As the 1 October 2012 commencement date of the five year staged implementation period for employers’ auto-enrolment duties draws closer, this July edition of the Pensions Bulletin considers some of the recent developments around the new requirements and reminds employers of the key points they should be considering as they approach their staging dates.
Recent developments around auto-enrolment
Auto-enrolment and salary sacrificeSalary sacrifice arrangements, which can be tax efficient for both employer and employee, involve an employee giving up part of his future salary in exchange for his employer providing a non-cash benefit. This can include the contribution of an equivalent amount to a pension scheme.
Generally, an effective salary sacrifice arrangement must not permit an employee to revert to his original salary within a 12 month period. Concern had been expressed that the statutory right to opt-out within one month of being auto-enrolled was incompatible with this requirement, and could result in financial penalty for employees auto-enrolled via salary sacrifice who then opt-out. To address this point, HMRC has recently confirmed that pensions contributions will be added to the list of salary sacrifice schemes which allow employees to opt out at any time (along with employer-provided childcare, workplace parking and employer-provided cycles), allowing salary sacrifice arrangements to meet the auto-enrolment requirements.
Auto-enrolment and offshore workers and seafarersFollowing consultation, the Government has determined that offshore workers and seafarers who are ‘ordinarily working in the UK’ will be included within the auto-enrolment regime, meaning that these groups of workers will be treated in the same way as land-based workers. This is, however, subject to a ‘sunset’ provision which will remove such workers from the scope of the auto-enrolment duties on 1 July 2020. A review will be conducted prior to 1 July 2020 to determine the Government’s future policy for offshore workers and seafarers.
Guidance issued by the Pensions Regulator confirms that an off-shore worker is ‘ordinarily working in the UK’ where he works under a worker’s contract in the territorial waters of the UK, or in connection with the exploitation of the sea bed or subsoil, or the exploration of their natural resources, in the UK sector of the continental shelf. Seafarers working solely in UK territorial waters, with only occasional trips outside UK territory will also be considered as working in the UK, particularly if this is specified in their contracts. More complex considerations will apply if the seafarer is not restricted to UK territorial waters.
Auto-enrolment and dual-status workersIt has recently been confirmed that ‘dual-status workers’ will be exempt from the auto-enrolment regime. A ‘dual-status worker’ is one who works in the UK but is subject to the social and labour laws of another EEA member state. This exception will prevent the employers of such workers having to comply with the cross-border scheme requirements (which impose additional regulatory and funding obligations) in order to fulfil their auto-enrolment duties.
Auto-enrolment and fixed and enhanced protectionEmployees with fixed or enhanced protection will lose their protected status if they are auto-enrolled and fail to opt-out within the one month opt-out period. Where a member opts-out within the one month opt-out period, the auto-enrolment legislation treats him as never having been a member of the scheme. There is therefore no benefit accrual and so fixed or enhanced protection is not affected.
Employers should however be aware that if an employee is automatically enrolled where there is no statutory duty to do so, that member will lose their protected status – in the absence of any legislation treating him as not having been a member, even if the member opts out at the first possible opportunity and accrues no benefits he will be considered to have started a new pension arrangement and so could lose his fixed or enhanced protection.
The Pensions Regulator’s strategy for tackling non-complianceThe Pensions Regulator has recently published its detailed strategy for monitoring and enforcing compliance with the auto-enrolment regime, together with an accompanying policy paper. These confirm that the Regulator’s main objective will be to establish and maintain a ‘pro-compliance’ culture, with a focus on educating and supporting employers. The Regulator has published a number of detailed guidance notes for employers and their advisers to assist in this regard. The Regulator will also seek to maximise deterrence, detect non-compliance quickly, investigate potential braches fairly and objectively and apply appropriate civil or criminal sanctions, where appropriate.
The greatest issue for the Regulator will be the identification of non-compliance, particularly amongst smaller employers. Although the Regulator does recognise that non-intentional breaches of the requirements will occur, it has indicated that it will conduct sampling exercises and also rely on information passed to it from other agencies and from whistle-blowers to assist with this.
Key questions for employers
Employers starting to prepare for auto-enrolment may wish to consider the following key questions:
- When will auto-enrolment apply to us? And will we use the optional waiting period?
- Which of our workers will need to be auto-enrolled?
- What pension scheme(s) will we use? If we are using our own existing pension scheme, will we need to make any changes to it? If a defined benefit scheme is in place, can we defer our auto-enrolment duties for certain workers until the end of the permitted deferral period (expected to be 30 September 2017)?
- How will we communicate with our workers about auto-enrolment?What are the cost implications (both direct and indirect) of auto-enrolment for our business?
- Will our HR, payroll and pensions administration systems need reviewed and/or upgraded to facilitate auto-enrolment?