Relaxed auto-enrolment arrangements, where employers adhere to the legal minimum, could lead to unintended consequences in the future, the industry has warned.
According to a new policy paper, Automatic enrolment and the law – how far do employers’ duties extend, by Royal London and Eversheds Sutherland, employers should look to extend beyond their minimum workplace pension duties to avoid future costs.
The report highlighted three key reasons why employers and larger employers in particular, may look to deliver more than the legal minimum. It noted that there is a risk that future regulators and ministers may decide that today’s employers should have provided more than the basic legal requirements around auto-enrolment, specifically if some workers get poor outcomes at retirement.
From this, Royal London and Eversheds Sutherland made references to examples in other countries where employers have had to pay damages for their pension provision failures. In addition, the report also states that similar to other pensions-related legislation, it is possible that courts may decide that employers have an ‘implied duty’ to provide for their staff and so a minimalist approach to auto-enrolment could breach this duty.
In order to ensure employers do not view auto-enrolment as a “once and done” requirement, the report suggests key areas that employers should assist with and abide by. These include: regularly reviewing auto-enrolment schemes, selecting an appropriate default investment strategy, the provider, etc. Also, ensuring that the chosen scheme offers tax relief to all employees, including staff earning below the tax threshold. “Employers who choose a scheme which delivers tax relief through the ‘net pay arrangement’ could face challenge as this excludes non-taxpayers from the benefit of tax relief,” the report detailed.
A final suggestion is for employers to assist with decision making and to protect against employees making poor choices. Although employers are not legally required to provide their workforce with financial advice, courts have referred to an implied duty for employers to give information to employees regarding their pension rights, to protect from individuals experiencing financial loss.
Royal London director of policy Steve Webb said: “It is very tempting for employers thinking that once they have chosen a pension scheme and enrolled the right workers they can largely forget about automatic enrolment. This paper is a wake-up call, especially for larger employers, which suggests that this might be a high-risk strategy. Many larger employers do already take pensions seriously and go well beyond their statutory minimum duties. But all employers should be reviewing their automatic enrolment arrangements on a regular basis to ensure that it remains fit for purpose.”
Eversheds Sutherland partner and head of pensions Francois Barker added: “In the US, employers have had to pay out over $350m in damages in connection with shortcomings in workplace retirement plans. Whilst there is not an exact parallel with the UK, the law tends to evolve over time and the courts may decide in the future that employers – particularly large ones – should have done more than the bare minimum required under the automatic enrolment rules. If firms want to insulate themselves as far as possible against future regulatory action, there are a number of key areas they should address on an ongoing basis.”