If you read nothing else, read this…
• Employers must refer to pensions in an employee’s contract of employment, but those that provide too much detail could run into difficulties if they want to make changes in the future.
• Employers cannot provide staff with opt-out forms if they want to leave the pension scheme, but must inform them of their right to do so.
• Employers that fail to comply with their new duties may face statutory notices, penalties or escalating fines.
Case study: FirstGroup up to speed with auto-enrolment hub
Transport operator FirstGroup will ensure its compliance with the reforms by introducing an auto-enrolment hub that will sit between its pension provision, payroll system, reward portal and communication processes.
The firm conducted a beauty parade of potential providers in June and planned to make an appointment last month, ahead of its May 2013 staging date.
The hub will be used to collect management information such as the date people join the pension scheme, their date of birth, gross pay, and employer and employee contributions. It will also record and calculate when an employee is due to be auto-enrolled (or re-enrolled after three years) and the dates of any opt-outs.
John Chilman, group reward and pensions director, says: “If The Pensions Regulator comes knocking on our door in a year’s time and says ‘prove to me you have invited everyone on the right date’, we have the audit trails and the logs.”
In April 2013, all new staff will be auto-enrolled into the company’s defined contribution (DC) scheme, which will offer phased contributions reaching 5% for both employer and employee. Once staff have been with the firm nine years, they will be able to join its defined benefit scheme the following April.
John Chilman will be speaking at Employee Benefits Live on 25 September
Employers could face financial penalties if they fail to comply with the legal requirements of pensions auto-enrolment at the right time, says Nicola Sullivan
Employers must be aware of the legalities surrounding auto-enrolment and the incoming pension reforms if they are to avoid the financial penalties associated with non-compliance.
In June, The Pensions Regulator published its Compliance and enforcement strategy, which states that employers that fail to comply with their new duties will be subject to statutory notices, penalties or escalating fines (see below).
Alongside its compliance strategy, the regulator reiterated that it is providing information and support to help employers take the right action at the right time. Interactive tools available via its website enable employers to find out what they need to do when and what contributions they need to pay.
Employers should also consider what information they put in employment contracts. Although they will have to refer to future pension provision, those that include too much detail could run into difficulties. David James, an associate solicitor at law firm Sackers, says it is important that employers preserve their right to change or replace their existing pension with a new scheme. “They do not want to tie their hands too much about what they are going to provide,” he says.
Bernadette Briggenshaw, pensions manager at Broadstone Pensions and Investments, adds: “Some organisations have chan- ged their employment contracts to say the employee will be entitled to join whatever pension scheme they are running at the time, to give themselves ultimate flexibility.”
Employers that want to reduce their current contributions to the minimum levels set out in the legislation also need to be cautious. Rebecca McAlees, an associate at Lewis Silkin, says: “Employers could potentially fall foul of the detriment provisions, which say an employer can’t treat an employee detrimentally because of auto-enrolment. If an employer just wants to offer the minimum contribution amounts, and the employment contract says it offers 10%, to reduce this to 5% is going to be a problem.”
Employers must also understand the rights of all workers, not just those who are eligible for auto-enrolment. As a starting point, they need to identify which staff are classified as eligible jobholders, non-eligible jobholders and entitled workers, says Ian Curry, an associate at Wragge and Co.
An employer will have to enrol all eligible jobholders into a qualifying pension scheme. These will be employees aged between 22 and the state pension age who earn more than the automatic-enrolment earnings threshold, which was set at £8,105 for 2012. They will be reassessed annually.
Identify non-eligible jobholders
Non-eligible jobholders will be aged between 16 and 74, and earn between £5,564 and £8,105 a year. Those earning more than £8,105 will fall into this category only if they are aged between 16 and 21 or between the state pension age and 74. An employer must notify non-eligible jobholders that they have a right to join the organisation’s pension scheme and receive employer contributions.
Entitled workers are those aged between 16 and 74 who earn below the qualifying-earnings threshold (£5,564 a year). For this group, the employer must provide information about its pension arrangements and allow these employees to join the scheme, but is not required to make employer contributions.
Sackers’ James says: “Entitled workers have the right to join a pension scheme but their employer does not have to contribute, which is more akin to the stakeholder obligations that currently exist.”
Some employers may think it is simpler to auto-enrol their entire workforce, but they must have a contractual agreement to auto-enrol staff who are classed as non-eligible jobholders or they could face claims for unlawful deduction of salary, says James.
On 1 July, legislation came into effect prohibiting employers from offering incentives to workers to opt out of an auto-enrolment pension. This includes refusing to employ someone because they want to join the organisation’s pension scheme.
Wragge’s Curry says employers should be careful not to use other elements of their reward package in ways that could be perceived as inducing staff to leave the pension scheme. “Employers cannot do anything that would [indicate] that pay rises are dependent on employees opting out,” he explains.
Take care with casual workers
Employers will also need to tread carefully when it comes to casual workers, including those from other EU countries. “Someone who comes over from the EU has a right to work in the UK and should be considered as a UK worker,” says Curry. “Employers have to communicate carefully with these groups.”
Employers can inform staff that they have the right to leave the pension scheme, but the opt-out form must come from the pension provider. Lewis Silkin’s McAlees says: “The opt-out notice can only come from the pension provider, so the employer cannot provide it to employees. But in the information they provide to employees, employers need to tell them they have a right to opt out.”
One thing is clear: employers that plan as far in advance of their staging date as possible are less likely to be caught out by the legal issues involved in auto-enrolment.
The Pensions Regulator’s stance on non-compliance
• Employers that fail to comply with their new duties may be subject to statutory notices, penalties or escalating fines.
• The regulator will have the power to issue a fixed penalty of £400 to an employer, as well as an escalating penalty at a daily rate. Escalating daily penalties are set at a level to fine an employer the cashflow benefit they gain from non-compliance. These range from £50 for the smallest employers (with between one and four staff) and £10,000 for employers with more than 500 workers.
• Under laws that came into effect on 1 July, employers are banned from offering incentives to their employees to opt out of an auto-enrolment pension scheme. This includes refusing to employ someone because they want to join the organisation’s pension scheme.
• To help detect such behaviour, the regulator will provide a whistleblowing facility, through which confidential reports of suspected non-compliance can be made.
