From 1 October 2012, all UK employers must automatically enrol “eligible jobholders” in a pension scheme. These eligible jobholders will be free to opt out of the scheme once they have joined, but must be re-enrolled every three years. While the eligible jobholders remain active members, their employers will be required to pay a minimum level of pension contributions. Companies can meet their legal obligations by putting suitable pension arrangements in place and automatically enrolling particular categories of employees.
What are Suitable Pension Arrangements?
To fulfil their duty to auto-enrol, employers must automatically enrol eligible jobholders in:
- NEST (National Employment Savings Trust), which is a central scheme set up by the Government; or
- an alternative occupational or personal pension scheme that counts as a qualifying scheme.
A “qualifying scheme” is one that satisfies the quality requirements or the self-certification requirements.
Who Do I Enrol?
Eligible jobholders: All “eligible jobholders” must be automatically enrolled in an automatic enrolment scheme. This will include anyone who:
- works or ordinarily works in the UK under a contract (including temporary workers, agency workers and directors employed under a service contract);
- is aged at least 22 and less than state pension age; and
- earns the equivalent of or more than the Earnings Trigger for income tax (i.e. £7,475 in 2011/12).
Contributions will be paid on the “qualifying earnings” of the eligible jobholders; these include earnings that fall between the Primary Threshold (£7,225 for 2011/12) and the Upper Earnings Limit (£42,475 for 2011/12). “Qualifying earnings” are defined broadly to include basic salary, overtime payments, bonuses, commission and statutory pay.
Non-eligible jobholders: An individual who is aged under 22, over state pension age or who earns less than the Earnings Trigger (but more than the qualifying earnings threshold) is entitled to opt into an automatic enrolment scheme and must be informed of this right. He must make and receive the minimum employee and employer contributions.
Entitled workers: An individual who earns less than the qualifying earnings threshold is entitled to opt into a pension scheme. However, it does not need to be an automatic enrolment scheme and therefore there is no requirement to pay contributions. Again, individuals in this category must be informed of their rights.
What are the Quality Requirements?
Broadly, for money purchase schemes, the employer must make contributions of at least 3% of qualifying earnings and the employee must make contributions of at least 5% of qualifying earnings (including 1% tax relief).
Defined benefit schemes must meet a “test scheme standard” under which the pensions are broadly equivalent to those which would be provided under a test scheme.
What are Self-Certification Requirements?
An employer can self-certify a scheme if it provides:
- contributions of at least 9% of pensionable pay, including 4% employer contributions; or
- contributions of at least 8% of pensionable pay, including 3% employer contributions, provided at least 85% of the total pay bill is pensionable; or
- contributions of at least 7% of pensionable pay, including 3% employer contributions, provided all pay is pensionable.
We believe self-certification will be widely used because most employers base contributions on a member’s basic salary or some other definition of pensionable earnings, rather than the qualifying earnings band.
When do I Have to Comply?
The obligation to auto-enrol starts on 1 October 2012. Initially, it will apply to organisations with over 120,000 or more employees. There is a phased introduction over four years.
The obligation to contribute will be phased in over five years. The employer will only contribute 1% in years 1 to 4, 2% in year 5 and 3% in year 6.
The Pensions Regulator will contact employers at least twice in advance of their staging date. Employers may delay enrolment for up to three months from the date eligible jobholders meet the age and earnings criteria.
What Must I Avoid? - Prohibited Recruitment Conduct, Inducements and Sanctions
- ask job applicants at interview if they plan to opt out of auto-enrolment;
- offer financial inducements to their jobholders to opt out; or
- treat a worker unfairly or put them at a disadvantage because of auto-enrolment.
The Pensions Regulator has responsibility for monitoring the auto-enrolment requirements and has the ability to issue enforcement notices and penalty notices. Fines for non-compliance could be £10,000 maximum a day for employers with 500 or more workers.