Automatic enrolment alert: Consultation with employees – some pitfalls

Employers should be alert to the mandatory increases in total minimum contributions to their qualifying workforce pension schemes under the automatic enrolment regulations. These increases will be required from the start of the new tax year on 6 April 2019. The new minimum for most automatic enrolment schemes will be 8% of qualifying earnings, with a minimum of 3% employer contributions. There are some schemes which will have different contribution levels and different amounts of pensionable pay, and this relates to how the schemes are assessed for the quality purposes under the automatic enrolment regime.

For many employers, these changes will involve decisions as to whether they are duty bound to consult with affected employees under the pension consultation regulations – which requires a 60 day consultation process. For consultation to apply there must be a “listed change”, and this includes increases to member contributions.

There is an exemption in the consultation regulations where the change is required for the purpose of complying with a statutory provision. The Pension Regulator has given some guidance on whether consultation is required but the status of this guidance is not legally binding and the position remains unclear as to whether the exemption can be applied in these circumstances. The basic problem is that there are different changes the employer could make to ensure compliance with the new statutory minimum requirements – for instance by paying more employer contributions itself. Other relevant factors will be whether there will be any changes in pensionable pay and/or whether the changes are to apply before 6 April, for instance to make the changes effective from 1 April so that the new contribution amounts apply to all earnings in that relevant pay period, which may be easier from the perspective of the ease of payroll administration.

For most employers the issue will come down to a commercial risk assessment for the board or senior managers, as to whether they should consult strictly in accordance with the 60 day pensions consultation process. This will involve preparing careful communications with affected staff and not presenting the changes as a fait accompli – during the consultation period the changes must be addressed as company proposals only. As part of this risk assessment, employers should weigh the potential consequences of breaching the consultation obligations, which includes fines by the Pensions Regulator and claims by employees alleging breaches of employer duties of trust and confidence.

A lot of employers use salary sacrifice mechanisms to allow employees to save tax and NI when making their employee pension contributions. These arrangements will need reviewing to ensure that the consents are wide enough to catch increased salary exchanges to take account of contribution increases. If fresh consents are required then this will need addressing before the changes are made and confirmed.

Employers may wish to consider sharing some of their NI savings with employees to help offset the increased employee contribution costs or in some cases increase salary levels. In some cases the increased employee contribution may be completely offset by tax savings through salary sacrifice or pay rises and also through higher personal tax allowances in effect from 6 April for the new tax year. All these matters will be relevant in their risk assessment described above. None of these will strictly speaking obviate the need to consult but may influence the employer in its risk assessment.

Even if the decision is taken not to consult according to the pensions requirements (and for a lot of employers this may be already too late) they should communicate these changes carefully and make sure these communications are accurate. In some cases there may be contractual changes with employees which will need agreement, including variations to matched employer/employee contribution levels and in relation to salary exchange arrangements. Employers should be careful not to be seen to be giving financial advice as part of these communications, which would not be appropriate or legal.