to go. While the big employers hitting their staging dates in the next couple of months are in a relatively good position, The Pensions Regulator chief executive Bill Galvin believes things will get considerably more problematic as we pass into the new year.
“We think employers are underestimating what they have to do with this. We have been working closely with big employers who go in October, working one to one and helping them through the process and get ready. But our research tells us that the people who are going in next year and the year after are basically underestimating how long it is going to take them to get ready.
“This is a challenge that can only be dealt with through changes to their payroll and HR systems. There is a lead time to that and we think that people are underestimating how long it takes.
“We will be making sure the industry is released to support the medium sized employers. We have got a particular focus on the payroll and software industry right now, working with them to make sure they understand the challenge.
So does this sense of concern mean the challenge is proving greater than at first thought?
“We always reckoned when we saw the legislation going through parliament that for employers with complex workforces it was going to be a challenge. Clearly there are different types of employment arrangement, with people who move in and out of different categories, with age changes, changing to the hours that they work and the amount they get paid and so there is a pretty fluid situation for any company with a sizeable workforce. We knew this was going to be challenging. That is why over year ago we put out detailed guides to make people understand that there is a lead time to this and you can’t get through this in as quick a time as some people think they might be able to.”
The readiness of public sector employers is of particular concern to Galvin, who warns they will be treated in exactly the same way as everyone else if they break the law.
“In the public sector employers where there is quite often quite a high coverage of pension provision already, they can be perhaps a little blasé. They think they already provide pensions and have high coverage and so they underestimate the challenge of putting in place some of the things they need to to ensure that they are compliant with the law,” he says. “We can’t differentiate between public sector and private sector in the way we go about things. Nor does any other regulator, HRMC or Health and Safety.”
Galvin detects a feeling that some public sector employers have a mistaken belief that auto-enrolment is something that will be looked after by their pension provider.
“There is a challenge for us to make sure that individual employers in the public sector understand this is a challenge for them, not just for the pension provider in the public sector, but for the employers themselves,” he says.
So where is the NHS up to on this, for example?
“There are many different PAYE schemes in the NHS and employers will be called based on the size of their PAYE scheme. So different parts of the NHS will have different duty dates and one of the challenges with an organisation like that is to make sure that the individual employers who have responsibility for the duties understand that it is them that have that responsibility and that they are the peoples who have to act,” he adds.
So what part of the process is Galvin most concerned about employers failing to get right?
“The challenge is in the first place assessing the workforce and identifying the different types of employees that they have. Because they have to be treated differently, there is a different communication challenge for different categories of entitled workers and eligible jobholders et cetera. In order to operate the initial stage of automatic enrolment you have to have assessed the workforce, understanding the different categories, making sure that your systems can tell you which employers are in these different categories,” says Galvin.
And is he concerned some public sector bodies have not got that data?
“I am not sure that the challenge is that they can haven’t got so can’t get the data, I think the challenge for the public sector employers is just to understand that they are going to have to go through this process. Their current systems are not going to categorise their employees in the way that they need to be categorised and so they will have to make changes to their systems to help them do that,” he says.
Given the scale of the challenge and Galvin’s current concerns at lack of readiness amongst all but the biggest employers, what sort of enforcement action should the inevitable stragglers expect, however numerous they may be? “There will be no excuse for people to be in that situation. We will have written to them 18 months in advance, they will have got a phone call from us and we will have asked them to provide us with a contact person that we can contact about this. We will follow that up with a letter 12 months in advance telling them exactly what they need to have done and where there are challenges we may follow that up with another phone call. No one will have the excuse to say on their duty date ‘sorry, I didn’t realise this was an issue. If I start now will it be okay?’ Because it will clearly not be okay,” says Galvin.
That means TPR is in for a busy period, as Galvin fully recognises. “There are over 1 million employers out there so over the course of the next four years they are going to be over 1 million corporate projects to get auto-enrolment embedded. I don’t know what the failure rate of corporate projects is on average, but some of those 1 million projects will not hit their timelines.
“That is not an excuse because our view is that all the information exists to tell people what they have to do and when I have to have it done by. And most people will get there, even if it is a struggle and even if they have to pull out all the stops at stops at the last minute.
“Where employers don’t get there, that means employees won’t get the contributions to their pension that they are legally entitled to. The most important thing is that employees do not lose out and where people are liable for a fine for not meeting a duty then we have to fine them because if we don’t then we are penalising those people who have made investments in getting there on time,” he says.
TPR’s auto-enrolment whistleblower line went live in July, when inducing staff to opt out of a scheme became illegal, and while Galvin says there has been some activity on it already, there has been no need for action yet. Where employers do receive penalties, they first have a right to an internal review and if that fails they are entitled to apply to the Pensions Regulator tribunal.
The approach of auto-enrolment has seen the debate on pensions charges shoot up the political agenda, with serious questions being asked at the highest levels about the level of disclosure that is necessary. Galvin believes fund managers that have refused adviser and journalist requests for details of their portfolio turnover rates and other ancillary charges should disclose them. “Ifyour question is ‘do I think portfolio turnover charges should be disclosed’, well the answer is yes they should be, even though I recognise that it is not straightforward,” he says, backing the calls of those seeking greater transparency.
“Itis a good thing that these consumer protection issues such as charging, the open market option and default fund asset allocation are moving right up the consumer agenda and that you have got people from industry trade bodies and consumer bodies keeping these things front and centre of media and consumer attention. That can only be a good thing. Our focus at the regulator is on trying to make sure that the arrangements that are put in place by employers show clear accountability for the decisions that are made on behalf of members. That is what will make these issues remain well managed over the long term.
“Is ‘immature’ the right word to describe the DC market? I expect over the next few years the products and services offered will be developed considerably. Nest has stood up and in public gone through its decision-making about default fund structures and charges and the rationale for the decisions that it is making in members interests and that has moved the debate on hugely. All of these factors have moved on the debate around what good DC looks like,” says Galvin.
So where does he see the charges debate ending up?
“We when we set out our six principles we said that we think there is a challenge around value for money. The NAPF took up this challenge and said that the industry can provide a code of practice on disclosure of charges. We have said ‘that’s great, get on with it’ and if that is comprehensive and adopted by the industry then we can monitor what comes out of that. If we need some powers above what we have at the moment to enforce that code if we feel it is not being adopted then we can talk to the DWP about that,” he says.
And is that something that is being actively considered?
“Steve Webb has made clear that if this remains an issue as auto-enrolment is rolled out then he will use his reserve powers. Charging is a blunt tool and everybody knows it would be much better for the industry to take up the challenge that has been laid out in lots of different quarters on disclosure,” says Galvin.
As auto-enrolment rolls out, Galvin envisages greater scrutiny of advisers’ activities.
“As we go down to small employers we will be focusing on situations where advisers might be incentivised to take more money out of the transaction. We are really focused on encouraging employers to make sure they choose pension schemes where somebody else is going to be looking after their employees interests,” he says. For Galvin this could be trust-based or contract-based with some level of oversight built in.
On the tit-for-tat sparring between between the NAPF and ABI over which side of the industry achieves best outcomes at retirement, with the ABI bringing in its shiny OMO code next Spring, Galvin believes it is not yet time to enforce a universal code over both disciplines, although he says he may look at the issue again in future.
“We looked at this back in 2009 and we found that there was some very good practice in the trust-based space. In general the last trust space games that seem to have good processes with well-engaged trustees who are keen to make sure that their members are well supported through the process. It is two years since we have had a look at this and maybe this will be an area that we will return to in the future if we feel standards are falling below what they should be. Since we raised trustees’ focus on this in the past boards have focused on this. We know that smaller schemes are not as well governed as we would like. We would like people to stop setting up these things and we would like to raise standards in the existing ones. And any that are going to be used for automatic enrolment then they will need to raise their game or find an alternative type of arrangement,” he says.
As the industry holds its breath for the start of the greatest experiment in UK pensions for a generation, Galvin sees two keys to success to the entire project.
“There are two critical issues for auto-enrolment. Firstly, employers start preparing early, and secondly, employers should choose a scheme that is in line with our six principles. If both of those things happen then the industry we will have in 2018 when all of this is through will be vastly different from what we have got now and for the better.”