TPR sets dangerous precedent with AE breathing space

Who would have thought that six months ago, a Tory Chancellor would have spent more than £350bn propping up the economy and the wages of millions of workers?  

Who could have foreseen that the Pensions Regulator, just getting into stride with its ‘clearer, quicker and tougher’ agenda, would take a softer line with employers missing pension payments?

The unusual circumstances brought about by Covid-19 may have warranted the chancellor’s fiscal bazooka, but I am less convinced that going easy on employers holding onto auto-enrolled workers' pension contributions was sound.

While allowing breathing space for a business to take a payment holiday on a defined benefit deficit contribution is understandable, creating the conditions for employers to hold onto auto-enrolled staff pension contributions is different and less excusable

Protecting savers is rightly at the heart of what the regulator does. It does not have an objective to protect employers. But in March, as the pandemic broke, supporting employers became a key focus for the regulator.

Contributions became 'Covid hardship fund'

One way it did this was by tweaking its rules so providers would only be required to report companies for skipping pension contributions after 150 days of the due date, or five months, significantly longer than the standard 90 days.

You may argue this was pragmatic given those were not ordinary times. Employers were struggling with cash flows and lockdown disruption, and may not even have been in the office to pick up a penalty sent by post.

But while allowing breathing space for a business to take a payment holiday on a defined benefit deficit contribution is understandable, creating the conditions for employers to hold onto auto-enrolled staff pension contributions is different and less excusable.

Let me set out why I find the regulator’s position troubling. 

TPR is very clear that a business should not use pension contributions – deducted from staff pay packets – for any other purpose than paying to a retirement account. 

Employees rightly expect their pension contributions to be paid into their accounts on time, where their retirement fund will benefit from tax-free investment growth. But in giving employers more flexibility to work with providers on making pension payments, companies were effectively given leeway to use staff pension payments as a Covid hardship fund.

Secondly, why should employers not be handing over pension money within reasonable time, given the bulk of it is likely to be staff cash?

Under auto-enrolment, eligible employees are required to contribute at least 5 per cent of their pensionable pay, compared with the employer’s minimum 3 per cent contribution.

According to the regulator, most employers did the right thing during Covid, with no "significant" spike in contributions being missed. Providers also reported no systemic abuse of the regulator’s relaxed approach.

Regulatory action decreases during pandemic

But how can savers be fully confident in the system when the regulatory valve for detecting abuse has been significantly loosened?

In the quarter before the Covid outbreak fully took hold (January to March), the regulator issued 10,400 notices to employers for unpaid pension contributions, or for not handing over contributions in time. But after it eased its rules due to the pandemic, and financial conditions worsened, the regulator only issued 352 of the same notices to employers between April and June this year. 

Just because fewer fines have been issued does not mean all is rosy. I do not believe we will have a clear picture of how employers behaved for months yet, when the regulator fully returns to normal enforcement.  

Certainly the Pensions Ombudsman is preparing for a significant spike in complaints from scheme members over unpaid contributions.

Nobody can deny that the regulator has a tough job. It has more than 1.7m employers to police and needs to be selective about the cases it chases, given its limited resources.

But in my view, giving all employers breathing space on the payment of auto-enrolment contributions set a dangerous precedent for a resource-restrained regulator. 

The fact that it has now launched an advertising campaign reminding employers of their duty to pay contributions on time suggests the regulator is nervous. This advertising campaign comes ahead of the end of the furlough scheme, when employers will begin to feel a cash crunch.

Employers clinging on to staff pension cash should not become the new normal. Millions are already facing a poorer retirement because of the economic crisis wrought by the pandemic. If their pension contributions go down the drain, alongside a business, then that is yet another headache to contend with.

TPR should now demonstrate that it is wholeheartedly focused on protecting retirement savers by immediately reinstating the 90-day requirement on providers to report unpaid contributions.

Josephine Cumbo is pensions correspondent for the Financial Times