With less than a year to go until the introduction of auto-enrolment is anything actually clear?
New research from Mercer has shown that 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.
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. Seeking clarification from the Department for Work and Pensions (DWP) on these and other outstanding issues, yields little results with the suggestion that employers will have to seek their own legal advice, or even going to court. The Pensions Regulator (tPR), which has to police the new regime, has also been unprepared to explain how it interprets the legislation.
The definition of earnings for auto-enrolment includes salary, wages, overtime and bonus, but some employers use other forms of compensation to reward their employees – some of which are paid as cash (for example, shift and car allowances) and others are benefits in kind (for example, childcare vouchers). There is currently no guidance on whether these should be included or excluded for the auto-enrolment criteria.
Definition of pay
Commenting on this lack of clarification, 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.
“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 nationwide, more or less compulsory, savings scheme”.
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.
Resolutions
One way the government could clarify the legislation is by adopting the same definition of employment income that is currently 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.
Many employers, reluctantly, are considering incurring legal costs to make sure they act responsibly and consistently with the legal intention.
At the time of writing further regulations are expected imminently, however it is understood 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’.
Brougham adds, “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. 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”.
www.mercer.com