In this October edition of the Pensions E-Bulletin, we have included an overview of the auto-enrolment requirements to assist in the run up to its introduction from October next year. We also look briefly at the Court of Appeal’s decision in the Nortel case.
Auto-enrolment: brief guide
Auto-enrolment will require employers to automatically enrol most of their employees into a qualifying pension scheme and contribute to it. Expected to introduce an additional 10 million people to pension saving, the new requirements are being phased in between October 2012 and September 2016, with the changes hitting the largest employers first.
Employees who are eligible for auto-enrolment are employees who: (i) are over age 22 and have not reached State Pension Age; (ii) earn more than the minimum earnings threshold (£7,475 in 2011/12); and (iii) work or ordinarily work in the UK. In addition, most employees who do not qualify for auto-enrolment may elect to join their employer’s scheme and employers will have to contribute in respect of them.
Qualifying pension scheme
Employers have to enrol all eligible employees into a qualifying workplace pension scheme, with no decision being required on the part of the employee. Employers can use their existing pension scheme to fulfil their obligations provided it meets the minimum requirements of the new regime. Broadly, the employer must either:
- make a minimum contribution (see below) to a defined contribution scheme or to the National Employment Savings Trust (NEST); or
- offer membership of a defined benefit scheme or hybrid scheme which meets certain minimum requirements.
Minimum contribution levels will be phased in gradually from October 2012 to October 2017, with total minimum contributions rising from two percent to eight percent of “qualifying earnings” (currently earnings between £5,035 and £33,540) and minimum employer contributions rising from one percent to three percent.
Enrolment and opting-out
Eligible employees must be auto-enrolled from their employer’s implementation date (their “staging date”) subject to an option for employers to delay joining for a three month waiting period. Employees will, however, be entitled to join early and start saving during this waiting period.
Employees can opt out at any time after they have been auto-enrolled but must not be encouraged or incentivised to do so. Employees who opt out during the first month will be treated as if they had never been members and receive a refund of any contributions paid. Employees who opt-out are, however, subject to re-enrolment by their employer approximately every three years.
Important safeguards will protect the right of employees to be enrolled into a qualifying scheme. Employers must comply with this aspect of the new regime from introduction in 2012, regardless of an employer’s individual staging date.
An employer must not take any action (or fail to take action) that results in an employee ceasing to be an active member of a qualifying scheme or which results in a scheme ceasing to be a qualifying scheme. If any such action is taken, the affected employee(s) should be re-enrolled into an alternative scheme within one month.
Employers are prohibited from inducing an employee to opt out of pension scheme membership, for example, by offering higher salaries or bonus payments in return for opting out. Employers must be careful that any communication materials issued to employees do not breach this requirement and imply in any way that employees will receive more favourable treatment if the employee opts out. While many inducement cases will be clear cut, certain situations such as flexible benefits packages, where employees are offered pension scheme membership as one of the options in their overall employment benefits package are less clear and employers should seek advice to ensure that any such package does not breach the inducement legislation.
As well as the protections in place for current employees, employers must also be careful when recruiting and must not make any statement or ask any question as part of the recruitment process which indicates in any way that the success of a job application may be dependent on whether or not an applicant might opt out of auto-enrolment.
Action for employers
Employers need to take action now to ensure that they are prepared for their go-live date. If not already known, employers should check their staging date, assess their workforce to determine what action will be required and then consider how to comply: whether to use an existing scheme, set up a new scheme or make use of NEST, or indeed a combination of approaches. If using an existing scheme, rule amendments may be required to become a qualifying scheme.
Office systems will need to be in place to implement the new arrangements and the increased costs (both in contributions and administration costs) will have to be factored into future business plans. Member communications will also have to be considered in good time as employers are obliged to provide certain information to their employees (including non-eligible employees and those who are already members of a qualifying scheme) within specified time limits.
Court of Appeal upholds High Court’s decision in Nortel
The Court of Appeal has unanimously upheld the High Court’s decision that liability arising from a financial support direction issued by the Pensions Regulator after insolvency has started should be treated as an expense of the insolvency and therefore have a ‘super-priority’ over other creditors. This decision is important because of the potential impact it could have on the rescue culture in the UK. It is thought that the case will be appealed to the Supreme Court and, although we understand that the Government is considering the issue, it is not anticipated that it will legislate quickly on this point.