Time to plan automatic enrolment implementation
Many companies still need to consider how they will implement automatic enrolment and, with most employers required to become automatic enrolment compliant in 2012/13, now is the time for employers to start taking action. In this “Countdown to Automatic Enrolment”, which is based upon the Pensions Act 2008 (as amended by the Pensions Bill 2011), we consider how employers and trustees can start to plan automatic enrolment implementation.
In addition, our recent briefing “Auto‑Enrolment – where are we now?” gives an update on the status of the revisions to the automatic enrolment legislation which is currently completing its passage through Parliament and considers the key unresolved issues surrounding the auto-enrolment regime. The Pensions Regulator has issued guidance in this area (which will be updated once the Pensions Bill 2011 is enacted).
Automatic enrolment implementation steps
Rather than wait for the Pension Regulator’s reminder letters1, which will be sent to all employers in due course, we recommend taking the following steps now:
Step 1: Each employer to identify their staging date
Each employer should identify its likely staging date for implementing the new regime, and potential automatic enrolment issues which may be relevant so that they can work with advisers to plan and draw up an implementation timetable.
An employer’s staging date is based on PAYE size as at 1 April 2012. A table of PAYE sizes and the applicable corresponding staging date can be found on line. A new employer set up after 1 April 2012 and before 1 April 2016 will have a staging date between March and April 2016.
There is scope for an employer to bring forward their staging date. An employer with a staging date of October or November 2012 may bring it forward up to July 2012 and an employer with a staging date of January 2013 or later may opt to bring forward their date up to October 2012.
The employer may find it advantageous to bring forward their staging date; for example to align that date with either another key date for the company (eg the start of the financial year or the start of the flexible benefits year) or, where the employer is one of several in a group each with different staging dates, to ensure there is one staging date applied across the group. The disadvantage of bringing forward the staging date is that it both brings forward the costs of automatic enrolment and reduces the implementation period.
Rather than wait until 1 April 2012, we suggest that each employer works out their probable staging date now based upon existing PAYE information (factoring in any known events which are expected to increase or decrease PAYE size and, therefore, potentially change their staging date) and uses this information (in conjunction with the steps below) to draw up a plan for implementing automatic enrolment, taking account of issues of particular relevant to them. Procedures should be put in place to keep this plan under review, picking up changes to corporate activity, the workforce etc. which may affect the timing and/or structure of the implementation of automatic enrolment.
Peak demand for advice and input from advisers, external payroll providers etc will be in 2012/13 when most employers will need to implement automatic enrolment. Therefore, early planning is essential.
Where an employer has an open defined benefits scheme or hybrid scheme, he may be able to delay automatic enrolment for a transitional four period commencing from 2012 if the scheme meets set conditions2. This transitional period is lost (bringing forward the auto-enrolment implementation date) if any of these conditions cease to apply (eg the schemes are closed to future accrual).
Step 2: Assess the full scale of the impact of auto-enrolment
Each employer should review its workforce, identifying the workers who must be automatically enrolled, the workers who may choose to be enrolled, and others who must be given access to a pension. The employer will need to contribute towards the pensions of those in the first two categories.
Identifying different types of “jobholder” and “worker”
The Pensions Act 2008 defines most workers as “jobholders”. A “jobholder” is a worker who: (i) works/ordinarily works in Great Britain under a contract; (ii) is aged at least 16 but less than 75; and (iii) is paid “qualifying earnings” (more than £5,035 but not more than £33,540) in the relevant pay reference period. Where a jobholder is:
- aged at least 22 and under state pension age; and
- paid qualifying earnings by his employer in the relevant pay reference period that is above the automatic enrolment trigger of £7,475;
he must be automatically enrolled by his employer into a qualifying scheme (ie one that meets the required statutory standards) unless he is already a member of such a scheme or he chooses to opt-out: We refer to a jobholder who meets criteria (a) and (b) above as an “eligible jobholder”.
Where a jobholder is not an “eligible jobholder”, either because he fails to meet criterion (a) or (b) above, he is not entitled to be automatically enrolled. Instead he may, by serving notice, require the employer to enrol him into a qualifying scheme (assuming he is not already a member of such a scheme already).
Therefore, all jobholders are entitled to enrolment into a scheme meeting the same minimum statutory standards, the difference lies in who initiates enrolment: the employer in the case of eligible jobholders and the jobholder in other cases. The difficulty for the employer in budgeting for these changes is that he cannot be certain how many eligible jobholders will opt-out of automatic enrolment or how many other jobholders will choose to opt-in.
In addition to being able to distinguish between the types of jobholder above, each employer will need to identify those workers who are entitled, on serving notice upon their employer, to access to a pension scheme (though no employer contribution). Such an “entitled worker” will be a worker who is aged at least 16 and under 75, working/ordinarily working in Great Britain under a contract, and has qualifying earnings payable by the employer in the relevant pay reference period that are below the lower qualifying earnings limit (£5,035).
Automatic enrolment obligations in respect of secondees and agency workers
Secondees and agency workers, working for three months3 or more, will need to be automatically enrolled if they are eligible jobholders. In both cases there may be a question as to who is the “employer” with the automatic enrolment obligation. With secondments, the secondee may have a relevant contract of employment with both the “seconding” employer and the company he is seconded to. There may also be cross-jurisdictional issues affecting the provisions of pension benefits. Companies must ensure that agency agreements make the agency responsible for paying the workers so that the agency has the automatic enrolment obligation.
In both cases, all existing agreements should be reviewed and all future agreements prepared with automatic enrolment in mind.
Step 3: Review current pension arrangements and plan for changes
Each employer needs to review whether an existing scheme(s) and/or a new one is the most appropriate vehicle for automatic enrolment compliance, taking account of scheme design issues.
The employer needs to cross-check which members of the workforce identified above are in his existing scheme and the extent to which that scheme meets the requirements of the new enrolment regime both for existing members and any new members. Having done this, the employer can decide whether to use that existing scheme (amended where required for automatic enrolment compliance), a new scheme (whether a private scheme or NEST4), or a combination of arrangements depending upon the circumstances.
Checking for scheme compliance, scheme rule amendments
Amending the schemes rules to ensure that the scheme is compliant with the automatic enrolment regime is likely to require trustee consent but may also, where undertaking scheme restructuring, involve a “listed change”5 requiring a 60 day employee consultation under pension consultation legislation prior to the change being implemented. Scheme restructuring may arise, for example, where an employer decides not to use his existing scheme as the pensions vehicle for meeting his automatic enrolment obligations and instead use an alternative scheme for that purpose. Sufficient time needs to be built in to the automatic enrolment implementation time plan to account for this.
Checking contractual agreements – need for consent and/or further consultation
An employer review of pension provision for automatic enrolment purposes should be accompanied by a review of employment contracts to make sure what is being proposed is not in breach of (or inconsistent with) those agreements. If it is, there may be a need to agree changes to those employment contracts with workers.
Pre-existing consultation/collective bargaining agreements with unions/employee representatives (if any) need to be considered and complied with.
Benefit design issues to be considered
- Review of existing and future benefit design proposals
In addition to making scheme designed changes specifically for automatic enrolment, the employer will also need to cross-check current and future proposed scheme design changes arising for other reasons for automatic enrolment compliance. For example where a defined benefit or hybrid scheme is closed to future accrual:
- before the employer’s staging date – this will prevent him from choosing a four year transitional period (see above);
- after the employer’s staging period – this will bring any four year transitional period to an end, triggering the requirement to implement automatic enrolment.
- The Government’s abolition of defined contribution scheme contracting-out (April 2012)
This will result in the ending of the national insurance rebate and reduce contributions paid into the defined contribution scheme which, in turn means the employer will need to check contribution levels have not fallen below the auto‑enrolment required minimum levels.
- Flexible Benefits
Many employers offer a flexible benefit arrangement under which workers select, based upon lifestyle choices, which benefits they wish to receive in a given year. Such arrangements need to be reviewed to ensure they will be compliant with automatic enrolment requirements. The following issues may arise:
- The pension scheme must meet the requirements of automatic enrolment (eg in terms of contributions payable and no member choice needing to be made to enable automatic enrolment).
- Depending on how the arrangements are structured, there may be an argument that the non-pension benefits breach the automatic enrolment requirements by constituting an inducement to opt-out of pensions.
- Flexible benefit arrangements must satisfy the requirements set by HM Revenue & Customs. For example, other than where a “life style” change arises, benefits should be selected once a year. This may not be compatible with automatic enrolment staging dates.
- Check terms of salary sacrifice arrangements
Compulsory salary sacrifice arrangements will be incompatible with automatic enrolment because they require member consent before scheme membership is established. Terms of salary sacrifice need to be reviewed and the arrangement restructured, as appropriate, in plenty of time before the staging date.
- Agreeing terms with personal pension/group personal pension providers for auto-enrolment purposes
The Pensions Act 2008 requires:
- An agreement to be in place between the employer and the scheme provider under which the employer must make minimum contributions6 on behalf of the jobholder in the relevant pay reference period.
- An agreement between the individual and the scheme provider for the former to meet the “shortfall” between the employer’s contributions and the maximum contributions (8% of qualifying earnings by 2017). Requiring a worker to agree to this before enrolling him is likely to breach the automatic enrolment requirements.
Such agreements will not already exist with personal pension arrangements.
Step 4: Put key support structures in place (administration, payroll, advisers, and IT systems)
It is important to manage the implementation of automatic enrolment by ensuring sufficient resources are dedicated to it.
Team to implement auto-enrolment and training
Auto-enrolment will impact across a number of key business areas. Employers should identify an appropriate internal team responsible for implementation of automatic enrolment, and consider what training and advice they may require from external advisers.
Payroll systems and administration compliance
Payroll and pension scheme administration systems will need to be reviewed with the appropriate external providers to ensure that these are able to cope with the requirements of the new automatic enrolment regime, such as deduction and payment of contributions, issuing and processing of prescribed notices, registration with the Pensions Regulator, self-certification of scheme compliance and maintaining and updating records. With the exception of certain opt-out notices, which must be retained for at least four years, most information relating to jobholders, their scheme membership etc must be retained for a six year period. Ideally such systems should be tested (in so far as this is practicable) before they go live.
HR issues – recruitment
HR interview and recruitment processes should be reviewed to ensure they do not breach the pre-recruitment conduct requirements of the automatic enrolment legislation (eg not asking interviewees about whether they will opt out of automatic enrolment).
Step 5: Plan communications with workers
Each employer needs to consider how and when to communicate information about the automatic enrolment regime to their workforce, tailoring the message according to the category of worker identified in step 2.
Employers need to consider the best method for informing each category of worker identified at step 2 above about the new automatic enrolment regime and how (and when) it will affect them. Some of this information is prescribed and must be set out in a set form (eg certain notices). In addition, only pension schemes (not employers) are permitted to provide certain information (eg the enrolment opt-out notices for those eligible jobholders who wish to “opt out” of automatic enrolment).
If they are:
- already members of a qualifying scheme, they should be provided with information about the scheme
- subject to a transitional period for a defined benefit scheme or a hybrid scheme, information about the deferment of automatic enrolment under the transitional arrangements;
- being automatically enrolled, information about what automatic enrolment is, how it affects them and that they may choose to opt-out (without inducing them to opt-out, which is prohibited).
Jobholders not entitled to be automatically enrolled
They should be provided with information about their right to opt to join the scheme and contributions payable.
Workers entitled to pension membership
They should be provided with information informing them that they may join the scheme.
Other considerations when preparing an implementation plan
Three further considerations when preparing an implementation plan are corporate activity, the role of trustees and preserving enhanced protection. Other considerations may be applicable depending upon the employer’s particular circumstances.
Auto-enrolment should be borne in mind in the context of any significant corporate activity, such as restructuring, sales and acquisitions. For example, the acquisition of a new business (or company) may mean not only due diligence to check for auto-enrolment compliance but also additional costs of enrolling new workers to meet those requirements.
Role of occupational pension scheme trustees
While the employer should take the initiative in implementing automatic enrolment, trustees should familiarise themselves with the key requirements and ask the employer how (and when) he intends to implement it if this information has not been provided already. Where the employer is proposing changes to the pension scheme, the trustees should consider the implications and timings of such changes.
Workers who have registered for enhanced protection under the Finance Act 2004
These workers may inadvertently lose that tax advantageous status if they do not opt out of automatic enrolment. While the employer should draw this to the attention of workers, this must be done in a manner which could not be interpreted as either inducing the worker to opt-out (a breach of the employer’s automatic enrolment duties) or providing financial advice to the worker.