The poet Yeats , concludes a short poem
But I, being poor, have only my dreams;
I have spread my dreams under your feet;
Tread softly because you tread on my dreams.
Small employers rely on large organisations to establish, manage and pay pensions for their staff. Generally they do not have pension experts who can choose the right workplace pension , they rely on others for help.
The latest figures from the Pension Regulator show that about half of small employers take direct instruction from an intermediary (usually an accountant or their payroll officer), the other half do things for themselves. Doing things for yourself means following the instructions on the Pension Regulator’s website and taking guidance from their correspondence.
Every employer due to stage gets a letter from tPR which explains that NEST will offer them a pension and that other pensions are available. When they start using tPR’s website they get the same message and an expanding list of providers who will offer them a pension – no underwriting required. All of the listed providers have either the Mastertrust Assurance Framework or have a fully functional Independent Governance Committee.
That is the extent of (regulatory) guidance you get , if you are doing it yourself. If you are getting help from an intermediary, you may get a shortlist of pensions, or even a recommendation, but you aren’t likely to get the detailed financial advice you would expect if you were taking out a pension via a regulated IFA and you won’t get the detailed search you’d get from a corporate pensions adviser.
Does this matter? Well nine times out of ten, any of the providers listed on tPR’s website will be the right answer. But let’s take two hypothetical situations where the one in ten chance comes up , and the chosen pension isn’t right.
Case study one.
NEST is chosen as it’s mentioned in tPR’s letter, an older member of staff contributes for a few years and then dies, the benefits of NEST are paid under a non-discretionary trust to his estate triggering a 40% IHT charge. The estate sues the employer for not making available a workplace pension which paid out via a discretionary trust.
Case study two
After a suggestion from an accountant, the employer chooses to join a multi-employer scheme that operates under net pay. The employer has a number of zero hours contractors who join the scheme because they have enough earnings one pay period, over the course of the year these contractors do not earn enough to pay tax. A class action lawyer finds out and sues the employer for the “Government incentive” that these employees could have got if the employer had chosen a scheme operating under relief at source.
Who is liable?
In both cases , the employer will be highly surprised to be subject to civil litigation. But unless the employer has a reasonable audit trail showing it paid attention to the pension decision, can it really defend itself?
The employer may be advised under case study one to point to the Pension Regulator’s correspondence or website and argue that NEST was advertised a safe haven. We think this is a very weak legal defence.
The employer may be advised under case study two to take action against the accountant for negligent advice.
An employer is asked under auto-enrolment to be the staff’s fiduciary – to exercise a duty of care in choosing a pension. We do not know till tested, how far this duty extends but there is plenty of litigation going on in other parts of the world against fiduciaries.
More importantly for the long-term future of pensions in this country, a breakdown in trust between staff and employer poses a systemic risk to the way we have chosen to organise private pensions in the UK.
We urgently need to review the care with which employers are taking decisions on behalf of their staff , minimise the risks and maximise the chances that Workie will make our dreams come a little closer to reality.