CWS 3.0: August 8, 2012

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Pensions Act Set to Distort UK Staffing Market

If you were thinking that, with the Agency Workers Regulations (AWR) in place, the U.K. staffing market is over the worst, you may want to pay some attention to the implications of the U.K. Pensions Act, which comes into effect in October. The act will not only add to staffing company costs, which may be passed on to buyers, but will also have the surprising impact of making larger staffing companies less competitive than smaller staffing companies.

Like many countries, the U.K. is faced with an aging population and a declining pension pot to share. The main aim of the Pension Act (2008) is to enable low to moderate earners to save more for retirement.

The principal change brought about by the act is that all workers will have to opt out of their employer’s occupational pension plan, rather than opt in. A second change is the creation of a National Employment Savings Trust (NEST), a public pension provider for those who do not have occupational pensions; it will function as a low-fee pension scheme in competition with existing funds.

The act affects all salaried workers over the age of 22 who contribute to PAYE (the U.K. system of income tax) and earning more than £7,475 per year (approximately US$11,632). While temporary agency workers are captured within the act, bona fide independent contractors, with their own limited company, are not. Some commentators believed the Pension Act might have more serious implications for the U.K. staffing market than the AWR. However, a final amendment, which defers the auto-enrollment of workers for three months, has mitigated the impact on staffing suppliers to a certain extent and eliminated it as a concern for any short-term temporary workers.

Employer obligations. The minimum pension contribution paid by employers will be 1 percent, rising to 2 percent in October 2016 and 3 percent in October 2017. Employers will not be allowed to reduce workers’ pay in order to meet the cost. Employees, meanwhile, will have to contribute 4 percent themselves and will also benefit by an additional 1 percent in tax relief.

While auto-enrollment is compulsory, workers can still opt out within a month of enrollment and they and their employer will be refunded any contributions paid. However, it will be illegal for employers to encourage employees to opt out or give up active membership of the pension scheme – known as inducement – for example by offering them cash or any other benefit.

Employers also must not suggest to a worker that opting out of a pension scheme will affect the outcome of the decision to employ or continue to employ them. The Pensions Regulator will have the power to impose sanctions for non-compliance ranging from the imposition of enforcement notices, escalating fines of up to £10,000 per day (approximately US$15,500) and, in the worst case, criminal sanctions.

Employers are also required to keep certain records and information that will enable the Pensions Regulator to check compliance for a period of six years. Good documentation procedures will be essential in order for employers to defend against any legal claims from employees aside from meeting the requirements of the Pensions Regulator.

Implications for Staffing. Staffing companies will have to meet the additional contribution for their temporary workers (after three months’ employment) and also the administrative costs of maintaining full documentation for auto-enrolling – and then un-enrolling those who don’t wish to maintain a pension. No one is quite sure what proportion of temporary workers will want to un-enroll, but as many such workers are focused on short-term remuneration, expectations are that it will be quite high. While many will no doubt welcome the additional employer’s contribution, they may well be reluctant to have 4 percent sliced off of their take-home pay to fund a pension.

What we can be certain of is that, having already been burdened by new administrative procedures under the AWR, U.K. staffing companies will be very determined to pass on these additional costs to their clients.

But the implications of the act do not stop there. In order to mitigate the impact on smaller employers, the government came up with a phased introduction, delaying duties under the act for the smallest of employers (based on the number of PAYE workers on their payroll) until 2017 (see chart below). What this staging effectively means, then, is that larger staffing companies will be faced with these obligations and costs sooner than their smaller competitors, creating an uneven playing field in the supply of temporary workers.

While few would disagree with the long-term benefits of encouraging more people to save more for their retirement, the introduction of the Pensions Act comes at a very bad time for the U.K. staffing industry already feeling the pinch from new regulations and an economy slipping into a double dip recession.

From October, it will also be very confusing for temporaries who work through several staffing agencies at the same time and experience varying automatic enrollment dates.

For the larger staffing companies in particular, the distortions in the recruitment market created by staged introduction will be especially unpopular. The fear is that, over the next five years, the selection of a staffing supplier may have as much to do with their staging date within the Pension Act as it does with their ability to supply good quality workers. 

 Staging of Employers Duties under the Pension Act

Employer (by PAYE scheme size or other description) Date before which notification to automatically enroll early must be sent Staging date
120,000 or more 1st September 2012 1st October 2012
50,000-119,999 1st October 2012 1st November 2012
30,000-49,999 1st December 2012 1st January 2013
20,000-29,999 1st January 2013 1st February 2013
10,000-19,999 1st February 2013 1st March 2013
6,000-9,999 1st March 2013 1st April 2013
4,100-5,999 1st April 2013 1st May 2013
4,000-4,099 1st May 2013 1st June 2013
3,000-3,999 1st June 2013 1st July 2013
2,000-2,999 1st July 2013 1st August 2013
1,250-1,999 1st August 2013 1st September 2013
800-1,249 1st September 2013 1st October 2013
500-799 1st October 2013 1st November 2013
350-499 1st December 2013 1st January 2014
250-349 1st January 2014 1st February 2014
Less than 50 Various dates from 1st July 2014 to 1 July 2016

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