employers – telling employees about pensions
by Roderick Ramage, solicitor, www.law-office.co.uk
first published (by distribution to professional contacts) on 30 December 2009
This article is not advice to any person and may not be taken as a definitive statement of the law in general or in any particular case. The author does not accept any responsibility for anything that any person does or does not do as a result of reading it.
Employers are required by law to give employees information about pension schemes and are or may prohibited from giving financial advice, around which is a minefield into which employers go at their peril.
Employers are not permitted to oblige employees to be members of a or any particular pension scheme: s160 of the Pensions Schemes Act 1993, re-enacting s13 of the Social Security Act 1986 by which Mrs Thatcher’s government started the pensions misselling scandal.
The written statements of terms of employment, which employers are required to provide under s1 of the Employment Rights Act 1996, must include a statement of the terms and conditions relating to pension and pension schemes and whether or not a contracting out certificate is in force. Employers with five or more employees must offer them membership of a stakeholder pension scheme, unless the employer has some other scheme which exempts it from this obligation, and from 2012 employers will be obliged to auto-enrol jobholders into a qualifying pension scheme (see separate update), enabling Gordon Brown’s government to start its own pensions misselling scandal.
financial service legislation
The Financial Services and Markets Act 2000 (FSMA), by s19, prohibits any person from carrying on a regulated activity unless he is authorised or exempt and, by s21, prohibits the communication of invitations or inducements to engage in investment activity, unless the person doing so in an authorised person or the contents of the communication have been approved by an authorised person. Regulated activities and investment activity (see s22, Sch 2 and SI 2001/544) include any activity relating to investments carried on by way of business.
The distinction between generic and specific investment advice is not statutory, although these expressions are widely used, not least by the Financial Services Authority (FSA). The popular view, that a person, including an employer, is not precluded from giving generic investment advice but must take care to avoid the risk of "crossing the line" (often inadvertently) and giving specific investment advice, which could result in the employer committing an offence under the FSMA, is a simplification which ignores the fact that many employers, if they give financial or investment advice, would not be doing so by way of business.
The boundary between what is and what is not permitted is unclear. Contributing to the uncertainty about the extent of this legislation is the failure of both the FSA and the Pensions Regulator (TPR), in their guidance to employers in relation to pension schemes, to commit themselves to what an employer may or may not do. For instance, TPR, has amongst others the following Q and evasive A, which is similar in approach to that taken by the FSA.
Q: How can I help my employees when they ask me which investment funds to choose for their pension?
A: You can … Give your employees descriptions of the funds available, including the charges that apply to the funds. The pension company that set up the scheme will often be able to give you this information. … You will probably not have the expertise to give an individual advice on their investment choices, and you may get it wrong. Good practice is to give your employees as much information as you reasonably can to help them to make properly informed choices
duty of care
In neither University of Nottingham v Pensions Ombudsman  IRLR 97 (ChD) nor Outram v Academy Plastics  IRLR 499 (CA) would the court imply a duty of care on the employer to notify the employee, in the first case about his choice of retirement date and in the other about pension options. An employer would however expose itself to the risk of claims for damages for negligence, if it were assume voluntarily a responsibility for pension or investment advice.
The information that a financial adviser needs to advise an employee is confidential to the employee who, if properly advised, is likely to decide that he or she does not wish it to be known to the employer
the prudent approach
Employers can minimise their exposure to risk in respect of advice about their pension schemes by restricting themselves to:
- telling employees what pension scheme is available, how they can join, how much they and the employer will contribute to it and the benefits or nature of the benefits which will be provided;
- offering the services of an independent financial adviser (and paying for it up to £150 per employee pa – SI 2002//205 reg 5);
- providing documents supplied by the pension provider;
- referring employees to, eg, www.moneymadeclear.fsa.gov.uk, www.pensionsadvisoryservice.org.uk, and www.thepensionsreulator.gov.uk; and
- establishing an internal policy with guidelines to ensure that staff responsible for HR, payroll and pensions functions do not give financial or investment advice.
copyright Roderick Ramage
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