Workplace pension reform emerged this week relatively unscathed from a government review of the policy (Making automatic enrolment work: A review for the DWP). The DWP review has approved the main requirements/features of workplace pension reform, with two main exceptions:
Level of salary for qualifying jobholders will change from £5,035 to £7,475
Under workplace pension reform the employer has a duty to contribute to a pension scheme for all its eligible jobholders. Prior to the DWP review an eligible jobholder was defined as a worker, working under a contract of service, aged between 22 and State Pension Age with eligible earnings of above £5,035 (in 2006/07 terms - equivalent to £5,732 in 2010/11 terms).
The only change to this definition is that the threshold for the automatic enrolment duty will now be set at £7,475 (aligned with the threshold for paying tax in 2011/12 terms, as set out in the DWP review). This threshold will change in line with the income tax personal allowance.
It is important to note, however, that the duty to contribute will continue to apply to jobholders' eligible earnings, which remains defined as qualifying earnings (which, by 2012, we estimate will be between £5,750 and £38,000).
Therefore, if a worker earns above £7,475 (and meets the other criteria to be an eligible jobholder) their employer will ultimately have to provide contributions of at least 3% of their eligible earnings between £5,035 and £33,540 (in 2006/07 terms).
In addition a jobholder earning between the pension contribution threshold of £5,035 and the automatic enrolment threshold of £7,475 can choose to opt in to pension saving, and such jobholders will receive the employer contribution.
This will remove the employer's obligation to provide pensions to a number of lower earning workers, especially those working part-time in the services industry. Auto-enrolling fewer staff should therefore be cheaper, partly because of reduced administration (see also the effect of a three-month waiting period, below).
All employers can now use a three-month waiting period before a jobholder needs to be automatically enrolled
Previously, the employer duty to enrol a jobholder and contribute to their pension was effective from the first day of a jobholder either:
- starting work (if eligible); or
- on them becoming eligible (e.g. if they turn 22 or their earnings rise to bring them up to the minimum threshold).
Under the DWP review all employers will be able to choose to apply a three-month waiting period before the duty to automatically enrol eligible jobholders starts.
Originally a three-month waiting period could only be used if the employer offered a 'quality' pension scheme (i.e. had an employer contribution level of at least 6% compared to the 3% minimum employer contribution required under workplace pension reform). The specific provision for 'quality' pension schemes has been removed by the DWP review.
It is important to note, however, that an eligible jobholder will be given the ability to request earlier membership of the pension scheme. The employer will then be obliged to enrol them from the date of their application and start contributing from this point.
Practically, this promises to be the biggest help to employers as a result of the DWP review unless a significant number of jobholders decide to opt in earlier. The provision of a three-month period of grace may minimise the administrative burden that was anticipated in having to enrol eligible jobholders on day one.
Some other recommendations have been made, including:
- Giving employers flexibility around the date they re-enrol employees who have previously opted out. This should be achieved by allowing a six month window for re-enrolment.
- The largest employers who will commence enrolment in October and November 2012 should have the option of automatically enrolling ahead of the planned start date. The DWP review has recommended this be from as early as July 2012.
- That the National Employment Savings Trust's (NEST) contribution cap (which currently restricts contributions made to NEST to £3,600 per year for each member) should be removed in 2017.
- Ensuring the effective and simple portability of individual's pension pots as they move between employers should be reviewed by the government.
- The Government should ensure there are effective communications to individuals, employers (especially smaller employers) and the pensions industry.
All the other elements of workplace pension reform have been retained following the DWP review and remain as set out in our previous alerts. These alerts are highlighted in our list of actions for employers and pension scheme trustees to consider.