NEWSLETTER    |     September 20, 2023

What counts as Basic Pay for Automatic Enrolment?

Auto-enrolment is tricky to get right and it can be costly to get wrong. Employers using pensionable pay (including basic pay) as the basis of pay from which they calculate their pension contributions have an added complexity as basic pay is not fully defined anywhere. If only basic pay is pensionable under scheme rules and elements of pay could either be basic pay or overtime/shift pay, it is difficult to ascertain whether they should or should not be included in the calculations as that line is not drawn out in any law, caselaw or guidance. Due to this lack of certainty, we have advised our clients to be cautious and include it, but the industry could do with having a definition of basic pay.

All employers have to automatically enrol certain UK workers into a compliant pension arrangement to meet the auto-enrolment obligations under UK pensions law. These employers must also ensure that minimum pension contribution levels (calculated as percentages of pay) are met. There are different compliant minimum contribution level percentages, based on different definitions of the pay used to calculate them, which employers can choose from. A contribution level minimum often used by employers is 9% of “pensionable pay”, 4% of which must be met by the employer. Pensionable pay  includes basic pay but we don’t know exactly what this means so we can’t tell our clients exactly what should and should not be included when calculating pension contributions.

There is no statutory definition of what basic pay is and there are no leading pensions law cases which define this either. Basic pay is largely understood to mean basic salary, exclusive of any bonus, commission, shift pay, overtime, statutory sick or holiday pay, or any other non-salary benefits. This understanding is codified in the Pensions Regulator’s guidance and has become accepted market practice. However, as basic pay is not clearly defined in the Pensions Act 2008 (the act which created auto-enrolment) or the associated regulations, and in the absence of an obvious precedent setting case, there is no certainty we can offer as to what should and shouldn’t be included in this definition.

Where pensions law is found lacking, we as pension lawyers often look to employment law and employment law cases to fill in the gaps. However, in the case of basic pay, there are no obvious employment law definitions or cases to offer any help or certainty. The result of this is that all we can draw from are the Pensions Regulator’s guidance notes which are helpful but not prescriptive and are ultimately not the law.   

For the most part, the Pensions Regulator’s guidance is clear enough to determine what should generally be included in basic pay. Although not legal precedent, it shows us what the Pensions Regulator thinks about this issue and helps us to anticipate what it would do when enforcing the rules. However, there are instances in which aspects of an employee’s pay package are not clearly or obviously within or outside of the basic pay description in the guidance. For example, hours which are not contracted but are paid at a basic rate and which the employee is expected to meet if the employer wishes them to, such hours could be deemed as either basic pay, or as overtime or shift pay.  Overtime and shift pay would sometimes be excluded from the pension contribution calculations.

For certainty, employers may have to wait until the industry gets clarification on this, either in the form of Pensions Regulator guidance, or an employment or pensions law case. In the meantime, we have advised our clients to be cautious and include ambiguous aspects of pay as basic pay when calculating pension contribution levels. Fines for auto-enrolment non-compliance can be hefty and employers would likely prefer to avoid having to pay those, as well as backdated pension contribution underpayments into the employees’ pension pots at a later date.

Key takeaway

In the absence of legal certainty or persuasive guidance which addresses the ambiguity over pensionable pay and ’basic pay’ head-on, we have advised our clients to err on the side of including any ambiguous elements of pay as basic pay where it is not clearly one or the other.

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