Following the Supreme Court’s recent decision in Clyde & Co LLP v Bates van Winkelhof, many commentators have suggested that an LLP must now automatically enrol (and pay contributions in respect of) its members into a pension scheme. However, the position is not that clear cut.
An employer must automatically enrol ‘eligible jobholders’ into a qualifying pension scheme. An eligible jobholder is a ‘worker’ who works or ordinarily works in the UK, is aged between 22 and state pension age, and receives ‘qualifying earnings’ which exceed the £10,000 annual earnings trigger for auto-enrolment.
As a result of the Supreme Court’s decision, LLP members are now deemed to be workers for whistleblowing legislation purposes. The Pensions Act 2008 also uses a very similar definition for ‘worker’, and on this basis it is very likely that, for the majority of LLPs, their members will be ‘workers’.
While the Pensions Regulator has so far given no definitive guidance in response to the court’s ruling, it has told us: ‘Employers [LLPs] should assess the individual circumstances of the person, but may look to the precedent set by case law’. This ‘may lead [the LLP] to conclude that such persons are workers and may need to be automatically enrolled’.
That is helpful to a point, but our takeaway is that, until the Pensions Regulator says otherwise, or the law changes, it would be safest to assume that LLP members are workers for the purposes of the auto-enrolment legislation.
LLPs then need to assess whether their members meet the other auto-enrolment eligibility requirements; namely, do they ordinarily work in the UK, fit within the age brackets, and satisfy the ‘qualifying earnings’ test?
It should, in theory, be easy to verify the first two conditions. However, qualifying earnings is a bit trickier to determine.
Qualifying earnings is defined in the Pensions Act 2008 as salary, wages, commission, bonuses, overtime and statutory payments such as statutory sick pay and family leave pay, between £5,772 and £41,865 per year.
On a strict reading of this definition, a pure ‘profit share’ arrangement does not appear to count as ‘qualifying earnings’, but this will be a case-by-case assessment for each LLP to do according to how each member is remunerated. Members who are remunerated via a fixed profit share which is guaranteed and not repayable if there is a shortfall in overall profits will probably have ‘qualifying earnings’.
Even if a member does not have ‘qualifying earnings’ and would not be an ‘eligible jobholder’, they could still be an ‘entitled worker’ under the legislation and have the right to opt into a pension scheme (but will not be entitled to receive minimum pension contributions).
The obligation to auto-enrol does not apply until an entity’s ‘Staging Date’. This is calculated by reference to the size of the organisation’s PAYE scheme as at 1 April 2012. If an LLP did not have a PAYE scheme on that date, then its Staging Date will be 1 April 2017.
If it did not have a PAYE scheme on 1 April 2012, but subsequent to that date does set up a PAYE scheme, then it will be treated as a ‘new employer’ and its Staging Date will be from 1 May 2017 at the earliest (depending on when PAYE income first became payable).
If it did have a PAYE scheme (for example, a legacy PAYE scheme) but on 1 April 2012 it no longer had anyone on payroll, then the LLP Staging Date will depend on the last two characters in the PAYE reference numbers (and the Staging Date could therefore be anywhere between 1 June 2015 and 1 April 2017).
If a law firm has a service company and an LLP, and the service company employs the staff and the LLP contracts with the members, the LLP is not bound by the service company’s Staging Date (assuming it does not use the same PAYE scheme that the service company uses).
In summary, the main questions for an LLP to consider are:
- When is its Staging Date?
- How are its members remunerated and could they be said to have qualifying earnings?
- If they do, then what level of contribution is required and where does it take the money from (that is, is a reduction in a member’s profit share permitted under the LLP agreement)?
- Is the LLP’s contribution a cost to be deducted before the calculation of profits (and pre-allocation of profit to members who are then taxed on it, so it results in a ‘tax saving’ for the individual member), or after profits are calculated and allocated such that each member would in effect make the employer’s contribution from their own share of profits?
In addition, care should be taken not to induce members to opt out of auto-enrolment, which would be unlawful, and that those members who have registered for protection in relation to the lifetime allowance do not inadvertently lose that protection by not opting out in time.
Some practical guidance
There has been a lot of panic, but our guidance is as follows:
- If the LLP has not reached its Staging Date, this may mean that no action is required yet;
- If the LLP is about to reach its Staging Date, it could send out a communication to members saying that it does not believe it needs to enrol them but, without prejudice to that position, give the prescribed statutory notification that it is postponing auto-enrolment for three months – pending clarification from the regulator and further consideration by the LLP; and
- If the LLP has reached its Staging Date already, then it should consider holding firm pending clarification of the position from the regulator, but begin a process of actively assessing whether any members qualify for enrolment.
If it becomes definitive that members must be automatically enrolled, the regulator can require the LLP to make back payment pension contributions in respect of its members dating back to the Staging Date, but is unlikely to receive any other sanction than this, particularly if it has conducted a reasonable assessment of whether members qualify for enrolment.
Clive Greenwood is joint head of Lewis Silkin’s partnership and LLP group and Christopher Hitchins is a partner in the firm’s employment, rewards and immigration team