Em­ploy­ers can’t re­tire from their pen­sion obli­ga­tions

The Daily Telegraph - Business - - Business Comment - SIR STEVE WEBB Sir Steve Webb is di­rec­tor of pol­icy at mu­tual in­surer Royal Lon­don

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’

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