Legal Insight: The HR implications of pensions auto-enrolment
From 1 October this year, pension auto-enrolment will start to affect the UK’s largest businesses.
While a lot of these employers will already have got to grips with fundamental issues such as identifying their staging date and considering which pension scheme to use to satisfy the new legislation, there are a number of HR implications that have not yet come into focus. Auto-enrolment will create a massive upheaval in terms of workplace pension provision and should not simply be dismissed as a “payroll issue”: HR teams will need to understand, address and help to implement some significant changes. To start with, the anti-avoidance provisions of the new rules have been law since July this year and now apply to all employers regardless of when their staging date occurs. This means that, during the recruitment process, organisations are now restricted in any conduct intended to screen out applicants who might want to save for a pension. These restrictions potentially cover all aspects of the recruitment process such as the way in which vacancies are advertised; what is said during interviews; how references are taken up and the terms of an offer. Therefore, employers will need to protect themselves against possible claims from job applicants attesting that they have been overlooked because they wished to take up their auto enrolment rights. In terms of sanctions, the Pension Regulator has the power to issue compliance notices and, ultimately, fines of up to £50,000 if an employer is found to have engaged in prohibited recruitment conduct. But the anti-avoidance issue also continues throughout the working relationship with an employee. Inducements For instance, organisations cannot take steps to “induce” staff members to exercise their right to opt out of auto-enrolment. They also cannot take steps to disrupt a worker’s continued enjoyment of auto-enrolment once that enrolment has taken place. What counts as inducement will be fact-specific but will certainly include behaviour such as offering employees a better rate of pay, or other benefits, in return for opting out. This situation raises interesting questions for employers that offer their personnel flexible benefits packages. These packages will need to be examined carefully, especially if employees are able to give up pension benefits in favour of alternative benefits. Opinions vary as to whether this scenario might be treated as “inducing” employees to opt-out, but the Pensions Regulator’s guidance states: "An employer who offers a flexible benefit package which offered alternative benefits instead of the basic 3% employer contribution could be at risk of breaching the inducement clause." As a result, HR directors would be advised to examine the approach adopted by their schemes and evaluate how options are presented to workers when they are making their selection. People preferring to take a cautious approach should ensure that their flexible benefits scheme provides, at the very least, the minimum statutory employer pension contribution, no matter what other options are chosen. But the anti-avoidance rules will also have an impact on dismissal situations. Any termination related to an attempt to enforce auto-enrolment rights will risk a tribunal claim of automatic unfair dismissal. It is worth noting that such claims do not require the usual qualifying period for unfair dismissal (now two years), however. Furthermore, actions short of dismissal will be susceptible to complaints of detrimental treatment, which again, are claims that carry no minimum service requirement. Workers who claim that breaches of the rules have taken place, on the other hand, may be able to argue that they have raised a whistleblowing complaint, giving rise to further layers of protection. Key HR considerations As a result, key considerations for HR directors will include ensuring that those managers involved in taking recruitment and dismissal decisions are properly trained and that policies and processes reflect the new rules. For example, the new regulations require that extensive, prescribed information about auto-enrolment must be provided to the workforce. Ensuring that these obligations are met and, more generally, that documentation is brought up to date will prove to be a major exercise for many HR departments. For instance, offer letters, employment contracts, policies and intranet sites will all need to be updated in order to reflect employees’ new auto-enrolment entitlements. It will also be necessary to evaluate existing clauses in contracts and handbooks: data protection clauses because they will cover the transmission of pension data; deduction-from-wages clauses (there is a statutory exemption if mandatory employee contributions are deducted, but not if the amount is in excess of mandatory levels) and existing pension flexibility clauses, which will need to be reviewed to take potential future changes into account. The key to implementing these changes successfully will be to engage staff and communicate with them effectively. This means that the HR team is likely to spearhead the process of explaining the new rules and should consider planning an internal publicity campaign before they come into force. But employers examining the question of who their “eligible jobholders” are should also be aware that the new rules include many in their workforce who wouldn’t normally legally be classified as “employees”. Therefore, they must be alive to the prospect that atypical members of staff such as casual workers will become eligible for auto-enrolment too. Moreover, those organisations that employ bonus schemes or overtime arrangements may find themselves having to examine such initiatives as the definition of what counts as ‘pensionable pay’ can involve workers “tipping over” the earnings trigger. As a result, some businesses will, undoubtedly, seek to change their remuneration structures in order to (legally) try and keep employees beneath the relevant thresholds. The value of planning If employers decide to make changes to their existing pension arrangements for current staff, however, they will need to keep in mind the usual rules about changing terms and conditions. It will also be necessary to take into account the possibility that such change could trigger statutory pension consultation rules, which require a consultation of up to 60 days. These rules apply where certain “listed changes” are being made such as stopping further benefits accrual by existing members or requiring member contributions where they were not previously required. But the situation is also likely to force some employers to think about the potential impact on their relationships with agency providers. Generally, agencies will be responsible for auto-enrolling their own workers. But HR directors will also need to consider the nature of their contracts with these agencies and the kind of documentation that is provided to atypical workers. The aim here is to ensure that a clear delineation of responsibility and a clear understanding of each party’s auto enrolment duties are factored in. Corporate takeovers, mergers or internal reorganisations in which TUPE applies could likewise generate some interesting scenarios. Once the new rules are in force, organisations will generally be required to immediately auto-enrol eligible job holders following such a transfer. Since 2004, however, employers have also been required to provide them with minimum pension benefits after their transfer, which could result in staff being entitled to more generous pension benefits than originally envisaged under the auto-enrolment model. While the above simply provides a flavour of some of the key issues that HR directors are likely to face as auto-enrolment implementation gathers pace, others are bound to come to light as the new rules start to affect more employers. This means that HR teams would be well advised to start evaluating these issues now so that they have plenty of time to prepare and start implementing suitable strategies to deal with them.
Charles Rae is employment specialist partner at law firm, Shoosmiths.