Is there a need for formal agreements between employers and providers for auto-enrolment schemes, asks Edmund Downes, pensions manager at Aviva
Do you remember when you were a child and you asked a question to which there wasn’t a sensible short answer, or where the adult simply didn’t know what the answer was? For me, the common response I heard was “because I said so”. I vowed that I would never say this to anyone. But to my surprise and regret, I’ve found that I’m answering perfectly sensible questions from adults with exactly the same phrase whenever anyone asks me about the formal agreements that employers are meant to have with providers of auto-enrolment schemes.
Not, of course, with trust-based schemes, as the regulations appear to think that the current trustee/employer relationship is already robust enough. However, there seems to be a gaping hole where contract-based schemes are concerned which needs to be plugged.
So what exactly will this formal agreement do? It all hinges on the employer paying the qualifying contributions over to the provider. Where the employer isn’t paying the full amount, there is a subsidiary agreement that each employee will be forced to make up the difference. The agreement is meant to formalise these payments, presumably to allow the provider to chase any low or missing payments.
Now remember that this agreement is at scheme level, and think first about the implications of certification. The primary purpose of certification is to allow schemes to make contributions without checking that the contributions for each and every employee exactly match the statutory minimum. It allows schemes to continue making contributions based on pensionable earnings, whereas the statutory minimums are based on banded earnings.
Under certification it is quite possible that contributions for individual scheme members will be more or less than the statutory minimum, and even possible that some will have no contributions paid at all. Hang on though – by signing this agreement the employer has just effectively said that they won’t use certification, as they are agreeing that they won’t breach the rules for each individual.
Now let’s think about whether employees have to make up the difference under their scheme between what their employer pays and the statutory minimum. Unless I’ve missed something, contributions to pension schemes remain voluntary in this country so employees can do what they want. If they want to pay less than the employer wants them to pay, so long as the employer is paying the minimum1 per cent, 2 per cent or ultimately 3 per cent, then the employer’s liability to make any contributions ceases.
How can providers enforce a minimum contribution from the employee? Clearly we can’t, as the pension contract remains valid whether or not any further contributions are being made. Indeed how do we know what has been agreed between the employer and employee in any other respect? And if the contributions drop, is that because of a change to received pay or something else? Unless we have knowledge of the full payroll and all correspondence we all have to go through a meaningless charade – because we have to!
I’m not having a dig at the Pensions Regulator. Their guidance reflects the legislation, and it is the legislation that is at fault. Unfortunately, for a number of good reasons, such as providing us with vital stability regarding the rest of the auto-enrolment requirements, the Department of Work and Pensions have signalled that they won’t be looking to change their rules any further, at least in the short term. Plus auto-enrolment legislation has been specifically excludedfrom the Government’s initiative to reduce red tape – so no hope there either.
In the meantime, all I can hope is that no-one takes the letter of the law too seriously. The employers who will sign one of these agreements are likely to know what the requirements are, because that is why they are seeking out an auto-enrolment scheme with a pension provider to meet those needs. In effect we’re here because we’re here because we’re here, because……