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Contractual v Automatic enrolment – do you understand the differences?

Automatic enrolment means that once an employer has passed their staging date it is required to automatically enrol eligible jobholders into a scheme with effect from the date they become eligible, unless they are already a member of the employer’s pension scheme. Both of these schemes meet certain quality requirements.

Generic contractContractual enrolment is an alternative approach to enrolment which can be used to meet the employer’s obligations under the automatic-enrolment regime, but is contained within a contract of employment and does not depend on the employee being an eligible jobholder for the purposes of auto-enrolment.

What are the advantages of contractual enrolment?

The main advantage for an employer of using contractual enrolment is that it will not be necessary to assess the individual auto-enrolment status of each new employee at the outset of the employment relationship. To avoid enrolling new joiners who are short-term workers or likely to leave employment at an early stage, the employer can also use a period of postponement of up to three months.

If, however, a jobholder who has been contractually enrolled later opts out of scheme membership, their employer is currently still required to assess their status and eligibility against the auto-enrolment criteria and, subject to them being assessed as eligible, auto-enrol them at that stage.

This is however set to change as a result of the Occupational and Personal Pension Schemes (Automatic Enrolment) (Amendment) Regulations 2015 which are expected to come into force on 6 April 2015.

What is changing in April?

As a result of the changes, generally employers will not necessarily have to auto-enrol eligible employees if they have previously opted out of contractual enrolment.

There are also new exemptions for those who:

· Are in a notice period in relation to their resignation, dismissal or retirement from employment with their current employer;

· Have in place any transitional protection in relation to the lifetime allowance limit; or

· Have received a winding-up lump sum and within 12 months have both ceased employment with and been re-employed by the same employer.

The requirement to automatically re-enrol all eligible jobholders, generally every three years will still be required to be observed.

The employer must still provide a contractually-enrolled worker who qualifies as a “jobholder” with statutory information about the pension scheme in which they have been enrolled.

The workers consent to contractual enrolment is required because there is no overriding statutory duty on which the employer can rely as there is with automatic enrolment. Including this in the contract of employment for new joiners would suffice. For the existing workforce, the effective way of securing consent would be to do so expressly, obtaining written confirmation from workers that they agree to the change.

What do employers need to do now?

For employers who have not yet passed their staging date preparation should be underway and decisions in relation to options for complying with the regime, including whether to use contractual enrolment, should be being considered and made. The Pensions Regulator recommends that preparation for compliance should be commenced at least 12 – 18 months before an employer’s staging date to allow sufficient time to meet all the requirements.

For employers who have already passed their staging date, it would be good practice to review how things are going with the current arrangements for auto-enrolment and any audit of this type can include consideration of whether it would be useful to introduce contractual enrolment for new workers.

Questions about auto-enrolment? Get in touch 

Keep up to date and follow us: @DWF_Employment

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Legal news, views, trends and tools for HR Professionals. Stay ahead. Go further