The deadline for paying contributions
Monthly payments into workplace pensions are nearly always made by direct debit nowadays. They are paid by employers on employees’ behalf, and must be received as cleared funds by the pension provider by 22nd of the month after they are deducted.
This is straightforward enough. Some employers occasionally miss the deadline by a day or two, perhaps because they haven’t taken weekends into account or because an error needs to be fixed. This is a relatively minor breach. Usually, contributions are paid in time, because there is plenty of time in which to pay them. Most employees who are paid monthly receive their salary towards the end of the second-to-last week of the month. That gives employers four weeks, more or less, before they are obliged to remit pension contributions to the pension provider.
And therein lies the problem. Employers can be compliant without really giving thought to whether they are treating employees fairly.
I should emphasise here that, commendably, some employers make payments immediately after they pay salaries, so that they arrive in employees’ pension policies before the end of the same month.
Our view, as discussed below, is simple: contributions should be made as soon as possible after they have been deducted.
The effects of delaying payments
We have a calculator at Employee Benefits Collective (EBC) that demonstrates the effects of not paying contributions promptly over time.
If we assume —
Total pension contributions — employer’s + employee’s — of £500 per month
Salary (and thus contributions) increasing by 2.5% annually to keep pace with inflation
Annual investment growth of 7%
— we get the following decreases in fund values if there is a 20-day delay in making payments:
Over 10 years — £339 less
Over 20 years — £1,213 less
Over 30 years — £3,047 less
Over 40 years — £6,909 less
The power of compounding creates an exponential rise in the amount of money that regular delays cost the employee as time goes on. The amount lost becomes increasingly significant. Furthermore, if individual losses are multiplied by the dozens or hundreds or thousands of members in a scheme, the collective shortfall can be colossal.
The principle matters: slow payments adversely affect employees’ savings.
These figures are purely indicative, of course. £500 is perhaps a somewhat aspirational figure to use for the monthly contribution, but higher-paid employees are A) likely to be contributing more, often a lot more, than this, and B) likely to be the most unhappy about the effects of their employer being slow to make payments.
An ancillary effect of making late payments is that new policies may take longer to be set up by pension providers, depending on their processes. This can be frustrating for employees, whose money has effectively vanished until they hear from the provider. Delays frequently result in HR, payroll and the scheme adviser having to field questions and counsel patience. Everyone’s expending energy unnecessarily. Yet we want new employees to appreciate and engage with their new pension asap. An avoidable delay is not a good start.
(We’re not fans of postponement, by the way. We believe new employees should join the pension and start saving from day one. Why wait?)
So: why the delay?
Unfortunately, making payments just before the deadline is the norm.
With most employers, this seems to be simply an unconsidered historical way of doing things. Before auto-enrolment (AE) brought in legal imperatives, a workplace pension could be regarded as an important benefit granted by the employer: there was no real pressure to look at its efficiency from an employee’s point of view. Now there is.
So, simple inertia is the usual reason for the delay. There are other factors, sometimes. Some companies simply don’t pay debts immediately, as a matter of policy. Some outsource payroll, and therefore have less influence, or believe they have less influence, on when actions occur.
We are aware, too, that some employers may be experiencing cashflow problems, especially since the advent of the pandemic. Delays, in this case, are entirely understandable.
Generally, however, the money set aside to go to pension providers is just sitting there, unused, for days or weeks, simply because the process is habitual.
Ironically, payroll staff tell us that it’s easier for them to make paying salary and contributions two parts of the same process, rather than treating them as separate processes. Moreover, according to providers, doing things this way also reduces the scope for errors
Our view, propounded in governance reports and meetings, is that pension contributions should be made as soon as possible after salaries are paid.
One advantage of EBC’s pension governance is that we strive to be entirely impartial. True governance isn’t about ticking a series of boxes to confirm that schemes are compliant. It’s far more than that. It involves detailed scrutiny and its ultimate aim is to attest that employers’ pension schemes provide value for money for employees.
It’s our job to hold pension providers to account if we perceive failings — as well as giving praise when it’s due (which it often is).
Similarly, it’s also our job to try to encourage good practice with employers. They don’t always get everything right and need guidance from time to time. Ethical employers — that is, in this context, employers who appreciate governance — are keen to maximise the value of their pension scheme for employees.
Pension scheme governance
We at EBC believe our rigorous governance proposition is second to none. Please contact us if you are an employer wishing to ensure your scheme is fit for purpose and delivers true value for money and excellent retirement outcomes for employees.