What is happening in 2012?
As a reminder, the Pensions Act 2008 (the Act) legislates for the latest in a series of policy reforms aimed at challenging Britain's looming demographic crisis. Put simply, too many people save too little (or nothing at all) to provide for themselves in retirement. With this reform the Government is trying to nudge people into saving more in their pensions. The Act:
- details the employer duties - requiring all employers to automatically enrol 'eligible jobholders' into a 'qualifying workplace pension arrangement' and to pay minimum contributions and defines:
- 'eligible jobholders' as workers, in Great Britain, under contract, aged between 22 and State Pension Age who earn more than the lower threshold of 'qualifying earnings' (see below)
- 'qualifying workplace pension arrangements' as any arrangements (including group personal pensions (GPP), stakeholders, group self invested personal pensions (SIPP) or an occupational pension scheme) that meets a minimum standard for contributions or benefits
- 'qualifying earnings' as earnings between £5,035 and £33,540 (in 2006/07 terms - this figure will increase year on year)), including bonuses, overtime and obviously statutory maternity, paternity and adoption pay
- provides that minimum employer contributions are to be phased in, probably over four years, but will eventually require 3% employer contributions (along with 4% of the employee's qualifying earnings and 1% provided by the Government through tax relief).
Much of the Act is already in force but some of the biggest changes for employers will come from 2012 with the onset of employer duties and the personal accounts scheme becoming fully operational via new implementing regulations. It is the impact of these new measures which we explore in this alert.
Impact on employers
Much of the cost and administrative burden associated with the new regime will fall on employers. From fulfilling the employer duty to make minimum pension contributions to automatically enrolling employees into qualifying pension schemes, it is employers who will face a new HR landscape from 2012. And it is employers who will suffer the financial penalties of not complying under a wide-ranging enforcement regime led by the Pensions Regulator.
The employer duty will be two-fold:
- to enrol all eligible jobholders into a qualifying workplace pension arrangement; and
- to contribute at least 3% of the jobholders' qualifying earnings into their pension.
This raises some important issues that employers will want to consider in advance of 2012. Below we answer some of the key questions that employers have been asking in respect of the pension reforms.
1.When will my company be liable for these employer duties?
Employer duties come into effect on 1 October 2012, but the key duty of enrolling all eligible jobholders will be phased in over the three years following that date. Larger employers will be required to comply first, and all employers will be given a 'staging date' designating from when they will be required to comply.
The consultation envisages dividing employers into 30 groups according to the size of their workforce and then extending the enrolment duty every month from 1 October 2012.
2.How much will my company have to contribute?
There will be an initial transitional period which will see minimum employer and employee contributions phased in over a period of five years. In the first three years total contributions must total 2%, with employers required to pay 1%. In the fourth year total contributions must be 5% with employers paying 2%. The full level of contributions (with 8% total contributions and employers paying 3%) will start from year five.
After this initial period employers will be required to contribute at least 3% of each jobholder's qualifying earnings (i.e. on earnings between £5,035 and £33,540 (in 2006/07 terms). The total contributions at that time from employer, employee and the Government (in terms of tax relief) will be 8% of each jobholder's qualifying earnings.
3.How much is this going to cost in total?
There will be higher costs for all employers attributable to both pension contributions and administration. Depending on the make up of the workforce it could add up to 4% (including additional administration costs) to the HR bill. Some industries and employers who have large numbers of low to moderate earners, part-time employees and temporary, seasonal or flexible workers could face a significant rise in their labour costs and suffer the resulting hit on the bottom line.
4.How should I handle the workforce when their contributions are taken from their pay?
Employers may face a barrage of queries from employees who see their take home pay decrease after auto-enrolment. They will have to be careful to ensure that the explanation given to employees does not fall foul of the prohibition on inducing an opt-out of auto-enrolment (see section below on auto-enrolment). Many employers will have survived the credit crunch and economic down turn by managing wage costs, delaying or cancelling annual increases in salaries and trimming benefits. The additional costs from fulfilling their employer duties may prolong the wait for future wage increases with a knock-on effect on employee morale.
Employers may want to handle this by highlighting the advantages of saving in the pension scheme, especially given the 'free money' provided by employer and Government contributions. It may also be sold as part of a broader and more comprehensive benefits package.
5.What additional administration will there be?
Employers will be required to register all eligible jobholders with the Personal Accounts Trustee Board. Employers will be sent a "call of duty" letter informing them of their statutory duty to do this.
Employers will then have to ensure that jobholders are automatically enrolled into a qualifying pension scheme within one month of the jobholder's first day at work. They will also have to handle any opt outs and refunds of contributions for those who do opt out.
1.Will we have to use the personal account scheme?
No. Employers are free to discharge their duty in whatever qualifying workplace arrangement they choose. The Government is simply setting up a personal account scheme (that will be obliged to accept all employers and eligible employees) to ensure that there is always an option available for employers to discharge their duties.
Employers are therefore free to use existing or new arrangements, including defined contribution or benefit schemes, GPPs and SIPPs, occupational pension schemes or stakeholder schemes, as long as these schemes meet the qualifying thresholds. Some things to consider include:
- Are the contribution levels high enough to qualify?
- Do you offer matched contributions? If so you will need a new 'floor' of 4% matching contributions (to match the minimum individual contributions). This may also require a change to the employee's terms and conditions which will need to be managed carefully to avoid legal and industrial relations issues.
- Does the scheme require information, opt-ins or decisions from prospective members before they join? A qualifying workplace arrangement must have no such bars to entry.
- Are there minimum earnings, service or age criteria which are incompatible with auto-enrolment?
We anticipate that most existing schemes will need to be tailored in some way before they can be used to discharge employers' duties.
2.How much time will we have to automatically enrol employees?
The Department for Work and Pensions' (DWP) response to draft regulations on auto-enrolment states that employers will now have one month to enrol employees, starting from their first day in employment. Although this may still be tight in practice, it is a useful concession from the originally suggested 14- day timeframe. The employer also has to provide information and ensure contributions are collected within similarly tight timeframes. In addition, contributions accrue from the date the employee is automatically enrolled and must be deducted on the first occasion an individual is paid after that date.
3.How will we have to process opt-outs?
Another administratively burdensome process surrounds the processing of employees who choose to opt out of pension provision and the consequential refund of any contributions they have already made. Jobholders have a 30-day opt out period that runs from the later of the date they become an active member of the scheme or the date they receive the enrolment information. Jobholders must opt out on a specific form provided by the scheme in which they have been enrolled - the form cannot come from the employer. The jobholder must then give the notice to their employer.
It is worth nothing that employees can only opt out once they have become an active member of the scheme. The current draft regulations do not permit a pre-opt out by a prospective employee.
4.And what about refunds? How will they be handled?
If a jobholder opts out during the 30-day opt out period, any contributions which have been deducted will be returned from the scheme to the employer and then the employer will refund the employee. This must be done by the later of 21 days after the opt out notice is given to the employer or by the second pay day after the notice is given to the employer.
5.Do I only have to act in respect of eligible jobholders?
No. While the duty to automatically enrol only applies in respect of eligible jobholders, the consultation states that those jobholders who fall outside of this definition would be able to opt in and enjoy the benefits of compulsory employer contributions. The ability to opt in will be available to those aged between 16 and 22, those between state pension age and 75 and those earning less than the qualifying earnings threshold. Employers will be required to tell these people that they have a right to opt in.
6.I've heard that we will have to automatically re-enrol employees who have opted out - is this true?
Unfortunately, yes. Employers will be required to re-enrol their eligible workforce every three years, following the same principles as automatic enrolment. To make this slightly easier, employers will be able to conduct re-enrolment for their entire workforce on a single date (such as the anniversary of the employer's duties commencing) rather than being required to operate a rolling series of individual anniversaries.
1.How is the Government planning to enforce the employer duties?
The Act envisages a compliance regime led by the Pensions Regulator, supported by the DWP and HM Revenue & Customs (HMRC). The Regulator will use data from various sources to identify non-compliance and its enforcement regime will be backed by the ability to issue fines.
The consultation states that the aim of the compliance regime is to be:
- effective - the Regulator will use the 'risk-based approach' it already applies to pension scheme regulation, targeting resources on those employers who present the biggest risks of non-compliance. It will also provide extensive information for employers to help them to comply
- efficient - the Regulator will use HMRC and pension scheme data to minimise the burden on employers to provide information
- graduated - the Regulator will employ a series of escalating enforcement steps to address non-compliance, starting with formal and informal notices and escalating through penalties to higher fines and criminal prosecution
- proportionate, risk-based and simple - the consultation envisages a 'business-friendly' role for the Regulator without imposing undue administrative burdens.
2.Will we be expected to interact with the Regulator?
Employers will be required to register with the Regulator, providing information about how they have met their employer duties. Employers will have to register within nine weeks of their staging date, and the DWP is proposing that employers re-register every three years thereafter.
3.How will the Pensions Regulator know if we are not complying?
The Pensions Regulator has stated that they want employer duties and the enforcement regime to be treated with the same seriousness as HMRC and compliance with the tax system. Various methods will be employed to locate employers who have not registered, including via the PAYE system, data from HMRC, VAT records and the National Insurance Contributions Office. At the onset of employer duties, employers will be sent a "call of duty" letter requesting that they register for the scheme and those who fail to do so within three months will face penalties.
4.What penalties would we face if we didn't comply?
The full enforcement regime is outlined in the consultation and currently features fixed penalties (of £500) and, if the breach is not remedied, escalating penalties of between £50 and £10,000 per day depending on the number of employees the employer has (companies with 500 or more employees face fines of £10,000 per day). In the case of repeated and serious non-compliance there may be criminal sanctions.
5.Will we be able to offer employees higher salaries to opt out of pension provision?
No! Employers will not be able to offer financial (or any other) inducements to their employees to opt out of membership of workplace pension schemes once their employer duties commence. In addition, employers will not be able to ask job applicants whether they plan to opt out of auto-enrolment. The Regulator will be able to issue compliance notices in respect of any such breaches.
In addition the Act confers various employment protection rights on workers (note - this only applies to workers, not all jobholders) who will be able to enforce their rights through the employment tribunals if they suffer a detriment.