Automatic? For employers, not quite

The Pension Regulator’s remit has been widened to regulate employers meeting the requirements of the auto-enrolment regime.

The first contact with employers will be when the Regulator confirms the date by which all workers who are eligible under the legislation, but are not members of a qualifying scheme, must be automatically enrolled into a qualifying scheme. It can impose fines and penalties on employers for non-compliance with the regime.

Now that auto-enrolment (established by the Pensions Act 2008) into a pension scheme for non-pensioned employees is up and running, albeit so far for the largest employers, will this mean that it will cascade down to medium and smaller employers without difficulty or drama as their staging dates arrive?

Certainly those employers can benefit from knowledge and experience of the approaches adopted by the larger employers whose staging dates have already arrived, but many are still likely to face challenges in terms of adjusting to the reversal in approach to pension provision, and the “governance budget” available to meet the statutory requirements, not only at the staging date allocated and at each automatic re-enrolment date but on a continuing basis.

Necessary steps

Steps required for employers include:

• training all staff involved on requirements, processes and procedures;
• assessing the status of all workers, including casual, temporary and, in some cases, agency workers, to establish the category they fall into (see below) and what needs to be provided;
• reviewing existing pensioned staff to identify whether there are any gaps in pension coverage which need to be dealt with to meet the regime;
• gathering sufficient data and making sure that information and record keeping requirements are met at staging date, each automatic re-enrolment date and on a continuing basis;
• designating a qualifying scheme;
• reviewing terms and conditions, processes and procedures (including recruitment, promotion and communications), and putting in place adequate monitoring and record-keeping processes. While an eligible job holder can opt out, no terms, processes or communications can encourage or tend to encourage anyone to opt out of auto-enrolment for pensions;
• reporting to the Pensions Regulator and otherwise meeting all requirements.

The categories of workers are:

• eligible job holders, who must be automatically enrolled into a qualifying scheme;
• non-eligible job holders, who have a right to opt into membership of a qualifying scheme but whose employers do not require to enrol them automatically; and
• entitled workers, who are entitled to join a pension scheme but not necessarily the scheme into which eligible job holders are automatically enrolled.

Potential traps

In terms of designating a qualifying scheme to meet the requirements, it may be that that can be achieved by a scheme already in place. If not, or an employer wishes to make different levels of pension contribution for different categories of workers going forward, it may designate an additional qualifying scheme. Many employers already have more than one pension scheme and this is a good opportunity for a review to check that what is in place is fit for purpose overall. Given the increase in cost for many employers as a result of the auto-enrolment regime, tiered pension arrangements are likely to be increasingly common. Care will need to be taken to avoid approaches which could lead to claims, including discrimination claims, succeeding against employers.

It may be possible to apply specific exemptions (Equality Act (Age Exceptions for Pension Schemes) Order 2010 (SI 2010/2133)) to seek to avoid age discrimination claims if there is different treatment going forward for currently non-pensioned workers. However, there is currently a lack of clarity in certain circumstances, so care needs to be taken in approach.

Equally, care should be taken in assessing and designating an appropriate additional pension scheme. NEST (National Employment Savings Trust), set up by the National Employment Savings Trust Order 2010 (SI 2010/917), is the default scheme. It must accept any employer that wishes to participate. Other providers have set up competing arrangements and no doubt more will enter the market. Employers should take appropriate financial and legal advice before deciding and designating a scheme.

The period of time required for an employer to meet its commitments under the regime while optimising the outcome for its business and employees will vary depending on its start point and strategy. What can be said, though, is that it makes business sense to carry out at least preliminary work in advance of the notification of the relevant staging date, ideally at least 18 months in advance of that date, to increase the chances of optimising the position, particularly where employers already have pensioned workers.