How will pension reforms affect employment contracts?

If you read nothing else, read this…

• Auto-enrolment is complex and may cause employers difficulties.

• Care is required in how part-timers, fixed-term workers and secondees are treated.

• Identifying eligible employees is one of the hardest tasks, because an employer’s existing systems will not be set up to capture this data.

• Communication is crucial to achieve success and compliance.

Benefits professionals’ heads may be starting to spin as the challenges of auto-enrolment come into focus, but some orderly planning should see them through, says Paraig Floyd

This year will be one of most momentous in recent times for benefits professionals, because in October, pensions auto-enrolment moves from the statute books into the workplace.

Implementation of the new regime will be staggered using staging dates, based on workforce size. Employers with 120,000 or more employees will be the first in line in October to enrol eligible staff into a suitable occupational pension plan.

The thing about statutory legislation is that however unpalatable its imposition may be, employers cannot be blamed for insisting their employees comply with it. But that does not make employers’ jobs any easier.

An eligible employee is a worker aged 21 or over earning more than £7,475 a year. This figure is likely to rise by reference to the consumer prices index (CPI). Employees earning below this threshold are not ineligible to join the pension scheme, but they will not be enrolled automatically.

Employers will need to communicate with all potentially-eligible staff, to warn them that pension contributions will be deducted from their pay. They will also need to tell remaining staff that they may become eligible, or that they may choose to join the scheme if they wish.

Employees are entitled to opt out of the pension scheme for a period of three years, after which they will be automatically re-enrolled. However, eligibility does not work in the same way. When an employee’s earnings push them above the minimum pay threshold, they are immediately eligible to be auto-enrolled.

Further challenges will arise for employers that opt to run more than one pension scheme: one to reward longer-term staff, and one to capture all others who may fall under the regulations, particularly in high-turnover industries such as hospitality. Catrina Smith, partner, employment law at Norton Rose, warns that such workforce divisions may have unintended, but implicit, consequences in terms of discrimination.

“Employers need to be careful about moving people into a scheme,” she says. “If Nest [the national employment savings trust] is offered to all part-time workers, as opposed to part-time and fixed-term staff, employers must be sure they do not fall foul of the regulations covering less-favourable treatment.”

Employers must be sure of the objective justification for offering different pension scheme terms, while being aware of subtleties, such as the demographics. Smith adds: “The majority of part-time and many fixed-term workers are likely to be women, so there is a possible risk of claims of indirect sex discrimination.”

Risk of discrimination

Employers with a high turnover that set an employee’s contracted hours to prevent them from becoming an eligible employee, to help reduce administration, are also at risk of discrimination. For example, one employee may be on a higher hourly wage, due to the difference in the minimum wage or length of service, allowing another to work considerably more hours in a week.

In the majority of cases, employers are unlikely to want to run a Nest or alternative arrangement on top of their existing legacy money purchase and final salary schemes, says Richard Wilson, senior policy adviser at the National Association of Pension Funds. “Employers are generally unwilling to remove an existing scheme and promote a new one in its place, although there are good reasons for running a separate scheme,” he points out.

“It is reasonable that staff of an oil company who work on the forecourt may have different requirements from those working at head office. Employers should seek to meet the different needs of their employees.”

Agency workers are a further complication of auto-enrolment. It remains unclear whether they might be eligible jobholders of the organisation where they are working and therefore able to claim access to its pension, even if the organisation pays the agency and the agency is therefore the employer.

Norton Rose’s Smith says: “It is well worth employers asking any agencies they use to indemnify them from liability to provide for its workers within auto-enrolment.”

Secondments are another potential headache. Robin Hames, head of technical at Bluefin, says: “If an employee is seconded from overseas for 12 or 24 months, are they considered to be ordinarily working in the UK and therefore auto-enrolled?”

If the originating organisation has to pay contributions in the interim, these would need to be paid into the employee’s pension scheme and then cross-charged.

Communication lies at the heart of a sound auto-enrolment process, and this involves getting the right information to the right employees, and with care. Providing information prescribed by The Pensions Regulator (TPR) is relatively easy, but the provision of additional information may prove tricky for an unsuspecting employer. David Marlow, development manager at Creative Benefits, warns: “Employers must be careful to neither offer advice nor coerce employees to opt out of the scheme.”

The danger of offering advice is that it may encourage opt-outs, particularly among older workers or those with a small income, who are likely to be on the threshold of means-tested benefits and may find themselves in breach.
But Marlow believes TPR will cut employers substantial slack with their implementation strategies in their first year, due to the inevitably large workload that it faces. He explains: “An employer that can claim to have done the right thing and has an audit trail for its decision-making process is more often than not unlikely to be punished.”

The good news about auto-enrolment is that it is nearly here, so employers can crack on with implementation. The bad news is that even the best-resourced employers with best-of-breed systems are already finding it hard.

One thing is for sure: it is far too late to still be considering the potential cost of auto-enrolment. Employers should instead be concentrating on implementation, and how this will be achieved.

Communicating change

Employers are required to communicate auto-enrolment to those they must auto-enrol, and those they do not, but who may want to join the scheme.

Communication is essential, so employers may as well try to do it right. An excess will turn people off. Giving staff face-to-face meetings with an adviser is the best way of communicating change, but it is expensive.

Online video and some written material is useful, but employers should keep it in bite-sized pieces or risk losing their audience.

Online communication alone is not enough. Employees want to use media they understand and can navigate easily, such as social networking site Facebook. One retail firm has even opted to use Facebook as its primary means of distributing information about auto-enrolment.

Twitter has its limitations. For example, it has a maximum message or ‘tweet’ length of 140 characters. That said, this limit is far outweighed by the fact that information can be distributed quickly and cheaply, and in an easily-accessible way.

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Increasingly, information is also being devoured via smartphones, hence the introduction of communication campaigns featuring quick-response (QR) codes, which connect smartphone users to relevant content once scanned using their device.

Read more on auto-enrolment and the pension reforms