Implementing a workplace pension scheme
26th February 2015
We’re talking to many clients at the moment about workplace pensions and we’re hearing lots of questions about employee contracts. These relate in particular to amending or implementing workplace pension schemes to meet auto enrolment obligations.
To deal with the issues surrounding employee contracts we asked Claire Haworth, Senior Associate Solicitor in the Employment Team at Napthens, to share her experience.
“In seeking to comply with the requirements for pension auto-enrolment, many employers are finding that the terms of existing pension schemes need to change in one of two ways:
- an employer may have amended its existing scheme to ensure it meets the auto-enrolment criteria; or
- an employer may have put an entirely new scheme in place which meets the requirements.
Employers need to check whether these changes also require changes to employees’ contracts of employment. An employee’s contract must set out any terms relating to pension.
For most, the contract will merely state that he/she may be eligible to join a pension and refer the employee to an explanatory booklet for more details. However, some contracts may give more information, such as the level of contributions or a waiting period before joining the pension scheme. You should be aware that these terms may be implied (i.e. through custom and practice) even if they are not express. This means that, when the terms of a pension scheme are changed as a result of auto enrolment, the contracts of current employees must also be changed.
There are three ways in which an employer can change a current employee’s contract:
- Obtain express consent from the employee;
- Unilaterally impose the change and rely on the employee’s conduct as evidence of acceptance of the change; or
- Terminate the employee’s employment and offer re-engagement on the new terms.
Option 1 is always the safest option. Option 2 is the most risky, as it may expose the employer to claims of breach of contract/constructive dismissal. Therefore, if express consent cannot be obtained, the employer could use option 3. However, before doing so, they will need to consult individually with each employee affected as a result of auto enrolment. If the employer proposes to dismiss and re-engage 20 or more employees, the employer should also consider commencing collective consultation (in addition to individual consultation), which involves electing employee representatives where necessary. Under option 3, an employee can still claim unfair dismissal. However, the employer can assert that the dismissal was for “some other substantial reason” and that it followed a fair procedure, which is potentially a good defence to this claim. In addition, the employee’s loss is likely to be limited to the change in pension terms.
Separate to the general consultation requirements above, the Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendments) Regulations 2006 (“the Regulations”) impose a specific duty on employers to consult on changes to a pension scheme in certain circumstances – regardless of whether or not the employees agree to the change. These Regulations only apply to employers that have 50 or more employees and only apply to “affected members” in respect of a “listed change” to the pension scheme. Broadly speaking, “affected members” mean employees who are active members of the pension scheme or who are eligible under their contracts of employment to join the scheme. An example of a “listed change” in a defined contribution scheme is increasing the level of member contributions. If the Regulations apply, the employer must consult with affected members for a minimum of 60 days. This is enforced by the Pensions Regulator with a maximum fine of £50,000.”
Senior Associate Solicitor,
You should always take specialist legal advice as appropriate.
All content is for general guidance only. It provides an outline, and may not include points which are important in your case. You should not rely on this blog without taking individual advice based on the full facts of your case. The information given was correct at the time of publication.