Earlier this month, the government published its response to the Taylor Review of Modern Working Practices. In this insight, we look at what the Taylor Review and the government’s response said about pensions, how this fits with the recent Automatic Enrolment review and what this could mean for pension scheme employers and trustees.

The Taylor Review of Modern Working Practices was commissioned by Prime Minister Theresa May in October 2016. It was an independent review of employment practices to consider how they need to change to keep pace with the changing world of work.

The Review was published in July 2017. We summarised the key recommendations in our insight. For pension scheme employers and trustees, the most important recommendations were the ones relating to employment status. The Review noted that there are three employment statuses: employee, worker and self-employed. However, it can sometimes be difficult to determine status. The legislation setting out the tests for being an employee or worker is not very detailed and, in practice, a lot hangs on tests that have been developed by the courts. To address this, the Review recommended that:

  • the government update the legislation so that it states the tests for employment status more clearly;
  • the current categories of self-employed, employee and worker (where the definition of worker catches both employees who are entitled to full employment protection and people who are only entitled to basic employment protections), be replaced with self-employed, employee and dependent contractor (with dependent contractor catching only the people entitled to basic employment protections);
  • the definition of dependent contractor should place more emphasis on control over work and less on the requirement to perform work personally, in order to avoid people missing out on basic protections because they have a right of substitution (that is, to bring someone in to do work instead of them); and
  • agency workers should be given a new right to request a direct contract with a hirer if they have been placed with that hirer for 12 months, and zero hour contract workers who have been in post for 12 months should be given a new right to request a contract that guarantees hours which better reflect the actual hours worked. The hirer/employer would need to consider these requests in a reasonable manner and may be required to report both on the number of requests received and the number agreed.

The government published its response to the Review earlier this month. In the response, the government accepts the proposal in relation to agency and zero hours workers and says that it would like to go further and “create a right for all workers rather than specific groups to request a more predictable contract where appropriate”. To explore this and other recommendations relating to transparency (including a recommendation that employees and workers be given a ‘day one’ right to a statement of key employment terms, including pension), it has issued a consultation on measures to increase transparency in the UK labour market.

The government also agrees that it should be easier for individuals and businesses to determine whether someone is an employee, a worker, or self-employed, and has committed to improving clarity and certainty in this area. As a first step, and in order to ensure that any reform does not have unintended consequences, it has issued a consultation on employment status.

The consultation on employment status asks a number of questions that explore the themes in the Taylor review. However, it confirms that no decisions about whether or how to reform employment status have yet been made. It also recognises that any change could impact on other government policies, including automatic enrolment.

For pension scheme employers and trustees, this is a key point. The automatic enrolment regime applies to employees and workers. As such, if the government does make changes to the current concept of “worker”, this could affect automatic enrolment duties and the most likely outcome is that a change would bring more people into scope.

Automatic Enrolment review

Both the Taylor Review and the government’s response refer to the Automatic Enrolment Review, completed last year. The key focuses of the Review were increasing saving, improving member engagement and doing more to help younger people, part-time workers and the self-employed to save. It culminated in the DWP policy paper Automatic Enrolment Review 2017: Maintaining the momentum, published in December 2017.

The policy paper made a number of proposals. These included:

  • reducing the lower age limit for automatic enrolment from 22 to 18; and
  • removing the lower earnings limit, which is currently set at £5,876.

Removing the lower earnings limit would mean that an eligible jobholder earning more than £10,000 would be eligible for automatic enrolment and for pension contributions on their earnings between £0 and £45,000, rather than on their earnings between £5,876 and £45,000. It would also mean that any employee or worker between the age of 16 and 74 who is not eligible for automatic enrolment would be able to opt-in and qualify for pension contributions on all of their earnings up to £45,000. The policy paper confirms that the concept of an entitled worker, who can opt in but does not have a right to an employer contribution, would no longer exist.

These changes would both simplify, and significantly extend the scope of, automatic enrolment. They could be particularly helpful for younger people, older people and people in part-time or multiple jobs. However, the policy paper recognises that expanding the scope of automatic enrolment in this way would have significant costs consequences for employers. As such, it confirms that the government’s ambition is to introduce these changes in the mid- 2020s to allow time for discussion, consultation and preparation. The only immediate step is that it seems possible (but by no means certain) that future threshold reviews will conclude that the earnings trigger for automatic enrolment should remain frozen at £10,000. This would mean that, as earnings rise, more people become eligible for automatic enrolment.

The policy paper also confirms that:

  • the DWP will monitor the impact of the 2018 and 2019 contribution increases before considering whether to make any further increases to headline contribution rates;
  • the DWP will work with the Pensions Regulator to ensure that there is “sufficient clarity” for people who work under flexible or atypical arrangements “and those who engage them so that the [automatic enrolment] system and its enforcement continues to operate effectively”; and
  • if the employment status tests are reformed, the DWP “will ensure they are also considered in relation to automatic enrolment so that there is sufficient coherence and certainty for workers, businesses and the Pensions Regulator’s enforcement of automatic enrolment duties”.

What do these proposals mean for pension scheme employers and trustees?

The focus on ’employee’ and ‘worker’ status underlines the importance of employers being comfortable with the way they assess their workforce for automatic enrolment. This can be a difficult area and employers who have any questions or concerns about assessment may want to take legal advice.

More generally, the proposals from the Taylor Review and the Automatic Enrolment Review have the potential to considerably widen the scope of automatic enrolment. At the moment, there are no firm proposals or timescales for change. However, we recommend that employers and trustees note the proposals and continue to follow developments.