Navigating the advice minefield
Employers’ auto-enrolment duties are a legal minefield that must be navigated with care, says John Lappin
As we now enter the final furlong before auto-enrolment commences, with the Pensions Regulator last month sending out the first letters telling large employers of their start date, both government and regulator have been measuring their words carefully.
Speaking at a Jelf event organised for employers last month, pension minister Steve Webb adopted a softly softly approach, saying: “The Pensions Regulator has a responsibility to make this happen - to make sure employers do what they need to do. Our approach is not big stick. It is not the regulator coming in raiding your offices at dawn and saying we need to see your payroll. Our goal is to make sure as many people do it and then pick up the rotten apples at the end. We want to facilitate, encourage and enable and then deal with the rebels at the end.”
Explaining the approach to Corporate Adviser, Charles Counsell, interim executive director for employer compliance at TPR says: “Clearly the regulator will move to address wilful or persistent non-compliance. But we will take a graduated approach to enforcement action, making employers aware if they have not complied with the law and giving them a fair opportunity to comply before taking further action.”
In theory, the obligations on employers are very tough indeed. An employer must not take or fail to take any action with the sole or main purpose to induce a job holder out of the scheme. Similar legalistic language is applied to attempts to screen out employees who might join the pension scheme. But some experts believe the inducement provisions could prove remarkably difficult to enforce, bearing in mind the sheer numbers of employers involved.
Pension lawyer Jennie Kreser, a partner at Silverman Sherliker, points out that the TPR’s budget is being cut and wonders therefore how proactive TPR can be. “I am not sure they are going to go gung ho into dragging employers before the courts,” she says. She is uncertain TPR will be able to afford to do proper research if its sampling uncovers a problem.
Aegon senior pensions development manager Kate Smith, who works in the provider’s regulatory practice team says: “TPR wants to build a pro-compliance culture. They are not going to issue a penalty without due warning and giving people the opportunity to do the right thing.
“TPR are going to have to learn on the job. They will learn a lot from the larger employers, what goes well and what doesn’t go well. I am reasonably optimistic for the early stages. With smaller employers there will be a heap of problems and they realise that, but are they prepared?she asks.
Richard Jacobs, director of Richard Jacobs Pension and Trustee Services, says the problem lies beyond the currently advised market. “The problem will be the small number of employers who really haven’t got the time or money to get involved in it now,” he says. “They will swear blind they knew nothing about it.”
Jacobs does not believe you can legislate against subtle persuasion. He cites the example of a bank employee he has been advising whose existing pension scheme has an RPI link. That employee believes that a refusal to sign an individual contract agreeing to a CPI switch means you move on to a ’naughty list’ with little chance of receiving pay rises or promotions. Jacobs believes similar unspoken pressure will influence auto-enrolment decisions.
He says with smaller firms, bosses may simply let it be known that if everyone joins, someone loses their job. “You can say that is easy to prove and it is criminal, but it will be said in a certain way and the person who complains is the one who may lose their job. It is going to happen - big style.
”Friends Life head of marketing corporate Martin Palmer believes TPR won’t be able to survey the whole market so will find other ways.
“If I was TPR, I would be looking at a comparator, across a sector, looking at company A against company B. They may well then look to try and find justifiable proof, if an employer is offering inducements.”
But will providers and advisers get caught in the middle of the confusion?
Kreser believes many employers will be put off offering advice. “I don’t think employers will touch advice with a barge pole because they won’t want to run the risk of doing anything which could be construed as trying to encourage an individual from opting out.”
But Steve Herbert, head of benefits strategy at Jelf Employee Benefits, takes a radically different view. He says that employers and their advisers may need to outline the downsides of joining - the opposite of the current situation where advisers generally try to maximise scheme members. “I can see employers increasingly having to offer employees that sort of steer. There are going to be people who shouldn’t be joining.”
He gives the real example of a big employer in the hospitality industry, which employs many foreign nationals employed for three to five month periods. At the moment they will be enrolled. “The idea that employers can’t allow employees to fully understand what they are committing to needs to be bridged and hasn’t been bridged yet, because there is a difference between proper steerage and soft coercion,” he says.
Standard Life’s head of pension policy John Lawson believes that some employers may attempt to put off joiners by setting employee contributions at too high a level.
He says: “The original act says employers cannot take actions that encourage employees not to join. It is a really broad brush approach. They would have to take a court case to try and prove it. Employers could go in with a higher employee contribution, rather than the 4 per cent required by the regulations. That is more likely to make employees not join - the impact of a bigger cut in take-home pay in one fell swoop. If you do it in dribs and drabs it becomes less noticeable and they are more likely to stay in,” says Lawson.
“A situation where the employer is putting in half of what you put in is not unfair, so three and six or maybe four and eight. It might not be seen as coercing the employee not to join, but you know if you ask for six they are not going to join.”
Matthew de Ferrars, a partner at pension lawyers Pinsent Masons, believes that for some employers the issue may not be deliberate avoidance.
“It may be more to do with arrangements that are themselves innocuous, with employers doing things that are not intended at all to get round the legislation, but the legislation catches them out all the same,” he says.
“With flexible benefit packages, under the legislation as it stands, you may not be able to switch pension for another benefit, at least up to the qualifying amount. You can switch additional employer pension contributions above the auto-enrolment requirement, but not beyond that, and so the structure of flexible benefits packages may therefore need attention. Guidance from the Pensions Regulator in this area is not very helpful as it has said that it comes down to the employer’s intention in offering the flexible benefits package - but that’s very subjective.”
Lawson fears that auto-enrolment requirements combined with flexible pensions could result in a big fall in funding with echoes of what happened with DB schemes and the Minimum Funding Requirement.
He says: “I can see even good employers allowing employees to flex down to eight. Let’s say the employer put in six and took six from you, they might flex that down to two per cent. You can flex your four elsewhere, say for extra holidays. There is a danger eight becomes the minimum almost like MFR was for DB schemes .”
However Origen director of client servicing Warren Page believes that flex schemes will receive a boost.
“I wonder whether employers might say you can flex your pension down to this level and then you can’t flex it below that, that level being the 3 and the 4 to get to the 8 per cent threshold. But on the flipside it is going to be very difficult to operate the opt in opt out re-enrolment process without the technology from flex platform providers so I expect more employers may look to it as a solution. That may help them abide by the law. It is not something I would want to see running in files in the HR department.”
De Ferrars points out that with high earners there could be issues with A-day or lifetime allowance protection. He says: “With some forms of A-day and lifetime allowance protection, it is a condition that you don’t accrue further benefits. If you auto-enrol someone are you going to blow that protection? There is an answer to that in the current legislation. You can opt out and you are deemed never to have been in the scheme but will employees and employers twig? And employers should not be advising people to opt out from a financial planning point of view.”
He also points out salary sacrifice should not be used primarily to bring people below the earnings threshold or to reduce the level of employer contributions, but that lines could be blurred. It will not be easy to distinguish between a bona fide salary sacrifice scheme and one which has been designed to get around auto-enrolment. So, in the future, salary sacrifice schemes will need to be structured with auto-enrolment very much in mind.
Finally he notes that self certification is getting more complicated following amendments to the Pensions Bill. “It is getting more and more complicated to determine if you satisfy any of the three tests. It was originally determined on a majority basis, but now it has increased to 90 per cent. You will have to be very careful about who are your employees when self certifying.”
When it comes to the sanctions advisers might face, Lawson says employers who are fined might then try and sue for bad advice, but while bigger pension consultancies may provide a specific contract, smaller IFAs advising employers may not and that might be more difficult for an employer to prove a case.
He says the FSA could possibly get involved but only in extreme cases of IFAs making a habit of creating ’auto-enrolment busting’ schemes.
“Stick to the 8 per cent and try not to get involved in the flexing down. Starting at three and five is acceptable from day one, even three and six,” says Lawson. “But advisers need to really check the advice they are giving.”
TPR, auto-enrolment and the law
Q. Is the Pension Regulator resourced enough to properly police the market, to identify where employees have been induced not to join particularly as SMEs are brought into the system?
A. Our first priority is to ensure that employers have the information they need. We will communicate with employers prior to their duty dates, providing them with sources of further information and support.
It’s important to bear in mind that we’re still more than four years away from these reforms affecting the majority of employers. Only around 2 per cent of employers will need to automatically enrol before September 2014.
In autumn 2011 we will make an announcement about our third party partner. It is anticipated that the third party partner will have responsibilities such as sending information to employers informing them about their duties 12 months and 3 months before their due date. We have not yet agreed on the extent to which specific activities might be retained or delegated to a third party partner. Whatever happens, TPR will set the strategy and operational policies that inform any and all enforcement action. The work of the third party partner will be agreed in advance and closely monitored by TPR.
Q. Some advisers have voiced concerns that they could be suspected of encouraging opt outs if numbers of opt outs rise significantly. Can you reassure them that this will not be the case?
A. Any decision to opt out, or to cease, saving for retirement should be an individual’s own. If the regulator becomes aware that an employer has instructed an adviser to incentivise employees to opt out then that employer should expect to be investigated. This is also the case where an employer is not recruiting individuals on the basis that they wish to save for their retirement.
The regulator will use all available mechanisms to identify suspected inducement activity and prohibited recruitment conduct including whistleblowing reports from individuals and advisers.
Q. Advisers are also concerned that employers may provide only information and not advice to employees because of the threat of legal sanctions. Is this a concern for you?
A. Employers should avoid giving advice to employees about opting out as it is unlikely that they would know enough about the individual’s circumstances, or have the necessary expertise. Advice of this nature could be considered to be inducement. However, this does not stop employers from providing information about, and promoting the benefits of, the workplace pension scheme to which they provide access. Q. Some experts have suggested that employers may set up schemes with very high employee contributions to effectively deter joining and encourage leaving. Do you see this as an issue? How could you counter this? If an employer’s sole or main purpose for setting up a scheme in a particular way is to encourage jobholders to opt out, then the regulator would consider that to be inducement. Where this happens we will consider the use of our powers.
Q.Are you happy with flexible arrangements in terms of auto-enrolment and the choices it gives to employees?
A. The intention of the legislation is to encourage pension saving at a minimum level, not to restrict flexible benefit packages that employers wish to offer their workers. As long as eligible jobholders are automatically enrolled into a qualifying scheme, they can choose to opt out and go into alternative non qualifying pension saving or choose a non-pensionable benefit.
The important factor is that the decision to do so is their own and they have not been influenced by the employer. Employers must therefore be confident that in offering a flexible benefit package their sole or main purpose is not to induce individuals to opt out of a qualifying scheme.