Pensions Auto-Enrolment: Unintended Consequences of Regulation and Private Law Remedies

Date01 September 2017
Published date01 September 2017

The introduction of auto-enrolment (AE) into workplace pensions in 20121 requires employers to enrol workers into a pension. Employers have significant discretion in this process and rely on the financial services industry to ensure compliance with AE minimum standards. Employers may not always have pension expertise and will engage pension providers for advice on establishing compliant pension arrangements or modifying existing schemes to use for AE. Whilst this policy benefits many, my empirical research2 has identified a number of negative consequences flowing from the introduction of AE. Examples include employers choosing poorly performing schemes, insufficient protection of free choice and poor default positions replacing active decision-making, all of which result in poor value for some employees. The parties' interests may not always be aligned. Despite the minimum criteria, there can be significant variations between fund costs and scheme quality as private sector pensions are frequently used for compliance. Whilst the ability of employees to opt-out provides legitimacy for the regime, the form of implementation and use of defaults erodes the exercise of choice and there are no provisions to encourage engagement and active decision-making by individuals. In addition to this, inadequate advice impacts on the effects of AE for many. For some this means that they pay in less overall than they would have if they had voluntarily chosen to contribute to a plan.3

This article explores whether further statutory change to the AE regime is required or whether existing private law remedies, with a focus on Scots law, afford sufficient remedies for those suffering loss. If fiduciary, agency, contractual or delictual obligations arise from the AE relationship then this may provide adequate remedies. This article will consider whether fiduciary duties are owed to employees, particularly by the employer (as an agent) to the employee, and the extent of duties owed under the contract of employment.


Employers may owe fiduciary duties to the employee in respect of the method of implementing its employer AE obligations, in a similar way to the duties owed to scheme members by occupational pension scheme trustees.4 However, the position in relation to contract based schemes, such as group personal pensions often used for AE, has always been governed by contract. In a personal pension policy the contract is agreed between the individual and the pension provider on the provider's terms. With AE, there has been a blurring of the lines where the employer chooses a provider, the contractual terms, enrols the employee into the arrangement and then deducts contributions from salary. The employee may change the investment, contribution amount, or choose to leave but cannot vary the contractual agreement other than by leaving the plan. The product provider generally writes the contract terms as “take it or leave it contracts”.5 My question here is whether fiduciary duties are owed by employers, product providers or advisors to the employees in the AE compliance process, almost as de facto investment intermediaries as envisaged by the recent Kay review.6 Fiduciary duties may arise from the nature and obligations of the AE relationship, particularly under agency which creates both fiduciary and non-fiduciary obligations.

When do fiduciary obligations exist generally?

Fiduciary duties and the circumstances in which they arise can be difficult to identify.7 The “trustee” must promote the interests of the beneficiaries, avoid conflicts of interest and not profit from the trust. Any consideration of fiduciary duties needs to identify to whom the duties are owed, what the duties are and in what respect the breach occurred8 and there are dangers of extending law by analogy.9 In establishing the fiduciary relationship one party is always dominant and another subordinate.10 Vulnerability and reliance in contract may justify supervision of the relationship, but not imposition of the requirement of one party to act loyally in the other's interests.11 The employee is particularly vulnerable in AE as he has no right to contribute to the process of choosing a pension product or provider. Asymmetries of power have created an “emerging trend to insist upon disclosure”12 but this may not justify exacting loyalty from one party to the other in the relationship.13

The exercise of power by one party over the other or exercise of discretion or judgement might also define the fiduciary relationship.14 In AE the employer has complete discretion in respect of product provider and benefits. The issues of trust, confidence, power, inequality and dependency demonstrate the roles of the parties in the relationship. However, there are many instances of inequality in contractual dealing which do not equate to fiduciary obligations given that one party has not relaxed self-vigilance.15 Financial advisors are one of the recognised categories of fiduciary agents16 but this is because the financial advisor voluntarily assumes the obligation. In the employment relationship, the employee relies on and trusts the employer to act in his best interests when dealing with his pension. Information asymmetries may then lead to the conclusion that the employer owes fiduciary duties to the employee in this respect. Such duties might then be qualified or limited by information provided to the employee by the employer. Control of the assets of the other party may also be an indicator of fiduciary status and this may arise in a wide range of business contexts, including contractual relationships, which may specify differing terms. Then “a question arises about the way in which fiduciary obligations may be imposed alongside the obligations spelled out in the contract”.17


Fiduciary duties are often presumed where a particular relationship or status exists18 and the law now recognises many relationships. This can make identification of a fiduciary relationship difficult and heavily dependent on the given facts.19 Some question the approach of using status to define obligations,20 arguing instead that the undertakings of the particular matter are key. Others argue that this contractual approach is incorrect with fiduciary obligation sometimes operating in “opposition to intention”.21 The status of the parties in any case will provide evidence of the nature of undertakings.22

The question of whether the pension product provider or the employer's financial advisors owe any fiduciary obligations to the employee also arises. This could be in the act of providing information to employees or otherwise dealing with pre or post contract issues. For AE, contractual terms are generally agreed between the employer and the provider/advisors and this might lead to an expectation of fiduciary duties owed by the advisor to the employer. Contractual provisions may seek to specifically exclude this and it will depend on the nature of the relationship. If the advisor or provider deals with employees this may also constitute a fiduciary relationship. It is sometimes assumed that all those acting in an advisory capacity are fiduciaries of their clients23 but it is not clear what the position is in relation to putative clients (the employees) in the AE situation. There are dangers in relying on status for implication of terms because the same status can describe many different types of relationship24 and some tasks within the relationship may not be fiduciary.25 For example, a financial advisor undertakes to provide advice and will be considered a fiduciary, but a tied advisor may not be where he provides only information and not advice. The nature of undertakings, here the provision of advice, taken with the status forms evidence of the extent of the fiduciary obligations. In addition to the giving of advice, it is suggested that there must be an element of discretion to establish that the advisor is a fiduciary. A financial firm may owe fiduciary duties where the firm moves beyond “mere salesman”.26 It is clear from my empirical study27 that there are misunderstandings about the role of product providers and advisors and whether information or advice is provided. Consequently, both employers and employees may be able to demonstrate that the provider of information was relied upon and trusted as an advisor undertaking fiduciary responsibilities rather than merely acting as a salesman.

The employment relationship can give rise to fiduciary duties28 but this does not mean that the relationship is fiduciary in nature.29 Increasing examples of senior managers owing the employer fiduciary obligations30 might lead to the conclusion that the employer could also owe fiduciary obligations to the employee in some circumstances. However, the operation of the employment law relationship where the parties do not subjugate their own interests to the other may prevent such a finding31 and it is unlikely that the entire relationship is fiduciary in nature. The most important component is the relationship of trust and confidence, with loyalty a key duty.32 Whilst mere employment does not create fiduciary obligations, the duties can exist where they arise from particular contractual obligations and within the constraints of the contractual relationship.33 Facts may disclose fiduciary obligations within the employment relationship on an ad hoc basis.34 A fiduciary may not be a fiduciary for all purposes. This would allow a finding that the employer is a fiduciary in respect of choosing the AE scheme but not in other respects.35

The asymmetry in information and power in the employment relationship demonstrates the employee's vulnerability which might indicate that fiduciary obligations are owed to the employee.36 However the mutuality in the relationship means that the employer is entitled to have regard to its own...

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