Automatic enrolment - reforming the reforms

16 March 2016

Workplace pension reform has become a part of 'business as usual' for many UK employers. The Pensions Regulator recently confirmed that more than 100,000 employers have enrolled over six million workers into a pension scheme.

Employer duties apply to all employers with more than 50 workers as of 1 April 2012. Over the next two years, the remaining smaller employers will be subject to workplace pension reform.

Workplace pension reforms do not stand still. Every year, the financial thresholds, triggers and limits that are used to determine worker eligibility and minimum contribution levels are reviewed. This April, those regular changes will be accompanied by issues arising from the end of contracting-out for defined benefit (DB) schemes.

The Government has also been looking (again) at the regulatory burden for employers. As a result, it will be tweaking the legislation in an attempt to remove unnecessary burdens.

We are also seeing the first legal cases to focus on issues arising from the Pensions Act 2008. As a result, workplace pension reform is being examined through the lens of litigation.

Finally, it is more than three years since the largest UK employers were subject to employer duties. Many larger employers will now be facing automatic re-enrolment.

Thresholds, triggers and limits - revised figures

The annual review of the financial thresholds, triggers and limits used for workplace pension reform will see one of the key figures change with effect from 6 April 2016.

The Department for Work and Pensions decided not to change the automatic enrolment earnings trigger or the lower limit for the qualifying earnings band. The upper limit of the qualifying earnings band was, however, increased in line with the upper earnings limit for national insurance contributions.

As a result, the relevant figures for 2016/17 that will be in effect from 6 April 2016 are:

  • £10,000 for the automatic enrolment earnings trigger (unchanged from last year);
  • £5,824 for the lower limit of the qualifying earnings band (unchanged from last year); and
  • £43,000 for the upper limit of the qualifying earnings band (+ £615 from last year).

The relevant figures for different pay reference periods have also been prescribed:

  Automatic enrolment earnings trigger Qualifying earnings band (lower limit) Qualifying earnings band (upper limit)
Weekly £192 £112 £815
Four weekly £768 £448 £3,261
Monthly £833 £481 £3,532
Annual £10,000 £5,824 £43,000

End of defined benefit contracting-out and qualifying scheme status

Contracted-out salary related pension schemes are regarded as being 'qualifying schemes' for the purpose of discharging employer duties simply by having a contracting-out certificate in place.

On 5 April 2016, contracting-out will be abolished. Employers will therefore no longer be able to certify that a scheme is a 'qualifying scheme' on the basis of being contracted-out.

Instead, employers will need to ensure that they can continue to certify the scheme on one of the other bases permitted under the legislation. These are the Test Scheme Standard or the alternative quality requirements for defined benefit schemes (which includes the "cost of accruals" test - an alternative measure of quality that is based on the cost of providing members' benefits).

The necessary certificate has to be put in place by 5 April 2016 and in most cases will require actuarial input.

What is the Government proposing to make this easier?

The Government is proposing to introduce an easement so that employers can more easily meet one of the alternative quality requirements.

The proposal will introduce a transitional easement for employers of defined benefit schemes that:

  • satisfy the contracting out conditions on 5 April 2016; and
  • where the benefits in their schemes have not changed.

Employers with such schemes will be allowed to apply the cost of accruals test at a scheme level. Without the easement, employers with such schemes could have been forced to apply the cost of accruals test at a benefits scale level.

The easement is transitional and will last until the earlier of:

  • the date that the actuary signs the first report after 5 April 2016 that breaks down the cost to benefit scale level; or
  • 5 April 2019.

Government consultation on technical changes

On 10 March 2016, the government published its response to a consultation on simplifying processes for workplace pension reform. The consultation (Workplace pensions automatic enrolment: miscellaneous technical changes to provide easements for employers) looked at easements that could be introduced to reduce the administrative burden on employers.

The suggested easements are grouped into two main categories.

Exceptions to the employer duty

Employer duties apply to workers as defined in the Pensions Act 2008. On 1 April 2015 a set of exceptions to the employer duty were brought into effect. These applied to individuals:

  • with tax protected status for existing pension savings (i.e. fixed, enhanced or individual protections);
  • who have given or been given notice of termination of employment; and
  • who cancel membership of a qualifying scheme or opt out before automatic enrolment.

If the exceptions apply to an individual, the employer duty in respect of that individual is turned into a power. As a result, employers can choose to automatically enrol such individuals, but they are not required by law to do so.

This was particularly useful for individuals with tax protected status for existing pension savings as they risked losing valuable protections if they accrued benefits after being automatically enrolled.

The Government acknowledges in its consultation response that the legislation providing the exception for individuals with tax protected status for existing pension savings will not be amended in time to cover the reduction in the lifetime allowance from  £1.25 million to £1 million. Regulations will be introduced 'at the earliest opportunity'. In the meantime, an employer duty will apply for individuals with Fixed Protection 2016 or Individual Protection 2016.

As part of its review of easements, the Government consulted on extending the exceptions to individuals who are:

  • company directors; and
  • genuine partners in Limited Liability Partnerships (LLPs).

Genuine partners in Limited Liability Partnerships will be subject to an exception. HMRC's Salaried Members Rules will be used to determine whether a member of an LLP is a genuine partner, as opposed to an employee (to whom the exception will not apply).

The Government has confirmed that these exceptions will be implemented via new regulations.

Compliance easements - reducing complexity for employers

Re-declaration of compliance

The Government will introduce a single re-declaration of compliance deadlines for all employers. Employers will only have to provide information to The Pensions Regulator within five months of the third anniversary of their original staging date.

This replaces the current regime which prescribes two separate deadlines for the redirection of compliance, depending on whether or not an employer has to re-enrol workers.

Early automatic enrolment - bringing staging dates forward

Under the current legislation, employers have to meet prescribed conditions in order to bring forward their staging date. The main restriction that the Government is targeting is the requirement to give The Pensions Regulator at least one month's notice of an intention to bring forward a staging date.

The Government has confirmed that it will introduce new regulations:

  • firstly, to remove the requirement to give The Pensions Regulator one month's notice of an intention to bring forward a staging date;
  • secondly, those employers who do not have anyone to automatically enrol:
    • can bring forward a staging date to any date - they will not be restricted to picking the first day of a month; and
    • do not need to get the agreement of a pension scheme to bring forward their staging date.

High Court case on peripatetic workers - who works or ordinarily works in the UK?

One of the first court cases to subject employer duties to judicial scrutiny focused on whether an individual "works or ordinarily works in the UK".

The most important employer duties under workplace pension reform only apply to jobholders. One of the tests for jobholders is that they are workers who "work or ordinarily work in Great Britain under the worker's contract". Corresponding legislation in Northern Ireland means that this effectively means workers who work or ordinarily work in the UK.

For most of us, this is a straight-forward question. We live, work, sleep and spend money in the UK. We might head overseas on holiday, but there is no doubt about meeting that limb of the test.

But there are plenty of workers for whom this is not a straight-forward question. Pilots, cabin crew, workers on ferries, professionals and executives who have a multi-jurisdictional role and managers who cover regions and who do not spend the majority of their time in any one country. It has been an issue that HR teams in sectors as diverse as oil and gas, travel, I.T. and charities have had to consider.

What was the case about?

The High Court has now considered the issue in the case of Fleet Maritime Services  v The Pensions Regulator [2015][1]. In this case, seafarers were engaged by Fleet Maritime Services to work on cruise liners. Fleet Maritime Services is incorporated in Bermuda and has no place of business in the UK.

The seafarers spent three to six months on board a cruise ship and then had a number of weeks' leave. As one would hope for a cruise holiday, the ships spent the majority of their time outside of UK territorial waters.

Some of the seafarers lived in the UK. Some did not. They were paid most of their wages in sterling, but did receive local allowances in different currencies.

The Pensions Regulator formed a view that employer duties would apply for workers who lived in the UK and who joined and left their ship at a UK port. This was regardless of the fact that the ship would then go on to spend most of its time in non-UK waters.

There would also be an employer duty for a UK resident worker who travelled to an embarkation port outside of the UK, but only for the travel time from the UK to that foreign port.

Fleet Maritime Services disagreed with this assessment and sought judicial review of The Pension Regulator's decision to issue a compliance notice in respect of such workers.

What did the High Court decide?

The High Court decided that:

  • an individual who works in foreign waters, lives in the UK and who embarks on a ship in the UK does work or ordinarily work in the UK;
  • an individual who works in foreign waters, lives in the UK and who embarks on a ship in a port outside of the UK does not work or ordinarily work in the UK;
  • the 'base test', as favoured in the key House of Lords case of Lawson v Serco [2006],  is the appropriate test to apply in respect of the Pensions Act 2008; and
  • not all workers will have a base for the purposes of an assessment under the Pensions Act 2008.

The last point is the most controversial as it marks a departure from the position in Lawson. In Lawson, the House of Lords decided that a peripatetic employee had to have a base for the purposes of being able to bring an unfair dismissal claim. This case states that this does not apply for the purposes of satisfying the worker test for automatic enrolment.

Otherwise, the case was broadly in line with The Pension Regulator's detailed guidance on automatic enrolment.

Automatic Re-enrolment

One of the employer duties is automatic re-enrolment. This applies in the same way as automatic enrolment and is required once every three years.

Employers can choose an Automatic Re-enrolment Date that is no less than three months before or three months after the third anniversary of their original staging date or their last Automatic Re-enrolment Date.

As a result, the duty will already apply to employers who had staging dates in 2012 and early 2013 and will start to affect employers who staged later in 2013.

Automatic re-enrolment could present similar challenges as faced by employers when they prepared for automatic enrolment. In particular, employers will need to consider:

  • what date to choose for automatic re-enrolment - the legislation allows a degree of flexibility. Employers can choose a date that falls up to three months before or after the third anniversary of their staging date. This means that they can avoid peak trading periods, inconvenient accounting or tax years and align with pay reference periods;
  • resources to deal with automatic re-enrolment - automatic re-enrolment should not require as much work as automatic enrolment. It is, however, likely to generate queries, opt out requests and more administration. This needs to be factored in when planning budgets and resource to cover this period;
  • whether to take advantage of new statutory exceptions - employers can choose not to re-enrol individuals who have left the scheme in the 12 months leading up to the re-enrolment date. In addition, there are other groups who can be excluded from the requirement to automatically re-enrol (see 'Exceptions to the employer duty' above);
  • re-registration of compliance - employers must re-register their compliance with The Pensions Regulator. They will do this by providing a fresh "declaration of compliance". The deadline for this is, in most cases, currently two months from the Automatic Re-enrolment Date. This is likely to change with new government regulations extending the deadline to five months (see section three 'Government consultation on technical changes' above). 

Benefit redesign and Scheme closures - statutory or contractual Enrolment

As workplace pension reform has become an established part of the pensions landscape, it starts to interact with other pensions processes and issues.

Many employers have already had to grapple with the interaction between workplace pension reform and TUPE. Now we are increasingly seeing issues arising from benefit redesign exercises, including closing defined benefit schemes to future accrual.

Closing a scheme to future accrual will mean that what was once a qualifying scheme for the purposes of workplace pension reform will cease to be a qualifying scheme.

The Pensions Act 2008 states that employers can only take action that results in a qualifying scheme ceasing to be a qualifying scheme if the jobholders become an active member of another qualifying scheme within the prescribed period.

In practice, this means on the day following the day on which the scheme ceased to be a qualifying scheme.

Employers will usually deal with this as part of their benefit redesign project. Often, this is by offering membership of a replacement defined contribution arrangement to affected employees.

As well as dealing with issues arising from the trust deed and rules, employee contracts, consultation and decision-making, employers need to ensure continued compliance with the Pensions Act 2008.

In particular, they need to ensure that the proposed timetable and process for the implementation of the benefit redesign proposals will work with their employer duties under workplace pension reform.

Implementation will require careful thought and detailed legal advice. Some key considerations include:

  • Will the affected employees be automatically enrolled or contractually enrolled into the replacement defined contribution scheme?
  • Does what the employer is proposing to do comply with the requirements of the Pensions Act 2008?
  • Are there any complications arising from the use of salary sacrifice?

Footnote

[1] Fleet Maritime Services (Bermuda) Ltd, R (on the application of) v The Pensions Regulator [2015] EWHC 3744 (Admin) (21 December 2015)


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