Auto-enrolment – is FE ready?

On 1 October 2012 radical changes to workplace pensions came into force. Employers will now be required to enrol eligible jobholders into a pension scheme as well as making minimum contributions each year. But does this affect FE Colleges given that most members of staff are in a final salary pension scheme?  What are the consequences?

A 10-year process triggered by the Turner Commission in 2002 aimed at the reform of the national pension system came into force on 1 October 2012 to establish a universal basic state pension. The Pensions Act 2008 now requires all employers to automatically enrol eligible workers in a pension scheme under the supervision of a Pension Regulator and with the possibility of managing the scheme through NEST, the National Employment Savings Trust.

The automatic enrolment scheme is to be implemented in different stages, starting with larger employers. For those employing more than 250 workers, the deadline for the application of the scheme is 1 February 2014, for those employing between 50 and 249 is 1 April 2015 and for those with less than 50 jobholders the deadline is 1 April 2017.

For the purpose of the Act, the definition of jobholder is intended to be very broad and to cover both permanent and temporary workers, and agency workers. A jobholder will be eligible for the new scheme if an employee or a worker is working in the UK under a contract, is aged at least 22 and has not reached state pension age. A jobholder shall also exceed the earnings trigger, currently set at £8,105 for the current fiscal year, and shall not be already an active member of an employer’s qualifying scheme.

An eligible jobholder will have to be automatically enrolled to the scheme by the employer from the moment they meet the qualifying requirements, including prospective jobholders and excluding those that are already active members of the employer’s qualifying scheme. The Pensions Act 2011 relaxed the terms of this regulation delaying this requirement for up to three months, provided that notice is given to the job holder.

A jobholder will have a right to opt out of the automatic enrolment scheme and the right to opt back in. These rights can be exercised only once within a 12-month period and provided notice is given to the employer. This procedure does not apply to eligible jobholders who are already active members of a qualifying scheme as they will be required to follow the applicable scheme’s procedure.

Non-eligible jobholders can nonetheless opt-in for an automatic enrolment scheme if they are aged above 16 or below 74 and have qualifying earnings above the earnings trigger. A worker within the same group but earning less than the qualifying earning threshold, currently set at £5,564 for the fiscal year, will be an entitled worker and can opt in for a registered pension scheme. This does not have to be an automatic enrolment scheme, meaning that an entitled worker will not have a statutory right to opt out once he has joined the scheme.

In addition to the duty of automatic enrolment of eligible jobholders, an employer will also have a duty to ensure that these remain active members of a qualifying scheme and that he automatically re-enrols eligible jobholders every three years after they have opted out. An employer will therefore have to carry out a continuous assessment of which jobholders in his workforce are eligible for auto-enrolment and which have the right to opt in as non-eligible jobholders or entitled workers.

A further set of rules has been placed to avoid the unfair treatment of employees and candidates following the coming into force of the new scheme. Employers are not allowed to contract out of the new duties and will not be able to ask applicants at interviews on their plans to opt out of auto-enrolment. Similarly, they are also discouraged from offering a financial inducement to their jobholders to opt out of the scheme, including through the offering of a salary raise or one-off bonus. Should a worker suffer any detriment following a breach of the duties under the scheme, he or she will be able to bring proceedings in the Employment Tribunal.

In fact, financial inducement is a practice that should be carefully considered by employers in the public sector running a final salary pension scheme, including FE Colleges. The Pensions Regulator will intervene on any proposal from an employer to a member of a final salary pension scheme if this is solely aimed at transferring accrued benefits into the new scheme.

In particular, the Regulator advises that full and proper advice shall be provided to members of the scheme as these are often left uncertain in the consequences of their decisions. An employer shall therefore include in an offer letter the reasons behind the offer with detailed explanation and clear instructions on how to respond. The letter should also include an account of the benefits that a member is giving up and the new ones that he may be acquiring following the scheme transfer. The underlying guidance for the presentation of an offer is that this is presented as a voluntary choice and that a member is strongly advised to seek independent financial advice.

A member should also be informed that when accepting a transfer from a final salary pension scheme to the auto-enrolment scheme, any inducement payment received from the employer will be taxable as employment income and will also be subject to national insurance contributions.

FE Colleges planning on switching from a final salary pension scheme should therefore refer to the latest Detailed Guidance published by the Pensions Regulator in August 2012. This sets out the qualifying criteria of an auto-enrolment pension scheme and employers are strongly advised by the Pensions Regulator to invest time in ensuring compliance with this as a first step to avoid potential disputes in the Employment Tribunal.

Matthew Kelly is a partner at law firm Thomas Eggar, which handles a wide range of related litigation, such as issues relating to FE governance and capital projects