Employers warned of contractual considerations of auto enrolment

A senior employment lawyer has warned firms about the legal implications of auto enrolment on employment contracts.

Under auto enrolment, employers are obliged to enrol employees into a qualifying workplace pension scheme. By 2018, every UK employer will have been brought on board.

Speaking at a pension reform event at the Danish – UK Chamber of Commerce yesterday (8 April), Gemma Ospedale, Partner at City law firm Royds LLP says employers should be aware that the statutory obligations to implement auto enrolment take precedence over the contractual position, if this is not compliant with the statutory obligations.

She said: “Many employment contracts refer to a pension scheme run by the employer in general terms and where to obtain any more information about it, usually from the employer’s HR function or similar. Others will state the existence of a pension scheme and terms of eligibility as well, with often a minimum period of employment required before the person can join the scheme.

“As a result many employment contracts will be out of date once the employer’s staging date for auto enrolment is imminent. And while this is concerning, the key thing is that the employer complies with the obligations for auto enrolment regardless of the contract potentially being out of date.”

Employers are being advised not to include auto enrolment obligations into contracts of employment to avoid potential confusion.

“You could end up with a long winded set of terms in the contract and run the risk of creating parallel duties in the contract and under the Pensions Act,” said Gemma.

“The simplest thing is to put in the contract that the employer will comply with its statutory obligations on auto enrolment at the appropriate time – or issue a side letter varying the pension clause in the contract to the extent that all statutory obligations will be complied with.”

Gemma said however, that where employees are already members of a qualifying pension scheme, the employer does not have a duty to auto enrol them – and can instead opt for contractual enrolment. This method uses the terms of the employment contract to enrol the job holders rather than the auto enrolment duties.

“The employer may continue to use its own scheme as long as it qualifies in line with certain criteria, and these vary depending on whether the scheme is defined benefit, defined contribution, or a hybrid scheme,” says Gemma.

“There are also a number of crucial factors to bear in mind between contractual and auto enrolment, namely obtaining the employees’ consent to put them into the scheme and make deductions from their salary for the employee contributions.

“Under auto enrolment the employer is required to enrol employees into a scheme and deduct contributions without the employees consent.”

Other factors include:

• The employer will still have to provide some information to the employees and will still have to register with the Pensions Regulator setting out how it has complied with its duties.
• The pension scheme must qualify as a qualifying scheme as if it were to be used for auto enrolment. If it does not meet the key qualifying factors for this, the employer’s duties in regard to auto enrolment will continue to apply.
• If an employee is already an active member of a qualifying scheme, they do not have the right to opt into an automatic enrolment scheme, or choose to opt out of the contractual scheme in the same way as staff do who are auto enrolled under the auto enrolment process.
• However, if that individual ceases to become an active member of the contractual scheme, the employer has a duty to review the employee’s status and their eligibility for auto enrolment.

Gemma said that contractual enrolment is not an easy way of getting out of auto enrolment and may in fact be more difficult to operate, especially where only some employees are members of the company’s existing pension scheme.

She said: “Potentially, you could end up having two enrolments running: the contractual with the existing members, assuming the scheme qualifies, and the auto enrolment scheme for those who are not. It may well be simpler to auto enrol everyone rather than have two systems of enrolment running concurrently.”

Gemma also urged employers to look into the Data Protection implications of auto enrolment, and seek express approval from employees to release their personal data to the pension scheme administrator, if express permission to release personal data where required under the Act is not given in the contract of employment.

Before their staging date, employers with existing pensions have to decide whether to offer membership of the scheme to non-members before the staging date. For instance, if an employer has a pension scheme where employer contributions match the employee’s contributions up to a particular percentage (for instance 4% or 6%), the employer will need to decide what percentage to offer, if non-members are auto enrolled - the matching percentage or statutory minimum contribution.

“If the employer offers the option to join its current scheme before the staging date at a matching percentage contribution, and some employees reject this,  make sure it is clear  to them that they will have to be auto enrolled (with the option to opt out)and the percentage rate which will apply,” said Gemma. “If the employer decides that anyone who is auto enrolled starts off on the statutory minimum contributions, some employees who do not wish to contribute very much of their own income may prefer this.”

If an employer welcomes a new employee, Gemma said this brings an opportunity ensure that the contract is fully reflective of that individual’s pension status from the outset.

Gemma concluded that the moral of the story is to check contracts and handbooks before a company’s staging date and if in any doubt take advice.