Readers of this bulletin will be aware that starting in October 2012, a duty is being phased in for UK employers to automatically enroll eligible employees into a qualifying pension plan. The implementation date for automatic enrolment (known as the "staging date") is determined by reference to the number of employees in an employer's PAYE payroll scheme as of April 1, 2012. The earlier staging dates apply to the larger employers, and clients must ensure that they are aware of their staging date. (By way of illustration, an employer with 10,000 or more employees on its payroll on April 1, 2012 will have a staging date between October 1, 2012 and March 1, 2013.)
Employers need, however, to be aware not only of their staging date, but also of the effect that any potential corporate acquisition may have upon their auto-enrolment duties. There are marked differences between the duties arising on the acquisition of shares of a target company and the acquisition of the business of a target.
Share Acquisition. A buyer must ensure that the target has complied with its auto-enrolment obligations. If the target has passed its staging date, the buyer must also consider whether or not the "qualifying scheme" used for auto-enrolment purposes will transfer with the target. If the target is part of a larger group and participates in a group qualifying scheme, that scheme is unlikely to transfer, so the buyer must ensure that the employees are enrolled in a qualifying scheme within one month of the transfer and with effect from the time of the transfer.
Asset Transfer. On the acquisition of the target's business through an asset transfer, the position is more complicated. It is unlikely that the qualifying scheme used by the target for auto-enrolment purposes will transfer:
- If the transferring employees were in a contract based personal pension plan, the buyer will have to replicate any employer contribution obligations, even if those are greater than any existing contribution obligations of the buyer for its other employees. (That was also the legal position even before auto-enrolment was introduced.)
- If the transferring employees were members of an occupational pension plan, the buyer has an obligation to match employee contributions up to a maximum of 6 percent of salary if it is going to offer a defined contribution plan. This obligation (which also pre-dates auto-enrolment) overrides any existing contribution obligations of the buyer to its other employees and any minimum contribution obligations under auto-enrolment which, at present, oblige employers only to make employer contributions of 1 percent of salary. Draft regulations have, however, now been issued to deal with the anomalous situation where transferring employees from an occupational pension plan may (as a result of the current legislation) benefit from an entitlement to greater pension contributions than were available before the transfer. The buyer will be able to choose whether to pay contributions in respect of the transferring employees at a rate of either (i) not less than that paid by the seller in respect of the transferring employees immediately before the transfer or (ii) the contributions paid by the employees before the transfer, up to a maximum of 6 percent.
- As the staging date applicable to each employer depends upon the number of employees on its payroll as at April 1, 2012, the situation may arise where an employee transfers from an employer that has passed its staging date to an employer that has not. As it is the staging date of the buyer that applies from the date of the transfer, the transferring employees would therefore lose their auto-enrolment rights until the buyer's staging date (but the pension protection provisions mentioned in the previous two paragraphs will still apply). If, on the other hand, an employee transfers from an employer that has not passed its staging date to an employer that has, the buyer must enroll that employee into its qualifying scheme (but, again, subject to the pension protection provisions mentioned in the previous two paragraphs).
In summary, the buyer needs to ensure now not only that the pension protection requirements but also the auto-enrolment requirements described above are complied with.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.