Pensions Regulator warns against confusion between 'contractual' and 'automatic' enrolment

The short document (3-page / 27KB PDF) sets out the differing consent and information requirements for the two types of enrolment, and reminds employers that schemes currently used for contractual enrolment will need to be reviewed before they can be used meet the employer duties associated with auto-enrolment.

"At the moment, many employers refer to contractual enrolment as automatic enrolment," the guidance said. "However, the process that employers must follow for automatic enrolment is different to that which they will follow for contractual enrolment."

"It is vital that everyone involved in the assessment of workers and enrolment into a pension scheme have well-defined procedures to allow for the distinction between contractual and automatic enrolment. This includes HR, finance, payroll, pension departments and pension schemes," the guidance said.

Broadly speaking, there are two ways in which a worker can become a member of an occupational pension scheme: through contractual and through automatic enrolment. Contractual enrolment requires the worker's consent to join the pension scheme and deduct contributions from salary, which is often obtained via the terms of the worker's employment contract. Automatic enrolment does not require the worker's consent to join the scheme; however, the automatically enrolled worker has a specific statutory right to ‘opt out’ of the scheme.

Automatic enrolment began for the largest employers on 1 October 2012, and 'staging dates' by which smaller companies and new companies will have to begin the process run until 2018. Once the process begins, employers will be legally obliged to make contributions towards the pensions of automatically enrolled workers who do not opt out of the scheme. Employers can alternatively comply with the requirements by contractually enrolling workers into a qualifying scheme.

According to the guidance, employers may use the same scheme for both contractual and automatic enrolment providing that the scheme rules allow this. The scheme cannot include any barriers to entry for workers, and potential members must not be required to make any decision or express any opinion in relation to joining the scheme. Workers eligible for automatic enrolment that are already members of a qualifying scheme at their staging date must be given information advising them that they already meet the requirements and advising them that the employer cannot do anything that would result in them losing their membership.

The guidance also reminds employers that the safeguards set out in the 2008 Pensions Act apply to both types of enrolment, although the rules on issues such as postponement and opting out are different. For example, employee communications in relation to either type of scheme must not breach the inducement provisions in the Pensions Act, according to the guidance.

Pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that the guide set out the "elephant traps employers may stumble into" when trying to comply with their obligations under the automatic enrolment legislation.

"An employer may think that its job is done if all its workers join its pension scheme, and that scheme meets the quality requirements for auto-enrolment," he said. "What that employer may not realise is that this apparently simple solution doesn't allow the employer to get round all of the complexities of the legislation."

"The employer, and those involved in running the scheme, need to make sure that they understand exactly what information needs to be provided to the workers and what the workers' rights are, especially if they choose to opt out. This guide confirms that the regulator is taking a strict approach, and won't allow the complex requirements of the legislation to be overlooked," he said.