Shoe-horning leaves employers wide open to compensation claims from angry workers

The absence of due care when making critical pension choices is guaranteed to return to employers in the long run.

The absence of due care in scheme selection under the Auto-enrolment process could open the way for angry workers to succeed in taking a class action against their employers. In turn, the employers can take action against their business advisers; and guidance from trade bodies that it’s OK to shoe-horn all firms into a single pension scheme is no defence.

In the Pensions Bill 2016-17 it is understood that the employer who chooses the pension scheme has less of an incentive than the member to pick one that will deliver good outcomes and value for money. In the Commons, Alex Cunningham proposed a number of amendments aimed at improving member engagement – including requiring Master Trusts to have member-nominated directors and to hold Annual Member Meetings. However, a proposed amendment that employers should have a statutory duty of care to choose a suitable scheme was rejected.

The current statutory position under Pensions Act 2008, Part 1, Chapter 1, Section 3 (2) is that the employer must make prescribed arrangements by which the jobholder becomes an active member of an automatic enrolment scheme with effect from the automatic enrolment date. So, there is no statutory obligation on the employer to choose a suitable pension scheme.

There are good governance standards published by The Pensions Regulator, but these are not mandated and are not therefore enforceable. If an employer fails to meet statutory duties it will be running a risk of compliance penalties, but not so if the employer fails to meet regulatory guidance. There is no risk of being fined by TPR.

However, under Case Law, the employer is obliged to follow due process; and it would be reasonable to expect that the employer was aware of the TPR guidance notes; and could potentially be vulnerable to a claim from its employees that it has breached its employment duties if the employer fails to follow due process and take care in selection of a pension arrangement. In particular, a failing would be demonstrated if there was no audit trail on how the scheme was selected.

As the employers have sole responsibility for selecting the arrangement employees are automatically enrolled into, and in some cases selecting the fund profiles, they inevitably take responsibility for their actions. The extent of the potential liability arising from such decisions is unclear, but numerous studies have already been made demonstrating that small differences in rates of return and fee levels between funds can equate to very significant differences in outcomes. If it can be shown that the employer has breached a duty towards the employee and foreseeable loss results from that breach, the employer may have to make up the difference.

There is no suggestion that employers must go to extreme lengths or incur exorbitant costs in selecting schemes. They just need to 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. Any well-run business should be able to justify its purchasing decisions when it comes to premises, equipment, consumables, etc. and so it should concerning payroll and pensions.

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