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
DISCLAIMER
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.
employment contracts
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[1]. 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 [1999] IRLR 97 (ChD) nor Outram v
Academy Plastics [2000] 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.
confidentiality
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.
END
30/12/09
copyright Roderick Ramage
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[1] http://www.thepensionsregulator.gov.uk/pdf/TPRFSAGuideForEmployers.pdf
http://www.fsa.gov.uk/pubs/other/guide4employers.pdf