Auto-enrolment will require employers to automatically enrol most of their employees into a qualifying pension scheme and contribute to it. Expected to introduce an additional 10 million people to pension saving, the new requirements are being phased in between October 2012 and September 2016, with the changes hitting the largest employers first. With less than a year to go until auto-enrolment goes live, employers need to take action now to ensure they are prepared.
Eligible employees are: (i) over age 22 and have not reached State Pension Age; (ii) earn more than the minimum earnings threshold (£7,475 in 2011/12); and (iii) work or ordinarily work in the UK. In addition, most employees who do not qualify for auto-enrolment may elect to join their employer's scheme and employers will have to contribute in respect of them.
Qualifying pension scheme
Employers have to enrol all eligible employees into a qualifying workplace pension scheme, with no decision being required on the part of the employee. Employers can use their existing pension scheme to fulfil their obligations provided it meets the minimum requirements of the new regime. Broadly, the employer must either:
- make a minimum contribution (see below) to a defined contribution scheme or to the National Employment Savings Trust (NEST); or
- offer membership of a defined benefit scheme or hybrid scheme which meets certain minimum requirements.
Minimum contribution levels will be phased in gradually from October 2012 to October 2017, with total minimum contributions rising from two percent to eight percent of "qualifying earnings" (currently earnings between £5,035 and £33,540) and minimum employer contributions rising from one percent to three percent.
Enrolment and opting-out
Eligible employees must be auto-enrolled from their employer's implementation date (their "staging date") subject to an option for employers to delay joining for a three month waiting period. Employees will, however, be entitled to join early and start saving during this waiting period.
Employees can opt out at any time but must not be encouraged or incentivised to do so. Employees who opt out during the first month will be treated as if they had never been members and receive a refund of any contributions paid. Employees who opt out are, however, subject to re-enrolment by their employer approximately every three years.
Important safeguards will protect employees' auto-enrolment rights and employers must comply with these provisions from introduction in 2012, regardless of individual staging dates.
Employers must not take any action that results in an employee ceasing to be a member of a qualifying scheme. If any such action is taken, the affected employee should be re-enrolled into an alternative scheme within one month.
Employers are prohibited from inducing an employee to opt out of scheme membership, for example, by offering higher salaries or bonus payments in return for opting out. While many inducement cases will be clear cut, certain situations such as flexible benefits packages, where employees are offered pension scheme membership as one of the options in their overall employment benefits package, are less clear and employers should seek advice to ensure that they do not breach the inducement legislation.
Employers must also be careful when recruiting and should not make any statement or ask any question which indicates that the success of a job application may depend on whether or not an applicant opts out.
Action for employers
If not already known, employers should check their staging date, assess their workforce to determine what action will be required and then consider how to comply. If using an existing scheme, rule amendments may be required to become a qualifying scheme.
Office systems will need to be in place to implement the new arrangements and the increased costs (both in contributions and administration costs) will have to be factored into future business plans. Member communications will also have to be considered in good time as employers are obliged to provide certain information to their employees (including non-eligible employees and those who are already members of a qualifying scheme) within specified time limit.