Pension Auto-enrollment Employee Assessment – Getting it right!

Auto-enrolment pension reform made it mandatory for every UK employer to enroll workers automatically into a qualifying pension scheme – starting in October 2012. Auto-enrolment brings a new set of duties and obligations, as well as major operational, financial, compliance and reputational risks to all employers – including the challenge of managing huge inflow of new members on staging dates.

Assessing the Workforce: Key Challenges

With so many auto enrolment compliance software and middleware available in the market, are employers confident that whatever solution providers are claiming are true? Even after thorough due diligence with highest degree of care, employers are facing issues with the untested software and middleware. In most of the cases, erroneous assessment is the root cause. Because of erroneous assessment, wrong communication is sent out to workers, a few eligible workers are left out, or wrong workers are enrolled in to the pension schemes etc. Unfortunately employers are not able to find these issues until its too late, leading to substantial compliance penalty risks. Any correction will cost them substantially, including the impending fines from the regulatory bodies.

Worker Group Categorization

Assessment of workforce is one of the most critical aspects of auto enrolment process. Assessing the workforce does not entail merely categorizing the workers based on their age and earnings, considering the legal uncertainties prevailing in this area. There are plethora of other worker groups like apprentice, people on service contracts, temps and agency workers etc., who are covered under the legal definition of auto enrolment. Beyond the ‘job titles’ and the contractual paperwork between the employee and the worker, there are several other qualifiers against which every worker has to be assessed, to ensure that no worker is deprived of their right of auto enrolment. When determining someone’s status as a worker, you must determine whether or not the individual is a ‘self- employed’, ‘ordinarily working in UK’, ‘is paid in a payroll cycle of under one week’ etc. But it is not as simple as it sounds, once employers start drilling down into the detail of the regulations involved with these validations, things will definitely prove to be a herculean task.

Earning Thresholds and Trigger Points

Though assessing the workforce based on their age on any given date is an easy task and can be handled by defining simple rule set, analyzing whether they are ‘eligible jobholders’ on the basis of their earnings is a daunting task. Apart from the workers who qualify the earning thresholds, employers will need to monitor the earnings of workers earning below the income tax threshold over a rolling 12 month period. A spike in earnings may result in a jobholder needing to be auto-enrolled. There are various examples where spikes in pay could occur, when overtime or bonus is paid, which would take them above the threshold and make them eligible, needing to be auto-enroled. However, challenge being managing the triggers related to earnings during any pay reference period, which could be weekly, four weekly, monthly or another variation, as many employers operate a combination of pay periods. Auto enrolment solutions should be intelligent enough to identify qualifying earnings, calculate the relevant contributions and be flexible enough to cope with ongoing phasing and regulatory changes related to earnings trigger and pay thresholds.

The Pensions Regulator is currently consulting on new standards for qualifying schemes in areas such as contributions, investments, government standards, administration, etc. Apart from the regular changes related to phasing, earning thresholds, more changes are anticipated in the auto enrolment regulations. The Pensions Regulator also acknowledges in its guidance that there is not a fully-developed set of legal rules that employers can follow to identify eligible jobholders under certain clauses like ‘ordinarily working in UK’, ‘TUPE transferred employees’ etc. UK courts are yet to make decisions about exactly how employers should interpret these clauses. It is certainly true that court decisions might be made over time, but employers will still need to make auto-enrolment policy decisions in the meantime. Auto enrolment solutions should be flexible enough to accommodate these changes on an ongoing basis, whenever there is a change in regulation.

Date Published: October 23, 2013

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