CWS 3.0: October 3, 2012

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UK Pension Plan Law Creates New Risks for Employers

As of Oct. 1, every employer in the U.K. is required to automatically enroll workers aged over age 22 (and earning more than £7,475 per year) into a qualifying workplace pension plan. We have previously covered the details and implications of the Pensions Act in Contingent Workforce Strategies 3.0, especially the market distortion created by the staging process. However, a new issue has been brought to light that potentially exposes employers to an increased risk of fines and criminal sanctions.

Under the Pensions Act, temporary workers will be automatically enrolled into a pension scheme after three months, resulting in a 1 percent increase in costs (rising to 2 percent in October 2016 and 3 percent in October 2017).

Buyers are not allowed to select temporary workers based on whether they have opted out of a pension scheme. However, clients naturally prefer less costly workers. The danger is that selecting on cost may coincidentally mean that buyers are favoring opted-out temporaries over opted-in temporaries, even unwittingly. And it will be obvious at the three-month mark that the worker’s pension status has changed, so employers will not be able to claim they were unaware of the status. The Pensions Regulator will unlikely be sympathetic to employers who discriminate in this way even though the decision may be made on purely cost grounds and coincidental to the enrollment of workers into a pension scheme.

The Pensions Regulator has the authority 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.

A transparent increase in costs at three months actually exposes employers to an increased risk of accidentally breaching the terms of the Pensions Act. For this reason, a number of staffing providers are considering a blanket increase in cost for all temporary workers from day one of their assignment and users of temporary labor in the U.K. should be considering the merits of this approach.

Obviously, any staffing company charging their clients a pension increment at day one will benefit from the fact that they don’t have to meet the actual cost of their pension obligations until three months later (and even then, some temporaries may choose to opt out of the pension scheme after one month anyway). Employers should, therefore, negotiate a fair day-one increment that reflects the likely overall increase in costs faced by their suppliers. This may be rather difficult to calculate given that the opt-out rate will remain an unknown quantity until at least four months’ time (February 2013) and probably longer for an established pattern to emerge. Circumstances will also vary depending on the proportion of temporary workers you employ for longer than three months.

Nevertheless, there is a strong advantage in not knowing about the pension status of your temporary workers. In this particular instance, ignorance truly is bliss.

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