8 April 2013 | By Jonathan Ames
Pension law changes from 6 April: new disclosure regulations, auto-enrolment, TUPE transfers and tax limits
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Pensions auto-enrolment is about to hit medium-size businesses. Employers are clamouring for advice - as are the law firms themselves
In the next few weeks government ministers will move closer to adding to the old adage that ‘the only sure things are death and taxes’. For millions of UK workers that maxim will become ‘the only sure things are death, taxes and automatic pension enrolment’.
A rapidly ageing population combined with an innate reluctance among many to plan ahead has convinced successive governments to legislate, forcing workers into pension schemes that will start them on the road to saving for retirement.
Auto-enrolment, as legislated for in the Pensions Act 2008, is hitting employers like a tsunami, with the peak in numbers of businesses scheduled to implement the rules arriving during the second and third quarters of this year.
Some of the country’s biggest employers have already been through the process. But as medium-sized businesses comply with the scheme, specialist pension lawyers are bracing themselves for a raft of queries arising from the legislation, not least from law firms themselves.
Auto-enrolment threatens to cast a harsh spotlight on one of the murkier areas of law firm structures - the position and role of so-called salaried partners.
The immediate issue facing employers and their legal advisers, whether in-house or external, is navigating the complex set of regulations. Top of the agenda is defining who are and are not ‘workers’ and whether they are ‘ordinarily working’ in the UK, with a dash of confusion around the already labyrinthine rules of the Transfer of Undertakings (Tupe) Regulations.
All this is set to keep specialist lawyers busy for much of the next six months and beyond.
“There’s a lot of complexity in the legislation,” says Isabel France, a partner in Linklaters’ pensions department. “The technical input required is greater than some anticipated. We are seeing queries ranging from employers who want help with the basics to those who are at the level of pressing the go button and want last-minute advice on the most technical aspects.”
Heading the list of concerns is the regulation’s requirement to enrol in the scheme ‘workers’ who are ‘ordinarily working in the UK’. Lawyers point out that the definition of a worker is unclear, especially in an economy that relies increasingly on contract and consultancy positions.
“Lots of people are on the borderline,” explains Helen Powell, a senior professional support lawyer in the employment and benefits team at Allen & Overy. “It’s difficult for employers to go through an assessment process to determine whether a worker is an employee or in business on their own account.”
A recent illustration of the conundrum is the case of the erotic dancer who lost an employment rights claim at the end of last year against table-dancing club owner Peter Stringfellow. The stripper had claimed to be an employed worker, but the Court of Appeal ruled she was a self-employed consultant.
Pensions lawyers are not forecasting a glut of law suits around the ‘worker’ definition in auto-enrolment, but nonetheless the status of each of a business’s employees has to be analysed.
Place of work is also a potential minefield for employers - especially with increasingly international workforces in the UK. Just as the term ‘worker’ requires analysis and clarification, the expression ‘ordinarily working in the UK’ could cause lawyers and their clients endless headaches.
“This is particularly tricky for businesses that have secondees or staff moving regularly between countries,” says Powell. “There are a lot of businesses in the UK with multinational workforces. You get odd results in this area - for example, there was a case last year where a person who was based almost exclusively in Tanzania was found to have employment rights in the UK.”
Claire Carey, a partner at London-based pensions specialist law firm Sackers, also sees the definition of ‘ordinarily working in the UK’ as possibly the most crucial element of the auto-enrolment legislation.
“One issue with which employers are having to grapple,” she says, “is where someone starts a role in another country, but ends up doing much of the job in the UK. You have to get into the nitty-gritty facts - where do they get paid? What currency are they paid in?”
But Sue Tye, a senior lawyer and pensions strategist at the London office of Baker & McKenzie, says the pensions regulator has issued helpful guidelines on this point. She uses the hypothetical example of a Spanish national temporarily working in the UK, but with the intention of returning to Spain. In that case, maintains Tye, the auto-enrolment legislation would not bite.
“The way I read the guidance,” says Tye, “is that if it really does look like a secondment or temporary placement the person is not in scope because they’re not ordinarily working in the UK. The regulator doesn’t seem too concerned about duration - it’s more a question of whether the worker is going to stay in the UK forever.”
She points out that the same principle applies to UK nationals working abroad. If the worker is likely to be coming back to the UK and ultimately retiring here, they must be auto-enrolled.
Other auto-enrolment advice is broadly broken into three categories, say lawyers. Employers need to think about their terms with third parties, such as payroll and pension providers, to assess where liability sits if implementation of auto-enrolment goes wrong. Put bluntly: who pays if a worker who should be auto-enrolled is not and that person ultimately is prejudiced regarding investments?
Clients and their lawyers also need to asses whether existing pension schemes meet the requirements of the new legislation. And they must ensure contracts of employment are clear and give the right incentives regarding joining pension schemes. Particularly difficult is the position of very high earners, with lawyers maintaining they should opt out as quickly as possible to avoid losing their existing tax concessions.
Tupe is another potential problem, with issues around what contributions must be made after a transfer under that legislation.
“Auto-enrolment,” comments Powell, “snarls things up badly.”
Tupe can apply to internal business employee transfers and, combined with auto-enrolment, could result in different sets of workers in the same business being on different contribution levels.
So concerned are ministers regarding Tupe that they recently launched a consultation on changes to the requirements in that area.
“The Government is trying to amend the regulations to avoid the sort of difficulties that would involve lawyers arguing the toss,” says Powell.
Nonetheless, these ingredients are already creating a cocktail of instructions for specialist lawyers.
“Implementation has increased workload,” claims Powell. “We’re having to review the rules of a lot of client schemes.”
Tye agrees, pointing out that some clients prefer to tackle the issues through their in-house departments while others seek a more comprehensive external solution.
“There are some with whom we get involved right from the start of the process,” Tye says. “Others do it very much in-house, and we get ad hoc queries on particular issues. It depends a great deal on whether a client has a pensions manager.”
Overall, says Tye, businesses are not running to their law firms in a blind panic. “We’re not seeing urgent queries from clients who have been taken by surprise, partly because we tried to get the message out there early,” she adds.
Law firms are not only advising clients on the complexities of auto-enrolment, but also wrestling with the practicalities of implementation for their own businesses. For the most part, the pitfalls are the same. However, issues around partnership and the tendency of law firms over the past generation or so to blur the lines of definition, could be a bear trap.
At the crux is the position of ‘salaried partner’, a role created by firms partially to mollify anxious associates keen to get on the partnership ladder and partly to road-test those lawyers to see if they are up to the mark - and, arguably, partly to perform a spot of leger de main with less savvy clients who put a lot of stock in the ‘partner’ title without noticing or thinking about what the ‘salaried’ element means.
“It all depends on what type of partner you are in a law firm,” explains Carey. “Somebody might be called a partner, but in fact that person is legally an employee.”
She says partnership committees must assess the relationship between the firm and those people described as partners.
“If salaried partners are deemed to be workers - in other words, they are entitled to paid holiday, get sick pay and have a subordinate relationship to the senior partnership - they need to be auto-enrolled,” she says. “Those who are pure equity-holders or members of an LLP - in other words, they have a share of the business - won’t be workers. But it will come down to nuances.”
There is no question that the regulations will keep specialist lawyers busy. The country’s smallest employers are not scheduled to implement until 2016 and they are the most likely to need external advice. But the issue of whether auto-enrolment will be a magic cure to the savings dilemma of a rapidly greying population remains debatable.
“Will the legislation have the desired effect?” asks France. “Getting people to save is one thing; all the evidence suggests that if you put people into pension schemes and they have to make an effort to get out, most people will probably stay put. Inertia is a great driver.
“But if the aim is to ensure everyone has a decent level of pension, that depends on the way employers choose to structure the level of contributions they are prepared to pay, the level of contributions they require of members of their schemes and the attraction of saving through pensions rather than in other ways.”
The Pensions Act 2008
Under provisions of the Pensions Act 2008 employers must automatically enrol into pension schemes workers not already in a qualifying workplace scheme, are at least 22 years old, are below state pension age, earn more than £8,105 a year and work or ordinarily work in the UK. Workers are allowed to opt out.
The legislation kicked in last October and until September 2017 a minimum of 2 per cent of salary must be paid into an individual’s pension pot, with at least 1 per cent contributed by the employer. Those figures rise to 5 per cent and 2 per cent respectively between October 2017 and September 2018, and to 8 per cent and 3 per cent from October 2018.The UK’s biggest employers, with workforces of more than 120,000, were first in the queue, with the requirement rolling out to the rest of UK business over the next five years.
The Department for Work and Pensions has so far not released official opt-out figures, but specialist lawyers says ministers anticipate between a quarter and a third. Anecdotal evidence from the large businesses already in the scheme suggest an opt-out rate of around 30 per cent, with workers suggesting they cannot afford the contributions.