Starting from October 2012, all employers in the UK are being required by law to make arrangements for their workers to be automatically enrolled into a pension scheme. For the first time, employers will be required to make contributions towards their workers’ pension savings. The workers covered will in many cases include workers who have been sent by their UK employers on secondments or other placements outside the UK to GCC countries.
Within the GCC context, this requirement raises issues with respect to end of service gratuity which is a statutory benefit in the six GCC member states. It is a benefit designed to be in lieu of pension for foreign employees and in certain circumstances may be replaced by a pension or savings scheme (usually expected to be locally based).
The automatic enrolment legislation
Automatic enrolment is being phased in gradually, with larger employers being required to comply first. All employers with more than 50 workers will have to comply by April 2015, and all businesses (other than start-ups established during the phasing-in period) will have come within the ambit of the legislation by 1 April 2017.
The Regulator has stated that employers need up to 18 months of preparation for automatic enrolment. This may seem a lengthy period, but it is important to ensure that you are in a position to comply properly with the obligations.
The requirements of the legislation are somewhat complex. The main obligation on an employer is the requirement to automatically enrol “eligible jobholders” into a pension scheme. A defined contribution scheme can be used for this purpose. Eligible jobholders are workers who:
- work or ordinarily work in the UK – we discuss this requirement further below;
- are aged between 22 and State pension age; and
- have “qualifying earnings” (currently GBP 9,440 per year).
Note that whether or not an individual is a worker of a particular employer will be determined in accordance with UK law. This is a separate question from the issue of which GCC employer acts as the individual’s sponsor and employer for the purposes of local GCC law.
The employer will need to pay contributions totalling at least 3% of the earnings of eligible jobholders in the band from GBP 5,668 to GBP 41,450. The employer can, however, opt, if it wishes, to comply with other contribution criteria which are substantially similar.
An employer must enrol eligible jobholders into a UK pension scheme rather than a GCC-based scheme. However, where eligible jobholders are already enrolled in a GCC scheme on the employer’s staging date, the employer can leave them in that scheme as long as it satisfies certain criteria laid down in the legislation. This will require a careful analysis of whether the GCC scheme meets these criteria. In summary, it will do so if it is a defined contribution scheme which is subject to local regulatory oversight, meets criteria relating to tax relief, and the local regulatory rules “provide that some of the benefits applicable to the jobholder may be designated for the purpose of providing that jobholder with an income for life” – in other words, a regular pension in retirement.
Workers who are not eligible jobholders need not be automatically enrolled into a pension scheme, but they have the right to join a pension scheme. If they do so, they are entitled, in some cases, to receive the same employer contributions as eligible jobholders.
We discuss the requirements of the legislation in more detail in this briefing note.
Worker placements in GCC countries
The requirement to automatically enrol a worker applies only if the worker “is working or ordinarily works in [the UK] under the worker’s contract”. This test was borrowed from a now-defunct provision of employment law. It poses particularly tricky problems in relation to workers who are subject to overseas secondments and other placements outside the UK.
The guidance from the Regulator states that a worker who is transferred to the GCC region (or anywhere else outside the UK) will probably be held to be still ordinarily working in the UK if his employment contract remains with his UK employer and it is expected that he will return to his duties in the UK at some future date. Similarly, an individual who is transferred to the UK will probably not be held to be ordinarily working in the UK if she retains an employment relationship with her overseas employer and she is expected to return to the overseas employer at the end of the placement.
The Regulator’s guidance also indicates that even a lengthy secondment overseas from the worker’s home country may not alter the conclusion that the worker is still ordinarily working in the home country. However, it needs to be remembered that this is still only guidance (albeit based on UK employment case-law), and that each secondment will need careful consideration of the precise nature of the employment relationship to establish where the individual is ordinarily working.
The situation is different if a worker is permanently transferred outside the UK, or if a temporary placement outside the UK is renegotiated so that it becomes a permanent one. In such cases, the worker will generally not be considered to be ordinarily working in the UK.
In summary, it will not always be obvious whether a particular individual is or is not ordinarily working in the UK. In many cases, specialist advice will be required to make a judgement call on a particular worker’s status.
End of service gratuity
End of service gratuity is a key benefit for non national employees in each GCC country and is calculated according to a statutory formula set out in each member state’s labour law. It is not possible for an employee to waive this entitlement and it is payable, subject to certain service requirements, even if the employee resigns his employment. It is not payable where an employee is terminated for gross misconduct. For more information on this benefit please refer to our previous legal update.
Under the automatic enrolment regime there is clearly scope for an employee to recover a double benefit; to receive both the pension benefit and also the end of service Gratuity payment. Care will need to be exercised and specific advice obtained on particular employee circumstances, including whether or not an employee can opt out.