Automatic enrolment 

Employers making minimum auto-enrolment payments at risk

Employers making minimum auto-enrolment payments at risk

Making minimum auto-enrolment contributions can be a high-risk strategy for employers, a new policy paper has revealed.

A document published today (13 September) by legal practice Eversheds Sutherland and mutual insurer Royal London sets out three reasons why employers in general, and larger employers in particular, may wish to do more than the legal minimum when it comes to pensions.

First, there are examples in “other countries of employers having to pay damages for their failures with regard to pension provision,” the paper stated.

In the US, for example, employers have paid out more than $350m (£267m) in legal settlements since 2009.

According to Francois Barker, partner and head of pensions at Eversheds Sutherland, there isn’t an exact parallel with the UK in this situation.

However, “the law tends to evolve over time and the courts may decide in the future that employers – particularly large ones – should have done more than the bare minimum required under the automatic enrolment rules,” he said.

This can be the case “especially if some workers end up getting poor outcomes,” the paper stated.

Finally, the paper points out that courts may decide, “as they have done in other pensions-related legislation, that employers have an ‘implied duty’ to look after their workers”.

“A minimalist approach to automatic enrolment legislation could fall foul of this test,” the paper stated.

Currently the auto-enrolment minimum total contribution is 2 per cent - 1 per cent each from the employee and employer.

From April 2018, the minimum total contribution will increase to 5 per cent, with the employer paying 2 per cent.

One year later, it will increase again to 8 per cent, with the company paying 3 per cent.

A total of £17bn a year will be going into workplace pensions by 2019 to 2020 because of auto-enrolment.

Sir Steve Webb, director of policy at Royal London, said: “It is very tempting for employers thinking that once they have chosen a pension scheme and enrolled the right workers they can largely forget about automatic enrolment.

“This paper is a wake-up call, especially for larger employers, which suggests that this might be a high-risk strategy.”

According to Sir Steve, “many larger employers do already take pensions seriously and go well beyond their statutory minimum duties”.

But all employers should be reviewing their auto-enrolment arrangements “on a regular basis to ensure that it remains fit for purpose,” he said.

This is one of the recommendations made in the policy paper, which suggests that “an employer who persisted with a pension provider that was not providing good value to members could face some searching questions in years to come”.

Companies should also make sure that “the scheme chosen provides tax relief to all employees, including those earning below the tax threshold,” the paper stated.

Members of pension schemes who don't pay income tax, are nonetheless permitted to basic rate tax relief (20 per cent) on pension contributions up to £2,880 a year.