An everyday story of kleptocratic mismanagement
Here is an extract from the recently published conversation between the DWP Select Committee (Frank Field & Co) and the DWP (under new management).
You are always supposed to read the source material first, so I’ve laid it out as it was published. My little rant is set out at the bottom!
Selecting the right scheme
Employers are responsible for selecting the appropriate AE pension scheme for their employees.
Employers are free to choose any qualifying pension scheme that is willing to accept their custom in order to comply with their automatic enrolment duties. TPR told us that selecting a scheme is one of the most significant challenges for smaller employers:
Concerns include finding a scheme that will accept them, ensuring they make the best choice of scheme for their employees, addressing the risk of challenge from their staff if the scheme is not well run, and making sure that the scheme they choose works with their payroll software.
32.CIPP highlighted a particular concern among employers about future legal action against them by employees if it appears they selected an inappropriate scheme or could not demonstrate they had taken adequate steps to choose an appropriate one.
The Minister (Ros Altmann) told us that anyone advising an employer would “be ill-advised” to formally recommend a scheme.
For the smaller employer, reliant upon their payroll bureau or external accountant, there is a distinct lack of clarity regarding where a potential liability for “advice” would fall. They assured us, however, that employers themselves would not be liable for poor scheme performance. Charlotte Clark said
“If you are an employer and you have made a decision, there is no liability—that is clear in the legislation. If you have decided to go with NEST rather than NOW: or People’s, there is no liability that can fall on you as an employer”.
33.Whilst this answer appears definitive, legal experts suggested the situation may be more complicated. Tristan Mander, a pensions lawyer at Ward Hadaway, said “it would be unwise to interpret such a statement as providing a safe harbour for employers, as it only addresses one source of legal obligations”
. His view was that employers will need to be able to demonstrate that they took adequate steps to ensure they selected an appropriate pension scheme:
The courts are very unlikely to decide that arrangement B ought to have been chosen over arrangement A, as that is qualitative decision that is outside of their remit, but they are now likely to find that an employer failed in its duty to follow proper process in taking its decision and hence they will find the employer liable for any loss suffered directly as a result.
34.Catherine McKenna, Global Head of Pensions at law firm Squire Patton Boggs, told us that there was uncertainty about who would compensate employees for poor scheme performance:
For example should it be the fund provider, the IGC [Independent Governance Committee] if they failed to identify and report poor governance or the employer for failing to appraise the IGC’s adequate monitoring of the default fund?
She said that clarity was needed on where liability would fall and that DWP should confirm to employers that “engagement and compliance with the minimum governance standards is sufficient to discharge them of liability for poorly performing or failed default funds.”
35.In her evidence to us the Minister said that employers needed to be very careful to choose a decent scheme for their employees.
Tristan Mander told us that “the need to suggest such due diligence implies by itself the potential for liability.”
He told us that employers need not go to extreme lengths in choosing a scheme but that they should exercise good decision-making hygiene, take proportionate steps and record their genuine attempts at finding the most appropriate arrangement to utilise, should anyone challenge their decision in future.
36.The Department have stated unambiguously that employers are not liable for their choice of AE pension scheme. Legal experts, however, have told us there could be grounds for legal action if employers cannot demonstrate due diligence.
We recommend DWP use their response to this report to make a clear and comprehensive statement about an employer’s potential liability. DWP should also confirm where liability will fall if a scheme performs badly or fails. This would provide reassurance to small and micro-employers choosing a scheme.
I’ve read this a few times and come to the same conclusion on each occasion. Much as I like Charlotte Clark, she is dead wrong on this business of choosing a pension. I attribute this to an overly protective mother-hen relation with NEST.
NEST is the baby of the DWP and it’s midwives were Charlotte Clark and Helen Dean (now NEST CEO). I am not calling on either to “kill their baby”, but I don’t think she (or Helen) are best placed to opine on NEST’s safe harbour status.
NEST is a good choice for most employers, a bad choice for some and for a very few, it may be the only choice.
It is not or the DWP to state If you have decided to go with NEST rather than NOW: or People’s, there is no liability that can fall on you as an employer.
That is not in the legislation and any employer who relies on that as an argument, will have “failed in its duty to follow proper process in taking its decision”.
The DWP have highlighted a flaw in the DWP’s approach to workplace pensions. It is the flaw that leads to the crumby choose a pension pages on tPR’s website. If the DWP doesn’t make it clear that there is material risk in not following due process, that NEST is not a safe harbour and that in many cases NEST is not the best choice, then it itself will be open to litigation.
Don’t let Workie become WASPI!
DWP should be only too aware – from the problems it has with WASPI -that sticking its head in the sand and hoping the problem will go away, is not the way to deal with the situation.
The DWP know perfectly well that the private sector is providing resource for employers to choose a pension in an appropriate way and that that resource is now readily available to employers at a reasonable cost.
Rather than stick by its pet scheme (NEST), the DWP should accept that NEST is just one of many good choices and promote choice rather than NEST as the big success story.
In doing so , they will be promoting the employer’s right to choose what is best for staff. This should lead to greater engagement by the employer in its “Workie” and this in turn should lead to greater promotion of workplace saving to employees.
The DWP Select Committee, Power in the darkness -right on!
Well done Frank Field and his gallant crew. Calling for clarification on choice is exactly the right thing to do. Well done for challenging the DWP’s mother hen act with their NEST egg. Well done to Tristan, Catherine , Andy and the CIPP and well done the former Minister.
The consequences of hundreds of thousands of employers sleep-walking into workplace pensions are unknown. Staff have a right to know not just where their money is invested, but why the employer made that choice.
It is difficult for civil servants, for whom gold plated pensions are laid on by the Government, to understand these dynamics, but not impossible. I hope that they will take up the challenge of the Select Committee and that, when they do, they will come and talk to Pension PlayPen.