When it comes to LLPs, all is still not clear over auto-enrolment.
Since the Supreme Court decision in Clyde & Co v Bates van Winklehof in May this year, LLPs have been waking up to the fact that most LLP members will be “workers” for the purposes of certain protections afforded under employment legislation.
But the Clyde & Co case also has the effect of giving some LLP members the right to be automatically enrolled into pension saving and, importantly, to receive pension contributions from the LLP.
Not all LLP members will be in this camp. To have full auto-enrolment rights, a “worker” must also be a “jobholder”, which requires them to be receiving “earnings” as specified by the legislation (e.g. salary, commission, bonuses, overtime).
Typically, a full equity member of an LLP receiving drawings on account of a true profit share would not be receiving “earnings” as defined so would not be eligible for full auto-enrolment rights. In contrast, salaried LLP members working under a contract of employment will already be jobholders with “earnings” and so qualify for automatic enrolment.
In between these categories the waters are a little muddier. The various payment arrangements that LLPs may have put in place for fixed share members (or similar) need to be assessed to establish whether they constitute “earnings” or not. Key questions will include the extent to which payments are truly dependent on the financial performance of the LLP.
To backdate or not to backdate?
Things get trickier for LLPs who have already passed their staging dates for automatic enrolment. Where a staging date fell before the Clyde & Co judgement, LLP members (other than “salaried members”) are likely to have been judged not to have been “workers” for automatic enrolment purposes. Now, with 20:20 hindsight, it is arguable that some LLP’s members were eligible to be enrolled from that earlier staging date.
The Pensions Regulator (TPR) has indicated in responses to individual queries that it has no discretion to alter automatic enrolment dates. TPR’s suggestion is that membership, and contributions or pension accrual are therefore backdated.
It is not obvious however what the level of any backdated contributions should be, e.g. the full rate that may be offered to other workers for pension saving, or just the minimum required for automatic enrolment?
Also, the legislation does not give a clear right to deduct backdated contributions. LLPs will therefore need to assess whether to obtain explicit consent to deductions from a member’s earnings.
Don’t blow it
Another potential pitfall is the risk that, by being auto-enrolled (and so accruing additional pension), an LLP member can lose pension tax protections they have registered with HMRC, e.g. to preserve a higher Lifetime Allowance for pension saving. Once enrolled, an LLP member could ordinarily submit a statutory opt out notice within a one month window with the result that he or she will be treated as having never been a member of the pension scheme and therefore not risk losing any tax protection.
However, there is a risk that if LLP members are treated as having been automatically enrolled at an earlier pre-Clyde staging date, such individuals have lost the opportunity to opt-out of auto-enrolment under the statutory process and so will lose the tax protections mentioned here.
TPR has indicated that the opt-out window may still operate for LLP members whose membership is backdated. However, given the potential impact of the loss of pensions tax protections, we would recommend that LLPs seek advice if this is relevant to their members.
Faith Dickson, partner, Sackers. Sackers senior associate Ferdinand Lovett assisted with this article