As the population in the UK continues to grow quickly and against a background of advances in technology, medical treatment and our lifestyles generally, we are all living longer. The effect is a growing aging population reliant in its retirement largely on an already overstretched state welfare system teetering on the brink of failure.

This issue has been exacerbated in the past generation by the rapid decline in private “final salary pensions” and the failure of some other pension schemes. This has lead to the imposition of minimum requirements and financial controls over how they are run. However the government have yet more radical change set in the foreseeable future with a view to paving the way into retirement for the next generation.

Retirement Age

In addition the maximum age for claiming unfair dismissal being removed some years ago we have also recently seen the abolition in the National Retirement Age in October 2010. It follows that it is now considerably harder to retire someone based on Age alone; in the event that an employer wishes to do so it must now show that any imposed Retirement Age is a proportionate means of obtaining a legitimate aim. Failure to do so will lead to a claim for age discrimination and even unfair dismissal.

Presently state pension age (not retirement) is 65 for men and between 60 and 65 for women (depending on their date of birth). However, by 2018 the retirement age will be 65 for everyone, rising to 66 by 2020 and eventually to 67 by April 2028.

The Present System

Whilst many employers still appear oblivious to their responsibilities, there are in fact employer obligations in respect of pensions and have been for in excess of 10 years.

Under the current system there is a minimum requirement for an employer with 5 employees or more (including shareholder/directors), at very the least in the absence of Occupational Pension Scheme, to provide access to a Stakeholder Pension Scheme.

At present there is no liability for the Employer to pay into that scheme. They act as a “money purchase scheme” and not as a final salary indexed one.

Other rules include:

• A stakeholder pension scheme cannot charge more than 1% a year of the value of the member’s fund for administration and investment expenses.
• Members must be able to transfer into or out of a stakeholder pension, or stop paying for a time, without facing any extra charge.
• All Stakeholder Pension Schemes must accept contributions of £20 or more a year, although some may accept lower payments.
• They must be run in the interest of their members. They can be run either under a trust or under contract-based arrangements by a scheme administrator.

It is therefore possible that an employer may find itself in a position whereby it is required to set up and provide access to a stakeholder pension scheme to its employees, however, no employees actually volunteer to join it.

Changes with effect from October 2012

The proposed changes will come into force with effect from 1 October 2012. i.e. in little over 6 months time from the date of the publication of this article.

The first noticeable change is that all “jobholders” over the age of 22 and under national pensionable age MUST be automatically enrolled into the occupational pension scheme. In reality this will mean that the additional opt in process will be scrapped.

A “jobholder” is defined as any person who meets the following three conditions:

• Works (or ordinarily works) in Great Britain under a contract, and including temporary workers and also executive directors employed under a service contract.
• Is aged at least 16 and under 75.
• Is paid “qualifying earnings” by an employer. Earnings include bonuses, overtime and statutory maternity, paternity or adoption pay. Under the DWP’s plans, the earnings “trigger” would be set at £8,105 and the band of earnings on which contributions must be calculated would extend from £5,564 to £39,853. We are presently awaiting full details as to how this will work.

The National Employment Savings Trust (NEST) is one form of pension scheme that is open to be utilised by Employers in order to comply with their obligations. NEST is a trust-based occupational defined contribution pension scheme run by the NEST Corporation, however, NEST is not compulsory and employers will be able to use their existing pension arrangements (or put in place new arrangements), provided they meet qualifying criteria.

Clearly increasing the access to “workers” is a significant step forward. This is also very much a natural progression from the recent agency workers legislation which provides that agency staff engaged in excess of 12 weeks must be provided with access to the same benefits as an employer’s directly employed staff.

Given the sheer size of the task at hand it is proposed that the automatic enrolment obligations will be brought in as a staged implementation based on the number of employees within an organisation. The target dates for such implementation will be specific to each employer however broad guidelines are set out below;

Number of employees Date compliance begins

250 or more 01 October 2012 to February 2014

50 to 249 01 April 2014 to 01 April 2015

Under 50 Employees 01 June 2015 to 01 April 2017

New Start Business 01 May 2017 to 01 February 2018

Between 1 April 2012 and 30 Sept 2017 01 October 2018

In order to check your specific compliance date you should review the charts published at www.tpr.gov.uk/staging

Contributions

The Second change to pensions is that it will become compulsory for employers to also contribute to the jobholders’ pension.

It is presently planned that employers will pay 3% of the employee’s annual salary into the fund and employees will eventually be required to contribute 5% of their annual salary. However, the level of contributions is due to come into force on a sliding scale over a 5 year period. That scale for the majority of jobholders (as a tier 2 candidate) is set out below:

Year Employer Contribution Total Minimum Contribution

Oct ’12 to Sept ’17 1% 1%

Oct ’17 to Sept ’18 2% 3%

Oct ’18 onwards 3% 8%

Opting In and/or Out of the Scheme

Jobholders automatically enrolled will have a statutory right to opt out of whichever scheme they have joined. Details such as the period within which the jobholder can opt out, and the calculation of and procedure for refunding contributions is yet to be published. An employer will be under a duty not to take any steps (or make any omission) by which the jobholder stops being an active member, or the scheme stops counting as a qualifying scheme, unless the jobholder is an active member of another qualifying scheme.

Non-eligible jobholders who are not automatically enrolled can give their employer notice requiring the employer to arrange for them to be enrolled into a scheme. But they can only do this once in a 12-month period. The employer will not be required to make any contributions in these circumstances.

Enforcement

Pensions will be regulated by The Pensions Regulator who will be given powers to issue compliance notices to employers who contravene this obligation and penalty notices to those that flout compliance notices. Penalties will vary according to the employer’s size although it is anticipated that large employers who do not comply could be liable for escalating penalties of £10,000 a day. In addition it is yet to be seen whether criminal penalties will apply in the case of “wilful” failure to comply.

It is not yet clear whether individual candidates will have redress for compensation for any failures by an employer before an employment tribunal. However, various employment protection rights on workers (but not “jobholders”) will be enforceable in this way; for example if they suffer any detriment in their employment because of their employer’s breaches of the regime. In addition, a new provision will be introduced into the Employment Rights Act 1996 (as section 104D) which will render unfair any dismissal arising from an employer’s breaches of the automatic enrolment requirements or the prohibited recruitment conduct. Employers cannot contract out of, limit or exclude any of the new duties imposed on them (except under a compromise in relation to proceedings in an employment tribunal).

Employers will not be able to ask job applicants at interview whether they plan to opt out of auto-enrolment and they will not be able to offer financial inducements (such as higher salaries or one-off bonuses) to their employees to opt out of membership of workplace pension schemes. An employer will face a compliance notice from the Regulator if it takes action for the “sole or main purpose” of inducing an employee or worker to opt out of such qualifying schemes.

Conclusions

For employers the new systems mean an increased administrative burden to ensure that all workers earning over the threshold are automatically enrolled into the pension scheme, together with in most cases an increased financial burden in respect of those individuals for whom it will have to now make contributions on their behalf; the effect has a greater impact by the very fact that the payments will be made in respect of workers as well as employees.

In order to ensure compliance with the new regulations the Pension’s regulator will be provided with greater range of powers and financial sanctions which can be imposed in addition to any compensation payable to an employee for the losses that he or she may suffer.

More details on the new systems and their implementation can be found at:http://www.thepensionsregulator.gov.uk/pensions-reform/detailed-guidance.aspx

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Instead of receiving her normal wages, she will receive a Statutory Maternity Payment, or an enhanced maternity payment if the contract of employment provides for one. Otherwise all of her other benefits remain the same, so provided that she had them before her maternity leave, she would also be entitled to receive her:

• Private health care
• Life Assurance
• Company Car
• Bonuses
• Pay Rises

However, a question arises where an employee has a Defined Contribution pension schemes. “Defined Benefit” or “Final Salary” pensions sit outside of the scope of this problem given that the pension will be calculated depending on the employee’s final salary rather than the value in the pot and therefore the value of input by the employer is somewhat of a moot point as contributions will need to be maintained to support that scheme.

Technically a pension is a contractual benefit, therefore under the Maternity and Parental Leave Regulations the employee would be entitled to receive them as normal. Under UK Provisions a payment is only due where the employee qualifies for a maternity payment in the first instance; therefore no payments are required where an employee does not qualify for maternity pay, or where they are on unpaid Additional Maternity Leave.

However, it would be unreasonable to suggest that she should continue to make payments at the same value as she had been under her full employment as to do so would be likely to wipe out the value of any maternity payment. Section 75 of the Equality Act therefore states that any contributions made by the woman must only be in relation to the sums that she receives at that time. So therefore a woman on maternity leave will only ever have to contribute 5% of her maternity pay, which is presently £6.44.

So far, pretty straightforward; however, what is the employer’s contribution? Well it will first and foremost depend upon the terms of the Pension; if the employer does not contribute in the first place then it will be suddenly expected to contribute thereafter. However if, and for the purpose of this article assuming that the employer does, contribute a percentage of the employee’s salary to the scheme the it’s obligations will continue. IN SUCH CASES it would be reasonable to assume that the value of the contributions would be the relevant percentage of the Employee’s maternity pay. Unfortunately that may be incorrect, as any modified term in her contract of employment must treat an employee on maternity leave as if she is not on maternity leave. It therefore follows that if an employee contributes 5% of her maternity pay then the Employer would have to provide whatever percentage in respect of the employee’s full salary.

There are 2 schools of thought, one as set out above that the employer should continue to maintain their level of contributions, as set out above, and as seems to be implied by and the other which the government appears to be favouring at the moment, although the most recent BIS and HMRC Guidance remain silent on the issue, is to treat the pension contributions as being part of the remuneration, thereby providing that the contributions will vary dependent upon the value of the sums paid to the employee. Unfortunately there is no definitive authority on this point and we await a case that challenges the issues.

Further, the European Law provides us with authorities in respect of the time in which the pension benefits must be provided. The cases of Boyle and Sass appear to suggest that any benefits must be for the duration of the full period of maternity leave, and should not stop at the end of the Ordinary Maternity Leave as they presently do in the UK. Again we await a UK authority on this.

In Practical terms

Practically, what does this mean for employers? Well, if you do not presently provide any contributions to pensions then you will be safe to carry on as you are, however, beware that the law changes from October 2012 and employers will be forced to contribute to their employees pensions.

Equally, if you are supporting an Final salary pension scheme then you are likely to have to keep up the contributions in order to maintain the existence of that pension fund.

In the event that you are providing a pension where the employer makes contributions, it is often best to:

• a) Offer a payment holiday for the employee during the duration of the maternity leave period, and inform them that they can make increased contributions at a later date if they wish to do so. Given that statutory payments are low, many employees will be grateful of the chance to take that opportunity and thus also allowing the employer to do the same.
• b) Check the rules and terms of your scheme to see what you are contractually obliged to pay, to see what contributions you will pay, if any.
• c) Consider reducing the pension payments to a value equal to the employee’s contributions. However, you should take independent legal and pensions advice before doing so.

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