New pensions requirements for employers

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

In stages from October 2012 onwards, all UK employers will be required to auto-enrol their “eligible jobholders” into a pension arrangement and pay 3% employer contributions. So what should you be doing now? Here our pensions team answers some common misunderstandings and offers some practical advice on how you can start to prepare for the new regime.

“I already have pension arrangements in place for my staff – why does this matter to me?”

Auto-enrolment represents a major shift for UK pension provision in the private sector. Currently, the minimum requirement on employers is to provide employees with access to a stakeholder arrangement, and, in practice, many employers do not actually pay pension contributions on behalf of employees. Even if you do offer more generous pension provision for staff, it may not be practical to use your current arrangements (if, for example, your pension scheme is closed to new joiners).

Importantly, staff such as temporary and fixed term contractors and even agency workers may fall within the definition of a “jobholder” meaning that the obligation to provide pensions will be far wider than at present. It can also potentially cover the following:

• Unusual or irregular working arrangements – i.e. ‘casual’, ‘freelance’, ‘as required’, ‘zero-hours’ or similar
• Contractual arrangements with consultants and the self-employed – depending on the nature of the contract or service agreement they are working under, these individuals may be workers (including those contracted through their own limited company) or they may be self-employed contractors (i.e. not a worker).

Given the complex employment relationships in the construction industry (often fragmented, informal and casual in nature) and the ever growing cost and price pressures, the new auto-enrolment requirements are likely to be an unwelcome pill for constructors to swallow.

The Pensions Regulator will be responsible for policing auto-enrolment and will be able to issue enforcement notices and penalty notices to ensure compliance. Criminal sanctions will also be available against any employer who is guilty of “wilful” non-compliance with the new duties.

“Can I just use my existing group pension arrangement for auto-enrolment?”

Possibly. Although employers will be able to use their current pension arrangements to auto-enrol jobholders any existing scheme that is used will need to meet certain quality criteria. This means that the scheme will need to accept total contributions of 8% of pay (of which 3% is paid by the employer) as well as offering members suitable default investment options.

“I am concerned about cost – can I just do a deal with my staff on pensions?”

No. You cannot contract out of the requirement to auto-enrol unless the jobholder himself chooses to opt-out in line with a particular process. The legislation also contains a number of protections which prevent employers from offering inducements to opt-out or engaging in prohibited recruitment conduct.

“So what do I do next?”

• Clearly given the broad scope of the types of worker who will be caught by the new regime you should start to review your existing workforce now to be clear on who will be classed as a “jobholder” for the purposes of auto-enrolment. You should also check your organisation’s “staging date” from which the obligation to auto-enrol will apply – the exact date will depend on the headcount in your organisation.
• You should also consider which pension vehicle you will use to auto-enrol your jobholders and, if necessary, review your existing pension arrangements to assess their suitability as a qualifying pension arrangement.
• From a financial perspective, auto-enrolment will amount to a 3% hit on your payroll. You should therefore start to plan now to manage these additional costs and factor the cost of auto-enrolment into your budgetary forecasts for 2012 onwards.

If you have any questions in relation to auto-enrolment generally or about how it might affect your organisation in particular then please contact David Farmer ([email protected] / +44 (0) 207 067 3013) in the first instance.