The radical shake up of workplace pensions which, from 2012, will require all employers to automatically enrol their staff into a qualifying pension scheme and make minimum contributions to that scheme, moved into its final implementation stage last week.
Regulations to implement the new scheme have been laid before Parliament and set out more detail about how the new scheme will operate in practice.
With only a couple of years left before the new system is introduced, many employers will want to start planning now how they will operate the scheme when it comes into force. In particular, establishing whether any existing pension scheme offered to staff is a 'qualifying workplace pension scheme' for the purposes of the Pensions Act 2008.
The Pensions Act 2008 provides that from 2012 employers will be required to auto-enrol workers in a pension scheme and make minimum contributions.
According to the Government, the aim of the new system will be to get the 7 million people in the UK who currently do not save for a pension to do so by being auto-enrolled into a workplace pension scheme.
From 2012 employers will have to offer a 'qualifying' workplace pension scheme to their workforce and must auto-enrol all eligible workers onto that scheme. This covers not just employees but also 'workers' and agency staff. Employers will also be required to make a minimum contribution of 3% of the workers' pay into the scheme.
'Auto-enrol' means that the worker is not required to give their express consent or make an application to join the pension scheme. However workers will be able to 'opt-out'.
A 'qualifying' pension scheme can include existing workplace schemes operated by the employer. Whether or not the scheme is a qualifying one depends on the scheme meeting a number of quality standards set out in the Pensions Act which varies depending on whether the pension scheme is a defined benefit, defined contribution or a hybrid scheme. Employers should contact their pension provider or the Pensions Regulator for further advice on this complex issue. Employers can choose whether to auto-enrol workers into their existing pension scheme or open a new separate pension scheme.
It is important to point out that the requirements to auto-enrol and pay a minimum contribution of 3% will not be introduced at the same time. Reforms will be introduced through a 'staging process ' whereby employers will be brought within the scope of the reforms month by month according to their size. Following consultation in the Autumn, the overall staging period has now been extended from three to four years, and will now run to 1 September 2016. Staging for new and small businesses will take place towards the end of this period.
Secondly the level of contributions will also be phased in over at least a 3 year period beginning with employers' contributions starting at 1%, then increasing to 2% and finally 3%.
It will also be unlawful for employers to 'induce' a worker to opt-out of the new pension scheme by for example, offering a company car or extra holiday in return for the worker opting out.
Changes announced last week to the new pension system include:-
- Pay reference periods – the Department for Work and Pensions will work with the Pensions Regulator to produce guidance for employers on the triggers for auto-enrolment and the use of pay reference periods to determine whether workers qualify and whether existing defined contribution pension schemes satisfy the statutory quality test.
- Re-enrolment – An employer will now be able to choose a date within one month of the three year anniversary of its staging date whereby they are required to automatically re-enrol eligible workers who opted out on auto-enrolment.
- Postponement – Employers will now not be able to postpone auto-enrolment for a worker who has already been postponed in the preceding 12 months. This is to prevent workers on a series of short-term contracts from repeatedly postponing auto-enrolment thereby never joining a pension scheme.
- Reporting obligations – Notification requirements have been reduced, for example, employers will no longer be obliged to tell the Pensions Regulator about the number of opt-outs and voluntary joiners.
- Record- keeping – Employers and schemes will no longer be required to keep duplicate sets of records.
- Interest on late contributions – The discretionary power for the Regulator to require an employer to pay interest on late contributions has increased from 4.9% to 4.2% plus RPI.
- Penalties – The flat rate fixed penalty notice amount will be reduced from £500 to £400.
- Inducements – The Regulator will be able to look back four years (not 12 months as initially prescribed) when investigating possible inducements by employers for workers to opt-out of pension schemes.
Finally in a separate move the Personal Accounts Delivery Authority has been renamed the National Employment Savings Trust (NEST).