Automatic enrolment and the law
06 December 2017
A Joint Policy Paper from Eversheds Sutherland and Royal London explores the question, ‘How far do employers’ duties extend?
“There is a general assumption that once employers have met their initial duties by enrolling eligible jobholders into a compliant scheme, re-enrolling those who had opted out every three years, and enrolling new workers as and when they start work, this is largely ‘job done’.
But this paper asks the question as to whether employers can simply sit back at this point and congratulate themselves on a job well done, or whether there are ongoing issues of which employers should be aware?”
The policy paper concludes that employers in general, and larger employers in particular, should be wary of taking their eye off the ball when it comes to automatic enrolment. It notes that there are examples in other countries of employers facing legal action where they are deemed not to have done the right thing by their employees when it comes to pensions. Also noted is that it would not be unprecedented for UK regulators and politicians to decide in the future that the employers of today should have met higher standards than the legal minimum requirements.
Employers who wish to insulate themselves against these risks may wish to consider the following areas identified in the paper:
- In choosing a plan in the first instance, to undertake due diligence beyond simply selecting any ‘compliant’ plan
- To recognise that automatic enrolment relies heavily on ‘defaults’ and that employees may be very passive in the whole process; in choosing a scheme, employers may therefore want to look at service to members, suitability of the default fund and other investment options and comparative levels of costs and charges; employers may also wish to engage with their employees to ensure that they are aware that statutory minimum contribution rates may not be sufficient to enable workers to afford to retire at a time of their choosing; larger employers in particular might reasonably be expected to be in a position to go ‘the extra mile’ in this regard
- To review the scheme on an ongoing basis; whilst there are no obvious UK precedents for legal action against employers who choose an underperforming pension scheme, US employers have paid out a total of over $350 million to settle claims relating to failures in retirement plans for workers
- To consider the position of employees who are members of the scheme but are non-taxpayers; some pension schemes deliver tax relief through the ‘net pay arrangement’ (NPA) which does not deliver tax relief to non-taxpayers, in contrast to the ‘relief at source’ process which does; employers could be vulnerable to challenge by lower paid workers if they choose an NPA scheme without good reason, since the pension received by the lower paid worker in retirement is likely to be smaller as a result
- To ensure that record-keeping is of a high-standard, not least given the large number of individuals who will build up ‘deferred’ pension pots as they change jobs repeatedly; individuals who have had no contact with a firm for many years may need information about their past pension arrangements, including help tracking down ‘lost’ pensions
The joint policy paper from Eversheds Sutherland and Royal London can be viewed through the link below: