The DWP has recently finalised a number of technical changes to the auto-enrolment legislation, which will come into force on 1 April 2015. These are designed to simplify certain processes and ease the burden on employers and workers alike. All the changes are permissive, meaning that employers with established auto-enrolment processes can continue to use these if they so wish.
The changes relate to three areas, namely:
- Providing employers with an option to simplify the information provided to workers as part of the auto-enrolment process (both in terms of the volume and the content of communications required).
- Creating four exceptions to the employer duty to auto-enrol certain categories of workers. These include jobholders who become eligible for auto enrolment whilst working a notice period and those who have a protected tax status.
- Introducing an alternative test for defined benefit schemes to meet in order to be classified as a qualifying scheme. At present, to meet the minimum quality requirement, such schemes must either be contracted out or meet a test scheme standard.
Simplifying worker communications
Currently an employer is required to provide five separate pieces of information to different types of worker informing them of what is happening under auto enrolment. In addition, should the employer choose to postpone auto enrolment, a postponement notice must also be given. Workers may receive some of this information in quick succession, which could lead to confusion and water down their engagement with pension saving.
The revised legislation therefore aims to reduce the number of communications sent to workers, in most cases to no more than three, and sets out a new minimum level of information the employer must provide.
The current requirement to provide separate communications to non-eligible jobholders and entitled workers outlining their rights to opt in to the scheme or join will be revoked. Instead, a standard letter may be given to all types of worker. Similarly the requirement to provide information to existing jobholders who are already members of a qualifying scheme at their auto enrolment date will be revoked.
The minimum amount of information to be given to workers is also being reduced. In most cases, eligible jobholders need only be notified of certain core components (for example, that they are being enrolled into a qualifying scheme, subject to the right to opt out and receive a refund of contributions). Non-eligible jobholders and entitled workers need to be informed of their respective rights to opt-in or join a scheme.
This change to worker communications is permissive. Employers who already have a set of communications in place and a system of communicating with their workers may continue in this way.
Even if employers choose to adopt the simplified communications, the changes will not absolve them from continuous assessment of their workforce in all circumstances. For example, workers who are not members of a scheme will still need to be assessed in each pay reference period to check whether they have become eligible to be auto enrolled.
Exceptions to the auto-enrolment duty
From 1 April 2015 an employer’s “duty” to auto enrol a jobholder will be converted to a “discretionary power” to do so, in the following limited circumstances:
- Jobholders who are working a notice period. Where a jobholder is in a notice period when the employer’s auto-enrolment duty is triggered, the employer may exercise a discretion not to enrol the jobholder. This exception will apply when the jobholder or the employer triggers a notice period, meaning that it can be utilised in circumstances arising from the jobholder’s resignation, dismissal, redundancy or retirement. The legislation also deals with the scenario when a notice of termination is withdrawn.
- Jobholders or workers who have cancelled membership of a pension scheme prior to automatic enrolment. Rather than being obliged to auto enrol such individuals who are eligible jobholders, the employer will now have a discretion during the twelve month period following the cancellation of membership to enrol the individual. After that period the employer will not be obliged to auto enrol the individual, but will need to re-enrol him at the appropriate re-enrolment date.
- Jobholders with tax protected status. Where an employer has “reasonable grounds to believe” that a jobholder has claimed one of the various forms of tax protection (that is, primary protection, enhanced protection, fixed protection 2012, fixed protection 2014 or individual protection 2014), it need not automatically enrol the individual. Whilst guidance has not yet been updated to explain further what “reasonable grounds” may be, the DWP has given the example of the employer being furnished with a copy of the worker’s HMRC certificate. The DWP has also reiterated that the onus should be on jobholders to notify their employers of their protected tax status.
- Jobholders in receipt of a winding-up lump sum. Broadly an authorised payment charge will arise where a jobholder receives a winding-up lump sum and then accrues further pension benefits during the subsequent twelve month period. Under the revised legislation the employer now has a discretion as to whether to auto enrol such an individual, thereby potentially avoiding the charge arising. While this scenario may not be common, the exception is welcomed and a sensible addition.
Alternative quality requirement test for defined benefit schemes
Currently defined benefit schemes open to future accrual must either be contracted out of the state second pension or satisfy a test scheme standard in order to meet the minimum qualifying scheme criteria for existing scheme members.
With the abolition of defined benefit contracting out from 6 April 2016, the DWP has taken this opportunity to introduce an alternative test for defined benefit schemes to satisfy. Broadly, as a minimum, a defined benefit scheme would qualify under the new test if the cost of future accruals would require total contributions of at least 10% of defined benefit members’ qualifying earnings (that is, earnings between £5,284 and £42,385 for the 2015/16 tax year) or 9% if no dependants’ pensions are available.
The legislation sets out the period over which this test must be applied and the relevant members to take into account. The legislation also confirms that there is no requirement to apply the test to each individual employer in a multi-employer scheme.
This is a welcomed change and one which may assist those employers who operate a contracted-out defined benefit scheme.
Earnings thresholds for 2015/16
The DWP has also confirmed the earnings trigger and the band of qualifying earnings for the 2015/16 tax year.
The earnings trigger (the level of earnings which a worker must receive to be auto enrolled) will be frozen at the current level of £10,000.
The lower and upper limits of the qualifying earnings band will rise to £5,824 and £42,385 respectively. This is in line with the National Insurance lower and upper earnings limits.
Some defined contribution schemes use this band of earnings as the measure for contributions paid into the scheme, while the lower threshold is used to distinguish between non-eligible jobholders and entitled workers for all employers.