11 July 2012 - Post by:Ailsa Yiu
The wrinkles in the pensions automatic enrolment regime are gradually being ironed out. But with less than six months to go until the first employers reach their compulsory staging date, there are problem areas the DWP has not addressed. The interaction between auto-enrolment and TUPE is one of them: when auto-enrolled employees are transferred to another company, the auto-enrolment legislation and the TUPE regulations step on each other’s toes.
Let’s say there is an employer which has auto-enrolled its eligible workers into a defined contribution occupational pension scheme. It makes only the minimum employer contribution required by the auto-enrolment legislation. During the first phasing period, employer minimum contributions are exactly half total minimum contributions, so employer and employee contributions are matched. However from October 2017 (or whatever later date the second phase of contributions starts) employee contributions would need to be 3% compared to the minimum employer requirement of 2%.
If some of this employer’s employees are subsequently TUPE-transferred to another company, then as the law stands the TUPE regulations would require the new employer to match the employees’ own contributions up to a maximum of 6% of their basic pay. That means the new employer paying a minimum of 3% when the original employer was paying 2%. The problem would be worse for a transfer the year after, when basic contributions will be 5% for employees and 3% for employers.
This is not new – it has always been a risk under the TUPE pension rules that a receiving employer may have to make higher contributions than the transferring employer. However it is likely that the situation will arise more frequently once we start to see transfers from employers who have enrolled their employees in a DC occupational pension scheme and are paying contributions at the statutory minimum level. Receiving employers could be in for a nasty surprise when they discover business transfers will trigger greater pension contribution obligations.
That’s bad enough on a business sale, but what about intra-group transfers? Any transferring employees may suddenly be entitled under the TUPE pension rules to higher pension contributions from their new employer than are available to other workers in the same group. Potentially controversial, and certainly costly.
This problem only crops up on transfers of employees who are in occupational pension schemes (which would include NEST). Does this make using occupational pension schemes for auto-enrolment unappealing? If an employer chooses to use a group personal pension plan for auto-enrolment instead, the obligations on any receiving employer won’t increase. A receiving employer has the same obligation to contribute to a GPP as the previous employer.
Another problem with intra-group transfers is that auto-enrolment rules will treat the transferred employee as a new employee. Once staging dates pass, that means auto-enrolling transferring employees into a qualifying scheme immediately. A transferring employee who has previously opted out of the group’s pension scheme would have to be automatically enrolled again, probably into the same scheme – creating unnecessary administration and confusion. At present there is nothing to exempt employers in this situation from the duty to re-enrol.
It may be that last-minute amendments are tabled to resolve these issues, but unless and until that happens, employers would do well to bear in mind the potential implications of TUPE when planning for auto-enrolment (and vice versa): the two don’t play well together.
Ailsa Yiu is an associate at Allen & Overy LLP.