With less than a year to go until the introduction of auto-enrolment, the Government is leaving employers with a great deal of uncertainty on how to implement fundamental elements of the regulation, according to Mercer. The legislation is still not definitive on key issues including how the level of savings should be calculated and who the rules should apply to. Mercer has approached the Department for Work and Pensions (DWP) to clarify these, and other outstanding issues, but has been told that the DWP expects individual employers to resolve them by taking their own legal advice, or even going to court. The DWP has also turned a deaf ear to employers that have lobbied them for help in this area. The Pensions Regulator (tPR), which has to police the new regime, has also been unprepared to explain how it interprets the legislation.
The purpose behind auto-enrolment is to ensure employees earning above a threshold level of pay should be able to access at least a minimum level of employer sponsored pension savings. The definition of earnings for auto-enrolment includes salary, wages, overtime and bonus, but Mercer points out that employers use other forms of compensation to reward their employees. Some are paid as cash (for example, shift and car allowances) and others are benefits in kind (for example, childcare vouchers).
Rachel Brougham, Principal and Head of Mercer’s auto-enrolment initiative, said: “The definition of pay is critical to every employer and every employee affected by auto-enrolment. If each employer forms its own interpretation of the legislation then their cost of implementation will differ, and some employees could end up getting less out of the system than they would have if they worked for a different employer.”
Ms Brougham explained: “For example, one employer could decide that a car allowance should be included in the calculation of earnings on which contributions are based, whilst another decided to exclude it. This doesn’t seem a great way to implement a nation wide, more or less compulsory, savings scheme.”
Mercer has asked the Government to clarify its legislation, which it could do, for example, by adopting the definition of employment income used by HMRC for calculating income tax. This would avoid thousands of employers having to consider taking legal advice and reduce the risk of misunderstandings.
Businesses that employ foreign workers or place employees abroad are also expected by the Regulator to form their own judgment of how auto-enrolment is expected to apply to them. The legislation introduces a new term, ‘working or ordinarily working in the UK’, for those employees that need to be auto-enrolled. When asked for clarification on this term, DWP has said that this would have to be tested in the courts and the Regulator suggests taking legal advice. "So we now have a situation where neither the creator of the law (DWP) nor the enforcer of the law (tPR) know what it means, yet they expect employers to do so and be liable to sanctions if they don't,” said Ms Brougham.
Mercer is aware that employers, reluctantly, are considering incurring legal costs to make sure they act responsibly and consistently with the legal intention. “It is extremely unhelpful for the Government to introduce new and imprecise terms, leaving the position of expatriate workers and secondees, for example, up in the air’”, said Ms Brougham. “The Government could easily define which employees to include by borrowing from existing tax legislation.”
Although further regulations are expected this week it is Mercer’s understanding that these important areas of detail will not be addressed. There are several other areas of the legislation in which employers desperately seek clarification, for example, in relation to the schemes that can be used to comply with auto-enrolment and the treatment of employees following TUPE transfers. Having established the policy, the Government must now produce legislation that implements these intentions effectively. Mercer considers the current position to be unworkable and likens it to the Government saying “we want you to pay tax on certain earnings, but we’ll let you decide which earnings to take into account”.
“The Government seems to be avoiding its responsibility as writer of the legislation to provide precision on fundamental planks of what is intended to be a universal system,” commented Ms Brougham. “If this were a niche offering, we would be less concerned about its reluctance to provide clarification, but auto-enrolment will eventually apply to every employer in the country and the law in relation to it must be made clearer.”
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