Since October 2012, some employers have been legally required to automatically enrol employees into a qualifying pension scheme if they are not already members of one. This process is gradually being rolled out to all employers, with many facing “staging dates” in 2014. With the benefit of having advised many employers with the process so far, hrlaw@foxwilliams and Punter Southall provide their top tips to help employers deal with the impact of automatic enrolment.

1.  Early planning is crucial

With an estimated 30,000 companies with between 50 and 250 workers needing to have completed their staging process in 2014, many leading pension providers are taking a hard line and demanding at least 6 months’ notice to quote for and provide an appropriate scheme. If employers leave it too late, they may end up having to choose between a very simple NEST scheme or an expensive and more complex investment product. Early planning is crucial to the smooth-running of implementing auto-enrolment for any employer.

2.  Check your consultation obligations

In some circumstances, there will be no legal obligation for employers to consult with their employees about the introduction of an auto-enrolment scheme because the employer is merely carrying out its legal obligations. However, employers have a statutory obligation to provide certain information to employees about auto-enrolment and its impact.

Other employers may face a statutory requirement to consult with affected employees where auto-enrolment affects participation in an existing scheme. All affected employees must be consulted, including those who have previously failed to participate in pension schemes which they are eligible to join. Such consultation must last for a minimum of 60 days before a decision is reached and any change implemented. Failure to consult in this way could lead to the Pensions Regulator imposing a fine of up to £50,000. There is also the risk of employees complaining that changes imposed without any warning or consultation amounts to a breach of contract, and potentially that they are constructively dismissed.

3.  Work closely with payroll

The importance of payroll in the auto-enrolment process should not be underestimated, and payroll systems ought to be tested carefully in the run up to an employer’s staging date.

The fluctuating earnings of casual staff, zero hours workers and those earning mainly commission can make it difficult to identify which employees are eligible for auto-enrolment and to calculate the cost to the employer. In these cases, it may be prudent for the employer to carry out a dummy-run on its workforce’s projected earnings based on the prior-year’s statistics.

Employers should liaise with payroll service providers to ensure that average earnings are monitored, and this will need to be built into the process, and explored as part of the planning stage.

4.  Beware lifetime allowances

It may be disadvantageous for some staff to be automatically enrolled in a pension scheme, particularly if they have a pension pot which has reached the lifetime allowance cap (as they could incur tax charges as a result of any additional contributions). It is sensible to remind employees to take their own independent financial advice well in advance of the staging date. This should help to prevent fall-outs with key employees who feel that not enough warning and support was provided.

5.  Use your postponement period carefully

Employers are able to postpone the date by which employees must be auto-enrolled by up to three months. However, this does not give employers a free hand to delay matters completely and they should remember that they:

  • need to have their compliant pension schemes in place by their staging date; 
  • must inform employees that the staging date is being deferred. Unless the employer has a sound business reason for doing so (e.g. to ensure harmonisation of joining dates across a number of sites / group companies), this might create employee-relations difficulties; and
  • must allow eligible employees to enrol in the pension scheme from the staging date if they so wish.

6.  Terms and conditions of employment

Employers must ensure that the terms and conditions for existing staff, and template contracts for new hires, are updated to reflect auto-enrolment.

  • It should be clear that employees may become members of the pension scheme if they meet certain eligibility requirements.
  • Employers should exercise caution when recording the level of contributions (both employer and employee) in case this is likely to change in the future, and reserve the right to adjust benefits and to change providers in future. Whilst there may not be an intention to require employees to contribute to the pension scheme at the outset, it is worth reserving the right to require employee contributions in future in case the position changes. 
  • Ensure that employees are informed in writing that participation in the scheme is subject always to the terms of the scheme (or such other registered scheme as may be put in its place), and the tax reliefs and exemptions available from HM Revenue & Customs, as amended from time to time.
  • In new contracts, check whether participation in the pension scheme is stated to be subject to completion of a probationary period or any other criteria which is inconsistent with automatic enrolment. It might also be sensible to clarify the employer’s obligations in respect of the pension scheme, and to limit its liability for the poor performance of the pension scheme.

7.  Pitfalls and surprises

Feedback from larger employers should be the most compelling ‘call to action’ for smaller employers. Pitfalls and surprises are well documented and have included

  • “The formal letter we received from the Pensions Regulator showed a different staging date to the one we were working to”
  • “Our payroll system let us down – we have to do manual workarounds every month”
  • “The process side of things was the most challenging aspect for us”
  • “Our HR and payroll people would have benefitted from more knowledge of the requirements”
  • “We had to implement auto-enrolment a lot quicker than was ideal; we’re now revisiting things to check that we comply and to improve efficiency”

8.  Auto-enrolment audit

Finally, many employers have found it useful to carry out an audit of the auto-enrolment exercise a few months after everything has been put in place. It will give you peace of mind that the business processes adopted by your HR and payroll functions (internal or outsourced), and the interfaces agreed with the pension provider are suitably designed to comply with your employer duties.

Aron Pope (Senior Associate) and Helen Farr (Partner) are employment lawyers at City law firm Fox Williams.
Alan Morahan is head of the DC Consulting practice at Punter Southall. He can be contacted on 020 3327 5460 and Alan.Morahan@puntersouthall.com.

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