Enrolling into pension saving: do you know your AE from your CE?

Helen Powell

“You like to-may-to, I like to-mah-to”; you say auto-enrolment, I say contractual enrolment. Unfortunately, we can’t call the whole thing off. The pensions auto-enrolment regime is logistically quite complex. Many employers are finding it easier, for a variety of reasons, to arrange things so that their workers are already members of a suitable pension arrangement when they reach their automatic enrolment date. This may well make good practical sense, but you need to be aware that it is not auto-enrolment. This is contractual enrolment, and understanding the difference does make a difference.

Clearly, schemes which are used for contractual enrolment need to meet the quality standards for auto-enrolment: if a worker isn’t a member of a qualifying scheme on their auto-enrolment date, you’ll have to auto-enrol them into a qualifying scheme anyway. If the end result is the same, then why does it matter?

– Contractual enrolment just means enrolment under the terms of the employment contract – you must have worker consent to making deductions from their wages. If you’re enrolling workers under the auto-enrolment regime, express consent is less important because the legislation covers you.

– If a member leaves a scheme after being contractually enrolled, then you need to know whether he or she was at any point eligible for auto-enrolment (broadly, aged over 22 and earning more than GBP9,440) during the period of membership. If so, then you don’t need to reassess the worker until re-enrolment rolls around – but if not (for example, if the member left the scheme before their 22nd birthday), then you will have to auto-enrol that worker under the regime when they first become eligible (for example, on the day the worker turns 22), even if that is very shortly after he or she left the scheme.

– You will provide different information to workers who have been contractually enrolled, as they will already be members of a qualifying scheme on their auto-enrolment date: for example, you need to confirm that they are an active member of a qualifying scheme and tell them that if their membership ceases (other than through their own actions), you will be required to auto-enrol them into a qualifying scheme with effect from the following day.

– If the scheme rules provide an opt-out period for contractually enrolled members, this may well be different to the opt-out window under the auto-enrolment regime – you might have two members enrolled on the same day but with different deadlines for opting out. The trustees will need to be clear which members are contractually enrolled, and which are auto-enrolled, in order to get this right as well as to comply with their record-keeping duties. You also need to find a way of explaining to members what their opt-out rights are – that will need careful planning.

One final tricky point that may not have occurred to you: many employers will think of the prohibition on inducing members to opt out in terms of the auto-enrolment regime, not in terms of contractual enrolment more generally. In fact, it could apply to both, because of the second bullet point mentioned above. If, for example, you contractually enrol a worker who is eligible for auto-enrolment, and you incentivise them to opt out of membership under the scheme rules, you may not have to enrol them again for up to three years (unless they exercise their right to opt in). That could put you in breach of the ban on inducements to opt out. This combination of circumstances may seem a remote possibility, but it’s one which is mentioned by the Pensions Regulator in its note on the differences between the two enrolment methods: click here to read more.

Watch this space for Stephen Richard’s post on some of the practical communications issues for employers using contractual enrolment.

 Helen Powell is a senior professional support lawyer at Allen & Overy LLP.

Comments published on Pensions Talk do not necessarily reflect the views of Allen & Overy or its clients.

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