Employers can’t retire from their pension obligations
Britain’s employers deserve a collective pat on the back. By next Easter, over a million employers of all sizes will have taken part in a huge – and highly successful – social experiment. Between them they will have “automatically enrolled” around 10m employees into a workplace pension. Anyone earning more than £10,000 per year and aged between 22 and state pension age has to be enrolled into a pension scheme chosen by their employer. Though workers are then free to opt out, the power of inertia means that roughly nine out of ten have remained in the scheme. As a result, many millions of people are now building up a retirement fund who would not have been doing so five or six years ago.
But while employers can bask in some well-deserved credit for their part in this revolution, they would be mistaken if they think that they can now sit back and relax.
A new paper jointly published this week by pensions law specialists Eversheds Sutherland and my own firm, Royal London, argues that firms could be at risk of future legal challenge if they now “switch off ” when it comes to workplace pensions. In our view, automatic enrolment, particularly for larger employers, should not be regarded as a “once and done” exercise. Instead, companies should be keeping their scheme under regular review and should be more than willing to change provider if the scheme is not delivering for their workers.
At first sight, this might seem to be a rather surprising conclusion. On the face of it, the law is pretty clear. Employers have to choose a scheme that ticks the boxes set out by the Pensions Regulator, they have to identify the right people to enrol and communicate things like opt-out rights and they have to re-enrol people three years later if they opt out. Beyond this, employers could be forgiven for thinking that they have met this set of duties and can now get back to the day job.
But there are several reasons for thinking that it might not be as simple as this, especially for larger employers.
First of all, there is the international evidence. In the US, since 2009 employers have paid out more than $350m in legal settlements in class actions over failures in employee retirement plans. Although the US and UK legal systems are different, it is easy to see from the US precedent the power of a class action.
With the largest workplace pension providers in the UK covering hundreds of thousands of workers (and in some cases millions), a systematic problem in one scheme could cause problems for very large numbers of workers and could potentially lead to big bills for compensation.
Second, although firms are required simply to choose a “compliant” scheme for their workers, the Pensions Regulator itself says that as well as these minimum criteria “there will be other things to consider before an employer makes a decision about what type of pension scheme to choose”.
The regulator is likely to be thinking about things like whether the “default” investment fund into which workers are enrolled is suitable, how well the scheme communicates with members, whether charges are reasonable and so forth. Employers who rely on “minimum compliance”, just doing the least that they think they can get away with, could find judges in future court cases taking the view that they owed a greater duty of care to their employees. This is likely to be especially true if they are a large firm who could be expected to take the professional advice they would need to evaluate their pension scheme on an ongoing basis.
Third, it is not just future judges who may be an issue for firms, it is future politicians and regulators. There are plenty of examples of cases where politicians have decided, with the benefit of hindsight, that a practice that was acceptable (or at least legal) at the time is no longer acceptable through the lens of history. The same could easily happen to employers who were happy to settle for “good enough” when choosing a pension for their workers.
There is one particular issue where I believe employers are particularly vulnerable. In most pension arrangements, the money workers put into their pensions attracts tax relief. But in a strange quirk, some types of schemes do not deliver tax relief for the lowest-paid. Given that most schemes do not penalise the low-paid in this way, I think it may only be a matter of time before a low-paid worker mounts a challenge against an employer who could have chosen a different arrangement but instead chose one which caused the low earner to miss out on tax relief.
The key to all of this is that the employer is acting on behalf of his or her employees who are passive in the whole process. On this basis, employers have a particular duty of care to choose well for their employees and to keep the scheme under constant review. They should do so not simply because of the risk of future challenge but because it is the right thing to do. It is also another way of telling the workforce that you care not just about their quality of life today but also about their long-term future.
‘In the US, since 2009 firms have paid out more than $350m in class actions over failures in employee retirement plans’