Are directors required to be enrolled in an employer-provided workplace pension scheme?

After several years of lobbying from professional accountancy bodies and others, the government has provided a sensible set of rules in answer to the question of whether directors are required to be enrolled into an employer-provided auto enrolment workplace pension scheme.

The latest development has been the issue of legislation to allow companies to opt to exclude directors from auto enrolment. This news will provide comfort for many; particularly small employers yet to go through the auto enrolment process.

The issue of the employment contract

Prior to this latest change, directors could be removed from the requirement to be auto enrolled if they did not have a written or implied contract of employment. Many directors of small companies do not have written contracts but it is difficult to be definitive as to whether an implied contract exists.

If there are only directors in the company, and it is unclear whether they have contracts of employment, there are two alternatives that will minimise the company’s auto enrolment duties:

Option A
The company could conclude there are no implied contracts of employment. There is no requirement for the company to have an auto enrolment pension scheme as there are no workers.

Although there are no auto enrolment duties the company should confirm with The Pension Regulator that the company has no workers here. Doing so will ensure the Pension Regulator (TPR) will stop issuing reminder letters – and threatening penalties – about auto enrolment duties.

Option B
If there might be contracts of employment, the new exception could be used. The company can choose to have an auto enrolment scheme and enrol the directors 
– but is not required to.

If the company chooses not to have an auto enrolment scheme, it would need to complete a ‘declaration of compliance’ after the company’s staging date has passed. The declaration would show the directors as workers but that they had not been auto enrolled due to the exception.

What if the company has employees as well as directors?

If the company has employees, it will have a duty to set up an auto enrolment scheme.

If the company concludes that neither director has a contract of employment, the directors are not enrolled as they are not workers. 
If the conclusion is that the directors have contracts of employment, the company can decide to not enrol them by applying the exception.

Take care

Employers need to take care if they advise TPR that they have no workers or no-one to enrol and then take on an employee in the future. If the staging date has passed, auto enrolment duties may apply for that new worker from the date of their employment.

If you are affected by this matter, contact your RfM advisor who can help you to decide the right option for your circumstances.