Education employers already participate in a number of pension arrangements including the Universities Superannuation Scheme, the Teachers’ Pension Scheme, the Local Government Pension Scheme and locally administered schemes.
But from 1 October 2012 they will also have to comply with new, supervening legal requirements on all UK employers (including education employers). These require employers to automatically enrol their “eligible workers” into a qualifying pension scheme and pay minimum employer contributions. Employers will also be required to provide information to workers about their new rights and to re-enrol eligible workers who opt-out approximately every three years.
The penalties for getting it wrong are stiff: as well as employment tribunal claims, employers could face fines of up to £10,000 per day. Any person whom the Pensions Regulator deems responsible for the breach could face a fine and up to two years in prison, although these penalties will be reserved as a last resort for deliberate persistent offenders. The new legal requirements apply from an employer’s “staging date” (determined by the size of its payroll in April 2012) and will be phased in, starting with the largest employers and running through to 2018.
This article considers the implications for education employers and focuses on some key issues.
- Who is a “worker” – the main criteria are age (22 to state pension age) and earnings (over £8,105 p.a.) but there will be some individuals whose status will be more difficult to determine – such as casual workers or those on flexible contracts. In particular, recent case law demonstrates that a self-employed individual who regularly undertakes work for an institution can still be regarded as a worker if he works exclusively for a particular employer.
Agency workers are usually the responsibility of the agency but the agency is likely to pass on the costs associated with automatic enrolment to the hirer.
- Secondees/visiting academics – individuals working on a secondment or on a visiting basis will normally remain a worker of the employer from which they are seconded, but the terms of the particular secondment should be checked carefully. Secondees moving to and from the UK are more complicated. Where the individual’s base remains in the UK they should be treated as “ordinarily working in the UK” and (subject to meeting the age and earnings criteria) as a worker. For a worker seconded to the UK, the question is whether the worker’s base remains outside the UK. If so, (s)he will not be ordinarily working in the UK and the UK host employer will not have any automatic enrolment obligations towards him.
- Fit with LGPS, USS and TPS - the regulations governing the LGPS have been amended from 1 October 2012 and give rise to a number of potential issues for employers participating in the LGPS. The changes took effect from 1 October 2012, regardless of an employer’s staging date. This means that some employers may need to re-enrol employees who have opted out of the LGPS between 1 October 2012 and the employer’s staging date. An employee employed under a contract of less than three months is not eligible for the LGPS under the amended regulations. To comply with its automatic enrolment requirements an employer will therefore have to issue a postponement notice to defer the requirements for up to three months. Amendments have also been made to USS and TPS as a result of the automatic enrolment legislation.
- Flexible benefits – where an employee can choose between a pension contribution or a different benefit – particularly cash - there is a risk that this will be regarded as an “inducement” to the worker to opt out of the qualifying pension scheme. This is contrary to the automatic enrolment legislation. In practice most employers can be comfortable since the ‘sole or main purpose’ of offering flexible benefits is not to encourage employees to opt-out but to offer a choice of alternative benefits. Employers must, however, provide carefully worded communications to ensure that this message is communicated properly. Conversely there is a risk that withdrawing a flexible benefit option, or paying lower salary increases due to the costs associated with automatic enrolment, could also be in breach of the legislation which protects workers from being subjected to a “detriment” on the grounds of automatic enrolment. However, in our view that risk is low where an employer removes the flexible benefits package but the overall value of the worker’s salary and benefits remains the same.
As for all employers, there is much for education employers to consider including:
- understanding the relevant legal issues on auto enrolment;
- checking self-employed arrangements;
- checking agency/secondment agreements;
- setting up procedures to track variable earnings;
- deciding on the approach to flexible benefits;
- ensuring that administration systems are robust; and
- considering off-setting the increased payroll cost - by using salary sacrifice for auto enrolment or looking at ways to de-risk existing locally administered schemes.