Having been discussed for over a decade automatic pension enrolment is now an obligation for all employers who employ more than 120,000 in their PAYE scheme and will be phased in for all existing employers by April 2017. New employers from April 2012 will not be required to auto enrol until 1 May 2017 at the earliest.
With the introduction of automatic pension enrolment it is hoped that in combination with a later State Pension Age, the future funding of employee pensions will become both more sustainable and an accepted concept, with employee contributions to schemes becoming the norm.
Employer or Trustee?
The new duties and obligations introduced in the Pensions Act 2008, essentially fall on the employers. However, trustees of defined benefit, defined contribution and hybrid pension schemes will have a role to play and will need to be aware of the impact of automatic enrolment on scheme members or potential scheme members where the sponsoring employer chooses to use an existing trust based scheme as its qualifying scheme for automatic enrolment.
Does the existing scheme meet the qualifying criteria?
To be a qualifying scheme the benefit structure provided by a DB, DC or hybrid scheme must meet minimum requirements and not levy excessive charges on members. A sponsoring employer should confirm to the trustees whether it wishes to use an existing scheme for the purposes of auto enrolment, if it meets the minimum requirements or what, if any, amendments need to be made to the trust deed and rules to meet minimum requirements.
Three areas that in particular may require consideration are the eligibility clauses for all schemes, the level of contributions required by both employer and employee, and the definition of Pensionable Salary.
- to be a qualifying scheme the trust deed and rules must not contain any barriers in the form of (i) restrictions that will prevent an employer meeting its opting-in and re-enrolment duties and (ii) any requirement for a new joiner to make a choice or provide information in order to become an active member.
The minimum contributions that must be made by the employer and employees are being phased in over a six year period for DC schemes and 5 year period for DB and hybrid schemes.
- DC pension schemes – from 1 October 2018 an employer must make minimum contributions of at least 3% of an employee’s qualifying earnings and the total amount of contributions paid by the employee and employer must be at least 8% of the employee’s qualifying earnings.
- Most DB pension schemes will satisfy the minimum requirements if the employer has been issued with a contracting out certificate by the National Insurance Services to the Pensions Industry, if a scheme is not contracted out of State Second Pension, it may still satisfy the minimum requirement if it meets the ‘test scheme standard’ in relation to the jobholder.
- A hybrid scheme – as long as one section of the scheme meets the appropriate DB or DC minimum requirements the scheme will qualify.
- Pensionable Salary
The definition of “qualifying earnings” for the purposes of automatic enrolment includes bonuses, overtime and statutory maternity, paternity and adoption pay and is unlikely to be compatible with the definition of Pensionable Salary contained in existing scheme rules. Consideration may need to be given to widening elements of pay included in the definitions of Pensionable Salary that are contained in scheme rules or by adopting a new definition based on qualifying earnings
If changes to the scheme trust deed and rules are required to ensure that they are compliant with automatic enrolment an employer may be obliged to consult with affected scheme members if the changes fall within the statutory requirements on consultation.
Investment – Default Option
Under the auto-enrolment regime employees will not be required to express an investment choice when automatically enrolled and as such a default investment option must be available in any qualifying scheme from the date employees start being auto-enrolled.
The overall and ongoing responsibility for the administration, management and investment decision, even where delegated, is that of the trustees and they will be required to ensure that a default option is available for employees who are automatically enrolled. Trustees should review the membership profile and/or the potential membership profile of the scheme if there is likely to be an influx of new members, and choose a default option that is best suited to meet the needs of the members. The trustees should review their decision on a regular basis.
Administrative Capacity and Process
The trustees should ensure that the efficient administration of the scheme will not be jeopardised by an increase in scheme membership and that they receive new membership details from the sponsoring employer in the format as prescribed by the auto enrolment legislation. In particular the trustees should confirm with the employer whether they have any role in the process by which employees may opt out of active membership.
Trustees may be asked by a sponsoring employer to advise members of an existing scheme on whether auto enrolment will affect them and if so, how and when the chances will occur.