Employers will soon be subject to a new duty to enrol eligible employees automatically into a pension scheme and pay a minimum level of contributions in respect of those who are enrolled.
A lot of the detail in relation to these new pensions ‘auto-enrolment’ obligations is still outstanding and may be subject to further change. However, some aspects of the new regime are becoming clearer, and many clients are starting to think about how they can prepare for compliance.
When will the duty start to apply?
This will start from October 2012 for very large employers. Its implementation is then staggered, for decreasing sized employers (based on the number of people they employ) through to September 2016 (although an employer can voluntarily comply with the new requirements early if it chooses). For example, an employer with between 350 and 499 employees will have to comply with the new duties from 1st January 2014.
The Pensions Regulator will write to all employers 12 months before the new duties are due to apply to them, but a table showing how this is staggered can be found at: http://www.dwp.gov. uk/docs/auto-enrol-and-wpr-the-facts.pdf.
What is the basic auto enrolment duty?
In summary, based on the legislation and draft legislation currently available, an employee will be a ‘jobholder’ who must be auto-enrolled if:
- they work under a contract of employment in Great Britain;
- they earn over £7,475 per annum (although it is possible for lower earners to opt in);
- they are aged 22 or over, but under state pension age (although some employees under 22 can also choose to opt in); and
- have completed a three month waiting period, if the employer chooses to impose one.
A jobholder must be enrolled either into their employer’s own ‘qualifying scheme’ or into the Government’s new national employment savings trust, “NEST” (which has been established as a money purchase pension scheme).
It will be possible for a jobholder to opt out of a pension scheme but, as the legislation currently stands, only once they have already been auto-enrolled. They must then be allowed to opt in once a year, and be auto-enrolled again every three years.
What contributions will be made?
If a jobholder is enrolled in NEST:
- the jobholder must contribute 4% of his earnings into NEST;
- his employer must contribute 3% of his earnings into NEST; and
- a further 1% contribution will be made up of tax relief.
However, these levels of contribution will be phased in over a five year period. For example, for the first four years of the new obligation applying to an employer, contributions of 1% of earnings will need to be made by each of the employer and the jobholder.
Can I use my existing pension scheme to meet my auto-enrolment obligation?
There are a number of qualifications that an existing pension scheme must meet to be able to be used to satisfy the auto-enrolment obligations, and some of these are still in draft legislation or yet to be finalised.
However, broadly speaking, an employer’s own scheme can be a qualifying scheme if it meets the following standard:
- defined contribution schemes (including occupational DC schemes or group personal/stakeholder pension schemes): these must provide for at least the level of contributions set out above in relation to NEST. These types of schemes will be able to ‘self certify’ as compliant schemes.
- defined benefit schemes: these must meet the test scheme standard which, in summary, means they must have a normal retirement date of 65, provide accrual at a rate of 1/120th of average earnings in last three years multiplied by service to a maximum of 40 years and provide revaluation and increases in line with statutory minimum. The employer and actuary must also certify that they are compliant schemes.
What should we be doing to prepare for auto-enrolment?
Employers need to recognise that the new obligations will soon apply to them, and work out when they will first be affected. They will also need to start to make plans for complying with the new duties, and decide which vehicle they will use to do that.
Although the new duties will predominantly apply to employers, the Pensions Regulator points out that trustees also have a role to play. At this stage, the key points are that trustees should:
- find out when the employer will become subject to the new auto-enrolment requirements;
- discuss auto-enrolment with the scheme’s sponsoring employer to determine if their pension scheme can or will be used to meet the automatic enrolment requirements; and
- respond to any requests from the employer with regards to their pension scheme meeting the requirements for existing active members.
Depending on whether an existing pension scheme will be used by the employer in the auto-enrolment regime and how, the follow up actions for trustees could be minimal or quite significant.