Surviving the Recession - Goldilocks Syndrome: Why employers have got to get auto-enrolment right

With all the trials and tribulations of the first six months of 2020, one thing has been crystal clear. The Pensions Regulator has insisted that all UK employers must keep making their statutory pension contributions under the automatic enrolment regulations, within the usual timeframes. However, with the recession looming, many employers may be tempted to fall back on actions that served them well at the time of the credit crunch and seek to avoid making redundancies by asking employees to forgo pension contributions or suspend pension contributions, as this would help the employer manage its cash reserves in the short to medium term. Employers will not be able to take such action in the recession of 2020 as this would see them guilty of undertaking inducement activity under the automatic enrolment regulations. Equally, for many employers who have made pension contributions in excess of the automatic enrolment statutory minimums, continuing to make these pension contributions will be an unwelcome drain on cash reserves, at a time when businesses are looking at 12 months or more, to recover the ground lost in the first six months of 2020.So what can beleaguered employers do to find that just right middle ground, which will help with keeping their business viable whilst times are uncertain, but also ensure that as and when things pick up in the future, the business retains a loyal and motivated group of employees? Too much? Whilst opt-outs by individual members at the current moment in time may be pushing about the 9% average for automatic enrolment, the choice as to whether or not to opt-out, must be the members. No employer should take any action that will be seen to induce a member to opt-out, this can include threats of redundancy for the member's colleagues, or offers to make up contributions when times are better. Neither can an employer reduce or seek employee agreement to reduce contributions below the statutory minimums. Going down this road will see employers facing fines and action from the Pensions Regulator. Not enough? Likewise, employers cannot face recession as though nothing has changed. Not doing enough could include ignoring payment obligations, if cash flow is stretched individual employers should speak directly with their pension provider, to look at what options might be available in the short-term, to allow pension contributions outside of the normal cycle. The Pensions Regulator has extended its reporting period to delay contributions up to 150 days, in a worst case scenario, individual employers may wish to consider making a direct approach to the Pensions Regulator, to discuss the position by self-reporting. The Pensions Regulator has said it would try and take a proportionate risk-based approach to the current situation facing UK employers.Employers should not ignore errors that may have arisen in the rush to furlough people whilst regulations were being finalised, many employers had already furloughed their staff and had worked on a “we'll sort pensions out later” basis. Even before the current recessionary situation, we have seen increasing use of the Pensions Ombudsman by members who are not happy that they are not receiving their correct pension entitlement under automatic enrolment. Again, not resolving problems could result in fines and/or action from the Pensions Regulator if the employer is not proactive.Employers should not ignore their ongoing duties. Whilst closures, re-openings of businesses in an extremely volatile and recessionary world market place occupy significant proportions of time, all employers are subject to re-enrolment duties, ongoing record-keeping duties and should make sure these are not ignored. Whilst the Pensions Regulator is taking a proportionate and risk based approach, not dealing with these issues (even if it means putting more people into your pension arrangement) can be a significant risk for employers going forward. Just right?For those employers where pension contribution structures are more generous than the current statutory 3% employer, 5% employee, thought needs to be given to fine-tuning and balancing the ongoing pension support (which is still one of the most highly prised employee benefits given by any employer), and the need to conserve cash, there is no one size fits all approach, much will depend upon the nature of individual workforces, the way schemes have historically been structured i.e. trust-based or contract-based, the pension scheme's trust deed and rules and the ability to amend historic structures, along with a benefit versus reward analysis in terms of the changes.In amongst the mix of things that could be considered are the following:

  1. Reduction (short-term or medium to long-term) of pension contributions over and above the statutory minimum.

Key points to consider:

    • Consultation requirements, both pensions and employment (if the pensions provision is contained in the contract of employment or salary sacrifice is used);
    • Amending the pension scheme rules and/or employment contracts;
    • Engaging with the pension scheme trustees if it is an occupational scheme that is being used; and
    • Duration of any change;
  1. Introduction or removal of salary sacrifice arrangements

One way for employers and employees to make national insurance savings is to use salary sacrifice for pension contributions, provided it is implanted correctly it is a quick an easy win in the drive to conserve cash. Conversely, on the back of furloughing, salary sacrifice could be seen as a double-edged sword with no full compensation given but if further national, or even localised, lockdowns are likely to occur in the next 12 to 18 months which would impact on an employer's business, would it make sense to have your benefit structure more closely aligned with that for which compensation may be payable, or would this be too big a reduction compared to what you are currently offering to employees?

  1. Employers offering benefits on the basis of certification

Can you change the basis of certification to reduce costs? I.e. can you move from a definition of pensionable earnings, which may be embedded in the pension scheme rules, to the statutory qualifying earnings, all the while still making the required contribution levels? Would this also be able to help your employees?

With a depth of experience for dealing with the Pensions Ombudsman and Pensions Regulator, undertaking consultations, amendments and helping employers find the right balance for their business no matter what the circumstances, our pension and employment teams at Freeths can help you to get it just right.


The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.