As the financial market braces itself for another year of turmoil, economic predictions for 2009 are bleak. Businesses are adjusting to pressing financial issues and stalling demand as banks and stock markets attempt to convalesce.
However, this is not to say that the economic downturn signals a slowing of developments. The legal landscape of 2009 is already shaping up for a year of reforms, not only in reaction to the economic crisis but also in concluding long-term strategies to improve regulation and strengthen employees’ rights. Outlining what we expect to be key developments across the areas of employment, pensions and benefits in 2009, this briefing considers how these changes may affect employers and employees in the UK.
The Equalities Bill will be passed during the current parliamentary session. The following key issues are under discussion.
- When selecting potential candidates for a new position, employers will be given the power to take into account the under-representation of disadvantaged groups when choosing between two equally qualified candidates.
- The employment tribunal will be given the power to make wider recommendations in discrimination cases to ensure that its decisions have ramifications beyond the case in hand. In this way, it will be able to take an active role in preventing future discrimination and encouraging better employment practices.
- A claimant may be permitted ?? to bring a discrimination case on combined grounds because the individual possesses a combination of characteristics. For example, a black woman may suffer different discrimination from that suffered by a black man or a white woman.
- Clauses in employment contracts that prohibit employees from discussing their pay will be prohibited.
Following the joint declaration by the Department for Business, Enterprise and Regulatory Reform (BERR), the Confederation of British Industry and the Trades Unions Congress in May 2008, agency workers will receive equal treatment after 12 weeks’ employment once the Agency Workers Directive is implemented in the UK by 5 December 2011. In 2009 the UK government will consult various social partners about the mechanisms for implementing this legislation, including the precise nature of the ‘equal treatment’ that will be received.
Extension of flexible working rights
Plans to extend parents’ flexible working rights are due to come into force during 2009. Employees with parental responsibility for children up to the age of 16 are to be given the right to request flexible working arrangements. The format for requesting these arrangements is also expected to be made more informal and an employer will no longer be required to produce written evidence of the revised working pattern unless this is requested by the employee.
To ensure that these changes are implemented as smoothly as possible, an independent review was carried out during 2008 by Imelda Walsh (human resources director of J Sainsbury). This review showed that awareness among employees of the flexible working arrangements needed to be improved, but that greater support for businesses was required to implement the changes.
An ongoing consultation aims to obtain employers’ input into the plans in an attempt to minimise the effects on businesses. In the meantime, BERR plans to launch a campaign to raise awareness of the changes, through media events and publications.
Statutory disciplinary and grievance procedures
The Employment Bill is due to come into force in April 2009. It will, as was widely publicised during 2008, repeal the statutory dispute resolution procedures that were introduced with the Employment Act 2002. In November 2008 the Advisory, Conciliation and Arbitration Service (ACAS) produced its revised Code of Practice on discipline and grievance, which has already been approved by BERR and will soon come before parliament for approval.
Employers will want to be aware of the key recommendations in the ACAS Code of Practice and consider how they will need to amend or update existing internal policies. The ACAS website (www.acas.org.uk) provides a very useful summary of the new Code of Practice.
The key change for employers to note is that the Code will not apply to redundancy dismissals or renewals of fixed-term contracts; a welcome relaxing of procedural red tape given the current economic climate.
Working Time Directive
The UK’s opt-out of the 48-hour week was reviewed by the European Parliament in December and the outcome of the vote was a decision to abolish the opt-out.
Despite calls by some EU members to abolish or restrict the opt-out, the European Council had previously reached agreement in 2008 to retain it until a further review takes place in four years’ time. The recent vote will mean further consideration of the issue, with a possible conciliation between the Council, the Commission and the European Parliament.
The additional safeguards to the opt out that had previously been agreed were:
- a worker would no longer be able to opt out of the 48-hour working week for more than one year without renewing the opt-out in writing;
- an opt-out would generally be void if signed at the same time as an employment contract or within four weeks of starting work; and
- no worker could work more than 60 hours a week averaged over a three-month period unless permitted by a collective agreement or an agreement between social partners.
We wait to see the outcome of the anticipated conciliation.
Changes to immigration
Employers should familiarise themselves with the fundamental changes to the UK immigration system that were introduced last year. The aim of the new system is to make immigration controls more transparent and to enable clear sanctions to be put in place for noncompliance.
There are now five tiers of individuals entitled to enter the UK and separate criteria must be met for each entry tier. Tier 1, which applies to highly skilled migrants, and tier 2, which replaces the work permit scheme, came into force during 2008 and are of the most significance to employers. Employers must now be sure that they are familiar with their new obligations and, in particular, must ensure that they acquire a valid sponsor’s licence.
Proposed changes to EWCs
The European Parliament adopted the revised directive on European works councils (EWC) on 16 December. This ends years of discussion about the revision of the 1996 directive establishing European information and consultation bodies. The EU Council is expected to approve the text formally and it will then be published and ready for national implementation. An agreement was secured between all stakeholders, including European social partners, before the vote took place. The Commission’s primary goals were to improve the effectiveness of processes of information and consultation and to increase the number of EWCs being established. The new directive will introduce new and extended definitions of what ‘information and consultation’ is and what should be considered a transnational matter (triggering the right for the EWC to be informed/consulted). But there is no general obligation to renegotiate existing agreements and therefore article 13 agreements will in principle not be affected. Furthermore, it will be possible to review existing agreements or sign new ones in the next two years outside the scope of the new directive (therefore complying only with the old text).
Alternatives to redundancy
Redundancies became increasingly common across many businesses during 2008. However, redundancy processes remain both costly and time-consuming, as well as often having damaging implications for a company’s reputation. In attempts to avoid redundancies, businesses are increasingly considering alternative options. These range from allowing staff to adopt more flexible working practices, such as job-sharing or introducing shift working or compressed hours, to looking at pay and bonus freezes, paid sabbaticals or unpaid periods of leave.
Some employers are also taking advantage of mobility clauses in employees’ contracts to move employees to locations where there is demand for work. Others may choose to restrict overtime to limit additional costs. We will shortly publish a guide on the legal issues arising from such alternatives to redundancy.
Employer debt – section 75 of the Pensions Act 1995
In November 2008 the Department for Work and Pensions (DWP) launched an informal consultation with selected stakeholders on making changes to the employer debt regime under section 75 of the Pensions Act 1995 in relation to corporate restructurings in which the employer covenant is not changed.
The DWP also issued an informal discussion paper suggesting a number of technical amendments to the employer debt rules, recognising that in some cases the regulations do not meet its stated policy intentions.
In both cases, the DWP promises a full consultation on draft amending regulations in early 2009, with the changes expected to come into force in October 2009.
The government is consulting on draft regulations that aim to exempt certain flexible retirement practices from the prohibition against age discrimination, as contained in the Age Regulations. It is considering two options that aim to exempt some practices from the prohibition.
Both options apply only to members who have reached male state pension age or, if higher, the normal pension age of the scheme and are working under a ‘flexible retirement arrangement’ – ie the member has reduced either his working hours or his grade of seniority after becoming entitled to receive all or part of his age-related benefits under the scheme.
The first option would create a broad exemption that renders unlawful any scheme rule or practice that halts the accrual of or entitlement to any future benefits under the scheme for members working under a flexible retirement arrangement. The second option would create a more limited exemption that would allow occupational pension schemes not to provide death-in-service benefits to members in flexible retirement.
The consultation closes on 10 March 2009.
Default retirement age
The European Court of Justice is expected to give its decision on the Heyday case in 2009. Age Concern is seeking a declaration that the UK provisions that allow employers to dismiss employees aged 65 and over by reason of retirement are invalid on the grounds that they do not properly transpose the EU directive prohibiting age discrimination.
The Advocate General has already given an advisory opinion suggesting that the UK rules are allowed provided that they can be objectively justified.
The Pensions Regulator’s powers
TPR’s new power to issue contribution notices under the ‘material detriment test’
On 15 December 2008 the Pensions Regulator (TPR) published a draft code of practice on when it expects to use its new powers to issue contribution notices against an employer and third parties connected and associated with the employer under the new ‘material detriment test’. The Pensions Act 2008 gives TPR this new power (backdated to April 2008).
After the consultation period has ended on 6 February 2009 the code of practice must be laid before parliament for 40 days before it becomes effective.
Increase of ‘lookback’ period for financial support directions
The government is consulting on draft regulations that would lead to a staged increase from the current 12-month period during which TPR can issue a financial support direction after a company has ceased to be associated or connected with an employer. The aim is for the time period to increase to two years by 6 April 2010.
The DWP is consulting on removing three employerrelated events from the notifiable events framework.
Broadly, under these proposals trustees will no longer be required to notify TPR if there are two or more changes in key scheme posts, and employers if there is a credit rating change or there are changes in key employer posts.
The consultation closes on 6 February 2009.
Penalty for failure to comply with pension consultation obligations
In December 2008, the DWP issued a consultation on miscellaneous changes to a range of regulations, including the pension consultation regulations (requiring at least 60 days’ consultation on ‘listed changes’).
There is currently no express sanction for breach of the regulations. The DWP is now proposing to allow TPR to impose a civil penalty on a person who has failed, without reasonable excuse, to comply with the consultation requirement. The provision confirming that a change will have effect notwithstanding inadequate consultation will remain.
The consultation does not deal with any clarification of the legislation on consultation.
Guaranteed minimum pension conversion
The government has recently consulted on draft regulations setting conditions for converting members’ guaranteed minimum pension into scheme benefits.
The regulations are likely to be finalised in 2009.
Abolition of safeguarded rights
The Pensions Act 2008 abolishes the requirements on safeguarded rights. Safeguarded rights are the equivalent of contracted-out rights and arise when a spouse is credited with benefits as part of a divorce sharing.
European directive on solvency
The European Commission consultation on the harmonisation of solvency rules for pension schemes that operate on a cross-border basis closed on 28 November 2008.
The EC’s consultation paper sought views on whether the Solvency II directive should cover two specific types of pension scheme: cross-border schemes and ‘regulatory own funds’ (broadly, undertakings that underwrite death, disability or longevity risk without involving the sponsoring employer – relatively rare in the UK).
The European Federation for Retirement Provision had previously expressed concern that the funding requirements contained in the Solvency II directive could be applied to all pension schemes currently regulated by the directive on institutions for occupational retirement provision. However, it was then decided to remove most pension schemes from the Solvency II directive’s scope.
Exemption from restrictions on financial promotions for third parties communicating to employees about pensions
In September 2008 HM Treasury began to consult on draft regulations that would widen an exemption currently available to employers so that some third parties contracted by the employer would be able to communicate with employees about a group personal pension or stakeholder scheme without the need to be authorised under the financial services regime.
The proposed extension is intended to cover employers that have outsourced their pensions administration arrangements.
Trivial commutation and payments made in error
HM Revenue and Customs has published draft regulations (the Registered Pension Schemes (Authorised Payments) Regulations 2008) that provide for further clarification of proposals, contained in the 2008 Budget, on simplifying the rules on trivial commutation. The draft regulations also allow for certain payments made in error to be treated as authorised payments.
Change in normal minimum pension age
The normal minimum pension age changes from 50 to 55 years of age on 6 April 2010.
Generally, a registered pension scheme’s rules cannot allow an individual to take pension and/or lump sum benefits before the normal minimum pension age, unless they are in ill health. If this rule is breached a tax charge may be incurred.
Registration deadline for enhanced and primary protection
The deadline for registering for enhanced or primary protection is 5 April 2009.
Enhanced and primary protection provide some protection from the lifetime allowance charge for pension rights that accrued before 6 April 2006.
In the light of the stormy economic conditions of 2008, employers and employees have to prove flexible in the area of benefits. Tumbling share prices have undermined the value of incentive plans and some controversial bonus plans, such as those lacking testing performance conditions, have begun to wane in popularity with remuneration committees.
Executive pay will continue to come under close scrutiny in 2009, particularly in relation to the banking sector. Cash bonuses have been targeted by politicians and the press, but businesses may also struggle to offer competitive pay rises in difficult economic conditions.
Share-based reward systems may therefore become a popular alternative. Long-term incentives have a direct advantage to the company because the immediate cost of granting such awards is lower. Executives may find over the longer term that the shares received under such arrangements have risen significantly in value when awards vest, so give a greater reward.
Regulation of executive remuneration
The Financial Services Authority (FSA) set out what it regards as good remuneration policy objectives in autumn 2008 in a statement known as the ‘Dear CEO’ letter. While expressly stating that it wishes to take no part in setting remuneration levels, the FSA encourages companies to implement self-regulation, long-term pay structures and responsible risk-taking. It is expected that the FSA will consider that an appropriate remuneration policy forms part of a firm’s internal systems and controls.
This concern is mirrored across the EU, particularly in France and the Netherlands, where regulatory bodies have imposed similar measures to limit executive pay packages and ‘golden parachute’ leaving payments.
SAYE schemes and guaranteed deposits
The Financial Services Compensation Scheme (FSCS) has confirmed that savings held in banks under save as you earn (SAYE) schemes will be protected up to the £50,000 limit. However, it should be noted that if a participant holds SAYE and savings accounts with the same bank the £50,000 limit will apply to the combined amount held in those accounts.
Companies operating international sharesave plans may wish to check the level of local protection applying to deposits with carriers outside the UK.
Rebasing share schemes
Following sharp drops in share prices, it is likely that many options may become ‘underwater’, meaning the market price is lower than the option exercise price. This results in schemes failing to achieve their incentive objective.
Although institutional shareholders support welldesigned plans, they are not supportive of the practice of revising the exercise price down to the current market price, also known as ‘rebasing.’ Companies will have to balance the interests of shareholders and best practice guidance with the need to properly incentivise employees.
Companies may wish to consider alternative solutions to dealing with underwater options. The options are:
- operating parallel schemes in which employees can choose whether to exercise the new option (which has a lower exercise price but becomes exercisable later) or the existing option (which has a higher exercise price but becomes exercisable sooner. The option that is not exercised falls away on the exercise of the other option); or
- granting new options and leaving underwater options intact.
In either case, companies will need to consider whether there is sufficient ‘headroom’ in their dilution limits to grant further options. The accounting charges incurred on the grant of options will also need to be considered.