UK: Workplace Pension Schemes: Automatic for the People?

Originally published 18th August 2005

To date, the legal and practical viability of automatic enrolment of employees in workplace pension schemes, such as Group Personal Pension plans (GPPs) and Stakeholder Pension plans (SHPs), has been viewed with a high degree of scepticism from the financial services industry because of what is considered an overly-restrictive legislative regime on financial products offered by third parties (e.g. life offices).

In response to this, the Department for Work and Pensions (DWP) has recently published guidance on the subject which addresses and clarifies a number of key concerns, which ought to be of interest to employers of all sizes.

Why have automatic enrolment?

As part of its efforts to encourage individuals to provide for their retirement, the Government introduced legislation requiring employers to facilitate access to an SHP or a qualifying alternative pension arrangement (e.g. a GPP), with fines of up to £50,000 if those requirements are not met.

As automatic enrolment requires employees to actively decline to join the pension plan operated by their employer, it is often considered as a simple way to meet not only the legislative requirements on employers, but also to maximise employee participation in the employer’s pension plan and the potential for financial provision for retirement.

The DWP’s guidance indicates that the principal legal concerns should not operate as a barrier to automatic enrolment, provided certain procedures are followed.

Avoiding the difficulties

One of the main perceived obstacles to automatic enrolment, particularly for employers participating in third party schemes, is the European Directive on Distance Marketing of Consumer Financial Services, which provides increased consumer protection in "distance contracts" for financial services.

The guidance points out that many of the restrictive procedural requirements of the Directive can be avoided by following some very simple steps which will avoid the contract being a "distance contract" at all, by ensuring that the employee receives "meaningful face-to-face" communication prior to entering into the scheme. This can be either on a one-to-one basis or by means of a group presentation, but essential to its effectiveness is that a record is kept in respect of every employee who was present.

The Directive also makes it an offence to require payment for an unsolicited supply of financial services, and there has been concern that by having an opt-out, rather than an opt-in, automatic enrolment would fall foul of this. However, the solution suggested by the DWP is to ensure that the employee actively makes a request to enter the pension scheme, which could be done by having them sign and return a tear-off slip to that effect to the pension provider.

Another complication is that, in passing employee details to a pension provider, employers could find themselves in breach of the Data Protection Act 1998. This too can be easily avoided, as all that is required is the employees’ consent, which can be included within their contract of employment.

Promoting Workforce Pension Schemes

As well as these simple steps to make automatic enrolment less complex, a legislative change last month means that employers are now permitted to promote their pension schemes to their employees, without the need for authorisation from the Financial Services Authority. Employers can now promote their pension arrangements, if the employer contributes to the pension plan in question. As ever, if an employer decides to promote its pension arrangements, it should ensure that it does not go so far as to provide financial advice. Of course, employers can choose to pay for or contribute towards the cost of financial advice for employees regarding pension provision.

Although these issues seem to have obvious solutions, employers may be concerned about the interaction of so many different areas of law, from pensions and employment to financial services and data protection. This should not discourage businesses from considering all possibilities in their employee benefit arrangements (e.g. introducing automatic enrolment in a GPP, a SHP or another pension arrangement or the introduction of a more comprehensive employee benefits package), as, with a little guidance, it is possible to have everything fall neatly into place.

The material contained in this e-update is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.

© MacRoberts 2005