Pensions auto-enrolment: compliance issues

This fourth and final article in our series on automatic enrolment looks at some of the finer detail. We consider how existing practices such as salary sacrifice and flexible benefits work alongside auto-enrolment, look at the new employer duties and discuss how to avoid falling foul of the Pensions Regulator.

Employers preparing for automatic enrolment need to establish how it will fit with their existing pension provision and their broader reward and remuneration packages. Practices such as contractual membership, salary sacrifice and flexible benefits can all work alongside auto-enrolment, but employers need to understand how.

The Automatic Enrolment Regulations impose a number of new duties on employers including record-keeping and communication. Often such tasks are already being undertaken but by the scheme trustees or another third party, rather than the employer. While the Pensions Regulator has indicated that it will take a sympathetic approach in cases of inadvertent non-compliance, employers still need to understand their new responsibilities and review their existing procedures.

Salary sacrifice

Earlier this year, HM Revenue & Customs (HMRC) revised its guidance on salary sacrifice to make it possible to use such an arrangement in conjunction with auto-enrolment. Under the previous rules, employees who signed up to a salary-sacrifice arrangement were required to do so for a minimum period, generally 12 months. They could only opt out and revert to their pre-sacrifice salary in response to certain "lifestyle changes". Otherwise, they would lose all their tax and national insurance advantages and would be subject to tax on the employer portion of any pension contributions paid. The new guidance makes it clear that employees can opt out under the Automatic Enrolment Regulations and receive a refund of their first contribution paid, without breaking the salary-sacrifice rules.

Other considerations for employers wishing to use salary sacrifice in conjunction with auto-enrolment are that:

• employers must not make signing up to salary sacrifice a condition of membership;
• as salary sacrifice is a contractual arrangement between employer and employee, normally each employee has to agree to it before they are automatically enrolled;
• if an employee does not agree to salary sacrifice either because they do not want to use it or they fail to respond pension contributions must be deducted as prescribed in the Automatic Enrolment Regulations; and
• qualifying earnings for assessing eligibility are based on reduced (post-sacrifice) earnings.

Employees must be able to decide whether to opt out of auto-enrolment independently of any choice about salary sacrifice. Should it become evident that employees are confusing the two issues, ie deciding against pension savings because they do not wish to participate in salary sacrifice, this could be seen as an inducement to opt out. Employers wishing to avoid any potential confusion between the two issues can do so by introducing salary sacrifice after the opt-out window has closed. This also has the effect of avoiding the necessity of having to implement and then reverse a salary sacrifice arrangement. In any case, communications about salary sacrifice should be separate and distinct from those about auto-enrolment.

Flexible benefits

The Regulator makes it clear that the auto-enrolment requirements are intended to encourage pension saving, not to interfere with flexible benefits provision. Nevertheless, employers offering flexible benefits must automatically enrol eligible employees in a qualifying pension scheme as a core part of their flex package. Once members have been automatically enrolled, they are free to increase or decrease contribution levels to their pension and deploy monies to other benefits in line with the rules of the flexible benefits plan. Members who choose to stop pension contributions or reduce them to a level below the minimum, must be treated as having ceased membership. This applies even if they continue membership of a non-qualifying scheme (or scheme section) with a lower level of contribution, in which case the employee will probably not have completed an opt-out form. Such members will need to be reassessed and, potentially, re-enrolled every three years.

Employers need to make sure that there is nothing in the terms of the flex plan that could be interpreted as an inducement to opt out of pension provision.

Pensions as part of a contract of employment

Employers that include membership of a pension scheme in their contracts of employment can continue to do so, subject to a number of conditions. Most importantly, employees must be enrolled into a qualifying pension scheme and their active membership must start on or before the employee's automatic enrolment date.

It is important that employers are clear about what actions are being taken in accordance with the scheme rules and what is as a result of auto-enrolment requirements. For example, in most schemes, while members can opt out at any point, they do not have the right to have their membership "unwound". However, those who do cease active membership of the scheme will need to have their situation carefully considered. If, on leaving, an employee does not meet the conditions to be an eligible jobholder, the employer will need to assess them regularly and automatically enrol them into pension saving on the first occasion they become an eligible jobholder. If they are an eligible jobholder when they cease to be an active member of the scheme they do not have to be reassessed until the re-enrolment date.

Employees must still be provided with specific information about auto-enrolment, even when their membership is contractual. They must also be informed that they have been enrolled into a pension scheme and given details of the scheme, before their automatic enrolment date.

Record-keeping

Employers face new legal record-keeping requirements on top of what is expected of trustees and pension providers as part of day-to-day scheme management. These records are required so that employers can demonstrate they have complied with the auto-enrolment requirements and must be provided to the Regulator on request. Records must be kept for six years; those relating to opting out must be kept for four years.

The information that must be recorded falls into two categories: (1) information about the pension scheme and (2) information about jobholders and workers. Employers can use their existing HR and payroll systems to record most of the required information. They can also continue to outsource record-keeping and document storage to third-party providers, but not the responsibility for them.

Where an employee has exercised their right to opt out or opt in, this notification must be kept in its original format. Both copies of original documents and electronic versions (such as scans) are acceptable, but it is the employer's responsibility to make sure that documents stored in this format are legible. The information that must be recorded is summarised in table 2.

Inducement to opt out

Employers must not take any action where the "sole or main purpose" is to persuade or cause an individual to opt out of or leave their pension scheme, without becoming an active member of another scheme. This applies to the recruitment process and terms and conditions of employment, as well as specific communications about auto-enrolment and other benefits. The Regulator's guidance (PDF format, 267K) (external website) says:

• an employer must not take, or fail to take, any action that results in a jobholder ceasing active membership of a qualifying pension scheme, or which results in such a scheme ceasing to be a qualifying scheme;
• any jobholder's or entitled worker's decision to opt out of, or leave, their pension scheme without joining another should be taken freely and without influence by the employer; and
• an employer must not try to screen job applicants on grounds relating to potential pension scheme membership.

These terms apply to members of existing schemes as well as to employees who join under auto-enrolment. They also apply to employees who are classified as "workers" who may request to join the scheme but who are not entitled to any employer contributions. An employer can face charges of inducement even if no one has opted out as a result of its actions.

As mentioned earlier, employers offering flexible benefits will need to make sure that there is nothing in the terms that could be seen as encouraging employees to choose non-pension over pension benefits.

Legislation banning unfair treatment of workers came into force for all employers on 1 July 2012. Therefore, employers must make sure their employment and recruitment practices are compliant from that date, even if they are still several years away from their staging date.

The Regulator stresses that employers should bear in mind the purpose of these safeguards when considering proposed actions. It suggests that, in cases where they are unsure whether or not a proposed action could amount to an inducement, they should seek legal advice.

Higher earners and income drawdown

There are two groups of employees who are likely to be eligible jobholders, but for whom automatic enrolment would have an adverse effect:

• high earners with fixed or enhanced protection; and
• members of defined-contribution schemes who have registered for flexible drawdown.

In the first case, protection will be lost if there is any further benefit accrual. In the second, there is a requirement that no further contributions should be paid in the year in which members make their drawdown declaration to HMRC.

While acknowledging that high earners could lose out as result of auto-enrolment, the Regulator's guidance is unclear as to the extent to which employers can provide warnings. However, HMRC is reported to have written to all employees with enhanced protection warning them that they stand to lose this if they fail to opt out of auto-enrolment. A similar message is contained in HMRC's fixed protection application documents. Despite this, many employers will wish to give these employees and those with drawdown the information they need to understand the consequences of failing to opt out within the one-month window.

Occupational Pensions understands that, if employers stick to providing factual information and suggest that individuals take financial advice, they will remain within the law. They must not, however, be seen to be offering any advice.

Employers must not treat any workers unfairly or dismiss them on grounds related to auto-enrolment. For example, an employer cannot deny promotion or training opportunities because the worker has decided not to opt out of pension scheme membership. If an employer does so, the worker can enforce their rights in an employment tribunal.

Re-enrolment

Re-enrolment is one of the cornerstones of the new workplace pensions requirements. Once every three years, everyone who has opted out or ceased membership must be reassessed. This includes employees who are contributing to their pension scheme at a lower rate than the minimum for auto-enrolment and as such are not members of a qualifying scheme. Employers can, however, choose not to automatically enrol anyone who opted out in the 12 months prior to the re-enrolment date.

Those who are eligible must be enrolled automatically back into a qualifying pension scheme. Employers must provide broadly the same information to employees as the first time round and re-enrolled members will once again have a one-month opt-out period during which their membership will be "unwound".

The re-enrolment date relates to the employer's staging date it is not the third anniversary of an employee's first automatic enrolment date or from the date the employee opted out so this will be a one-off bulk exercise once every three years. Employers may choose a date that falls within three months either side of the third anniversary of their staging date (or previous re-enrolment date). This six-month window allows employers to choose a re-enrolment date that does not clash with other major activities, such as their financial year-end or pay reviews.

Employers will again need to be aware of any employees for whom re-enrolment could have an adverse effect and consider them when planning their communications.

Giving information to the Regulator

All employers with at least one worker must register with the Pensions Regulator saying what steps have been taken to comply with their duties under auto-enrolment. Registration can be carried out online and must be done within four months of the staging date. According to the Regulator (external website), "registration allows us to understand where employers are having difficulty in meeting their duties so we can provide the right help." It goes on: "It also helps us to see where employers are failing to comply."

As well as information about the business, employers will need to provide the following details about their employees and who has and has not been automatically enrolled:

• the total number of workers employed on the staging date (or if using postponement for any workers, on the last day of the postponement period(s);
• the number of eligible jobholders automatically enrolled into each scheme being used;
• the number of workers who were already active members of a qualifying scheme on the employer's staging date;
• if applicable, the number of eligible jobholders subject to a transitional period; and
• the number of workers employed on the staging date who are not already accounted for.

Employers may authorise someone else, such as their accountant, to carry out the registration on their behalf.

Self-certification

Where an employer has self-certified that the scheme they are using for auto-enrolment is a qualifying scheme, they are required to document certain information about that scheme (the certificate). The specific information to be included varies according to the type of scheme and is set out in the Occupational and Personal Pension Schemes (Automatic Enrolment) (Amendment) Regulations 2012 (SI 2012/1257). Broadly, the certificate must set out:

• the scheme reference number;
• whether the certificate relates to a whole scheme or part of a scheme;
• which employees are covered by the certificate and which are not;
• if there is an upper limit on the contributions that can be paid; and
• the certification period.

The certificate must be renewed every 18 months and kept for six years from its effective date. The employer must provide a copy of the certificate to the Regulator on request and to a relevant jobholder or trade union representative, within two months of receiving a request.

Sanctions for non-compliance

The Regulator has stated that it will work with employers who unintentionally fail to comply with the auto-enrolment requirements to help put things right. However, it has made it clear that it will take action against those who gain a competitive advantage by ignoring the auto-enrolment legislation.

Where the Regulations are breached, the Regulator has a range of available sanctions for breaches including:

• a compliance notice requiring a change of practice or specific steps to be taken;
• backdated membership and contributions;
• an unpaid contributions notice can cover both employer and employee contributions; and
• a fixed penalty of up to £50,000 or an escalating penalty.

In extreme cases the Regulator can bring criminal charges against a company or partnership and against any director, officer, manager or partner of that organisation. There are specific employment rights protecting any employees who make a claim of non-compliance against their employer.