Why auto-enrolment is not ‘job done’
By Michael Barker
FORMER pension’s minister Sir Steve Webb has fired a strong warning to companies that they could be sued for hundreds of millions of pounds if they continue to provide “the bare minimum” in pensions for their workers.
His message, in an article in the Daily Telegraph is stark. He says many UK employers assume once they have enrolled their staff onto a scheme this is largely “job done”.
But they are ignoring what has happened in examples in other countries where companies have faced legal action for not getting their staff the best outcome.
Sir Steve, who was a pensions minster between 2010 and 2015 is now a director at Royal London, has expressed his fears in a policy paper written with law firm Eversheds Sutherland.
It says that in the future courts may act against employers that are currently complying with the law – if their pension schemes aren’t seen as good value for workers.
Sir Steve says: “Politicians and regulators have a knack of coming back years after the event and deciding that what was deemed ‘good enough’ at the time was not ‘good enough’ in hindsight.”
The minimum total contribution to the government’s auto-enrolment pension scheme will rise next year to five per cent, with a rise to eight per cent planned for 2019 and by next Easter around 10m employees will have been automatically enrolled into a workplace pension by employers of all sizes.
Sir Steve is urging those employers not to “switch off” when it comes to pensions or to regard automatic enrolment as a “once and done” exercise.
He told the Telegraph: “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.”
Sir Steve point to the US where he says since 2009 employers have paid out more than $350m in legal settlements in class actions over failures in employee retirement plans.
And he adds: “Although the US and UK legal systems are different, it is easy to see from the US precedent the power of a class action.”
The former government minister also points out that in the UK, although firms are required simply to choose a “compliant” scheme for their workers, the Pensions Regulator adds “there will be other things to consider before an employer makes a decision about what type of pension scheme to choose”.
And he warns: “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.”
Sir Steve also highlights one particular issue where he believes employers are “particularly vulnerable.”
He says: “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.”
Sir Steve adds: “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.”
To discuss any aspects of auto-enrolment or other pensions matters please contact me on 01772 430000