In October 2012, the ground-breaking automatic pensions enrolment legislation began to come into effect. Under the legislation, all employers will have to make arrangements for their workers in the UK to be automatically enrolled into a pension scheme. The intention is to increase the level of pension saving in the UK, and it means that, for the first time, employers are required to contribute towards the pension saving of their workers.
The legislation is being phased in over time, with the largest employers being required to comply first. Automatic enrolment will be in force for all employers with more than 50 workers by April 2015 and it is important for employers to start planning – if they have not already done so – as to how to implement the new requirements. Even employers with existing pension schemes may need to amend their schemes to be compliant, and employment documentation and HR processes will need to be reviewed.
All businesses, other than start-ups established during the phasing-in period, will have come within the ambit of the legislation by 1 April 2017.
Overview of the legislation
Who does automatic enrolment apply to?
All employers are affected by automatic enrolment: unlike under the stakeholder pension regime, there is no exemption for employers with fewer than five employees. Employers will have to automatically enrol “eligible jobholders” into a pension scheme.
Jobholders are workers who:
- Work or ordinarily work in the United Kingdom
- Are aged between 16 and 75
- Have “qualifying earnings” (between GBP 5,668 and GBP 41,450 for 2013/14)
Eligible jobholders are jobholders who are between the age of 22 and the state pension age and who earn more than the “earnings trigger” – this is set at the PAYE threshold (GBP 9,440) and is reviewed annually by the Secretary of State. Eligible jobholders have to be automatically enrolled into a pension scheme.
Jobholders who are under 22 or between state pension age and 75, or who earn below the earnings trigger, do not have to be automatically enrolled. However, these “non-eligible jobholders” do have the right to join a pension scheme and to receive the benefit of employer contributions on the same basis as eligible jobholders.
Workers who earn less than the threshold for qualifying earnings are “entitled workers”. They can require their employer to allow them to join a registered pension scheme, but the employer is not required to make any contributions in respect of them.
What do employers have to do?
Employers need to automatically enrol eligible jobholders into an appropriate pension scheme. Employers will need to:
- Assess their workforce to identify whether workers are eligible jobholders, non-eligible jobholders or entitled workers; and
- Identify an “automatic enrolment scheme” (or schemes) into which eligible jobholders will be automatically enrolled A key part of the legislation is that enrolment must be truly automatic: the jobholder is not required to do anything – not even sign an application form – in order to join the scheme. The employer’s duty is to ensure that members are enrolled into the scheme. This means that employers will have to review their HR and payroll processes to ensure that they comply with automatic enrolment.
What are “qualifying earnings”?
“Qualifying earnings” are earnings which fall into a specified band, periodically adjusted by the Secretary of State. The qualifying earnings band currently corresponds with the lower and upper limits for National Insurance contributions (GBP 5,668 - GBP 41,450 for 2013/2014).
The earnings to be taken into account are gross earnings – including bonuses and overtime – as well as statutory sick pay and statutory maternity, paternity and adoption pay.
What type of schemes can be automatic enrolment schemes?
A pension scheme which is established in the UK or the EEA and which satisfies a quality requirement can be designated as an automatic enrolment scheme by an employer. It will be possible to have a different automatic enrolment scheme in relation to different classes of jobholder (subject to discrimination legislation).
The quality requirements are as follows.
For money purchase schemes
An occupational or personal pension scheme to which:
- The employer contributes at least 3 per cent of qualifying earnings; and
- Total contributions of 8 per cent of qualifying earnings are paid
However, many employers contribute to money purchase schemes based on a percentage of total basic salary – whereas qualifying earnings include bonuses and overtime. To avoid the administrative complexity of having to test contributions for all enrolled employees against the qualifying earnings band, there will be provision allowing employers to self-certify that their scheme meets the quality requirement. This will require confirmation that the scheme satisfies, from the first pound of earnings, at least one of the following three contribution options:
Click here to see table.
All of the rates of contribution are subject to the transitional periods (see below).
The same option does not have to be applied to all eligible jobholders. An employer can self-certify even where there is a cap on pensionable pay, provided that those affected will receive at least minimum contributions on their band earnings.
Self-certification certificates will be valid for up to 18 months. This should help employers to align the renewal of certificates with automatic re-enrolment dates (see below).
Employers with money purchase schemes which are mainly administered in the EEA will also be able to self-certify.
For defined benefit schemes
- Contracted-out final salary schemes. Most final salary schemes will be contracted-out at the moment, but it remains to be seen how the planned abolition of contracting-out in 2016 will affect this criterion
- Schemes which meet the “test standard” of providing a pension from age 65 (to be increased as state pension age rises) with a rate of pension of at least 1/120th of average qualifying earnings in the last three tax years preceding the end of pensionable service for each year of pensionable service up to a maximum of 40
- Career average schemes which revalue the average salary benefits at the lesser of inflation and 2.5 per cent, and which are either contracted-out or meet the test standard
- Cash balance schemes which operate either on the basis of an annual accrual lump sum of 16 per cent of qualifying earnings, or an annual accrual lump sum of 8 per cent of qualifying earnings, but which increases by 3.5 per cent per annum in real terms
When does the duty to automatically enrol apply to an employer?
Automatic enrolment applies to all employers, so, to avoid a potentially intolerable burden being placed on NEST (see below), the duty to automatically enrol is being introduced in stages. The staging will depend on the size of an employer’s PAYE scheme as at 1 April 2012. The first staging date was 1 October 2012, and this applied to all employers which had a PAYE scheme of 120,000 or more. The staging dates are set out in Table 1.
It is possible for employers to adopt automatic enrolment before their staging date if they have selected a suitable scheme and notified the Pensions Regulator.
How do the transitional periods operate?
Just as the duty to automatically enrol jobholders is being phased in over time, so are the mandatory contributions to be paid by and in respect of jobholders.
For money purchase schemes, there will be two transitional periods in this regard. The first transitional period is running from 1 October 2012 to 30 September 2017. The second transitional period will run from 1 October 2017 to 30 September 2018. The employer and total contributions gradually increase, so the full effect of automatic enrolment will come in with effect from 1 October 2018.
Click here to see table.
These transitional periods would not work for a defined benefit scheme or hybrid scheme. Instead, a single transitional period applies for such schemes from 1 October 2012 to 30 September 2017. Provided that a jobholder has been eligible to join the scheme from the employer’s staging date to the end of the transitional period, the employer’s duty becomes one of enrolling the jobholder into the scheme at the end of the transitional period.
Can automatic enrolment be postponed?
An employer can defer automatic enrolment for a jobholder for up to three months from the employer’s staging date, the date when the jobholder joins service or the date when the jobholder becomes eligible for automatic enrolment.
This is of benefit to employers as it may mean avoiding having to enrol staff whilst they are still in a probationary period or where there is a high turnover of short-term staff (e.g. in the hotel or construction industries). However, jobholders will have the right to opt in during the deferral period.
The introduction of a deferral option also undermines one of the original principles of automatic enrolment: that workers should not see the impact of pension saving on take-home pay, thereby allowing inertia to mean that workers would continue to save. By allowing a three month postponement, there may be more opt-outs than would otherwise be the case.
The automatic enrolment date
Subject to the employer’s right to defer enrolment for up to three months, the duty to automatically enrol will apply on:
- Commencement of employment of an eligible jobholder, or
- Where a non-eligible jobholder attains the age of 22, if s/he is earning more than the earnings threshold, or
- Where a non-eligible jobholder or entitled worker’s pay takes them over the earnings threshold and s/he is between the ages of 22 and the state pension age
This is known as the automatic enrolment date.
The process of enrolment
The aim is that membership of a pension scheme is achieved within a month of the legislation applying, but with the effect of membership being backdated to the automatic enrolment date.
The process differs slightly depending on whether an occupational pension scheme or a personal pension scheme is used.
Occupational pension schemes
The employer must enter into an arrangement with the trustees of the scheme so that active membership is achieved before the end of one month of the automatic enrolment date.
The employer must also provide the jobholder with enrolment information (see Table 2) within a month of the automatic enrolment date, although failure to do so would not prevent membership from being achieved.
Trustees have a statutory power to modify schemes to assist in achieving automatic enrolment.
Personal pension schemes
Automatic enrolment is deemed to have occurred once the jobholder is provided with:
- The enrolment information by the employer (see Table 2), and
- The terms and conditions of the scheme by the scheme provider (usually an insurance company)
What does the jobholder have to do?
A key aim of the legislation is that enrolment is truly automatic, which means no completing of application forms or selecting of investment options in money purchase schemes. Schemes which require members to select investments in order to join will need amending if they are to be used as automatic enrolment schemes. Eligibility rules for occupational pension schemes may also need amending.
The employer has to provide the scheme with specified information about the enrolled jobholder within a month of the automatic enrolment date (see Table 3).
How do jobholders opt out?
Another key aim of the legislation is that jobholders should see the effect of pension saving on their monthly pay before being able to opt out. This means that members will only be able to opt out and receive a refund of contributions after they have been admitted to active membership of the scheme.
Members have a month in which to opt out, commencing from when automatic enrolment was deemed to occur (in the case of personal pensions) or from the later of achieving active membership or providing the enrolment information (in the case of occupational schemes). Optout forms are only available from the scheme – not the employer. This is to minimise the risk of employers encouraging members to opt out. The form is returned to the employer. If the form is incorrectly completed, the member has up to 6 weeks from active membership commencing to opt out. However, some employee benefit consultants and pensions providers have obtained Pensions Regulator approval for on-line opt out forms.
Once a member has given a valid opt-out notice, the employer has one month to return his/her contributions (lengthened if the employer’s payroll arrangements have closed). The rule requiring pension contributions deducted from wages to be paid to the scheme by the 19th of the month following deduction, or the 22nd in cases where payment is made electronically, is relaxed for the first month of contributions to avoid the employer having to pay over contributions only to request them back shortly afterwards.
What about existing members of pension schemes?
Existing active members of pension schemes which meet the quality requirements for automatic enrolment have to be informed, within two months of the automatic enrolment date, of the following:
- That they are already active members of a qualifying scheme;
- The contact details of the scheme; and
- That the employer cannot take any action to terminate their active membership without ensuring that they are automatically enrolled in another qualifying pension scheme
What information needs to be given to the Pensions Regulator?
Employers must provide the Regulator with details of the scheme or schemes used to achieve automatic enrolment and the numbers of jobholders automatically enrolled. In addition, an employer must keep records in relation to the members of the scheme(s). A list of these requirements is provided in Table 4.
When does automatic re-enrolment apply?
The aim of the legislation is to encourage pension saving. To achieve this, there will be an automatic re-enrolment date on the third anniversary of the employer’s staging date and on the third anniversary of every subsequent re-enrolment date. In each case, the re-enrolment date can be brought forwards or backwards by a period of three months at the discretion of the employer.
A jobholder who opted out of the scheme, or ceased to be an active member, will be automatically re-enrolled on the re-enrolment date unless s/he had ceased to be a member or opted-out in the previous 12 months. Jobholders who are automatically re-enrolled may decide to opt out again.
Compliance and penalties
Can employers encourage opting-out?
Encouraging opting-out is prohibited. Employers cannot advertise positions for employees willing to opt out or ask potential recruits if they plan to opt out. Employers are also prohibited from giving financial incentives to opt out and from taking any action with the sole or main purpose of causing employees to opt out.
Workers will have the right not to suffer any detriment in their employment as result of being automatically enrolled. Employers will not be able to contract out of, limit or exclude any of their duties.
What are the powers of the Pensions Regulator?
The Pensions Regulator has a wide range of powers to enforce automatic enrolment.
The Regulator can issue “compliance notices” directing the employer (or a third party) to take or refrain from certain actions in order to comply with the legislation. Failure to comply with the notice can attract either a fixed penalty notice or an escalating penalty. The fixed penalty is GBP 400, but the escalating penalty rate is between GBP 50 to GBP 10,000 per day depending on the size of the offending company.
Prohibited recruitment conduct attracts fixed penalties of between GBP 1,000 and GBP 5,000 depending on the size of the company.
The Regulator can order employers to pay outstanding contributions and can order interest on late payment at the rate of RPI plus 4.2 per cent. Where the outstanding contributions are paid within three months of the due date, the jobholder has the option to decide whether to make the contributions at all and can pay in instalments. However, if contributions are outstanding for more than three months, the employer becomes liable to pay both the employer contributions and the jobholder’s contributions. Fixed and escalating penalties can be applied if there is a failure to comply with an outstanding contributions notice.
The Regulator has set out its strategy for carrying out its enforcement functions in relation to automatic enrolment (this is available here, phrased in somewhat technocratic language). The Regulator has stated that it will:
- Ensure that its approach is proportionate to the risks it is faced with
- Ensure that there is clear accountability for member outcomes; this will include holding accountable “supplyside” actors such as pension product providers
- Work closely with the Government and other regulators to maximise the overall effectiveness of its approach
- “Engage the market at the most appropriate part of the value chain”; this means that the Regulator will broaden its approach beyond the traditional main players in the pensions market to include (for example) providers of payroll software; and
- “Adopt an evidence-based approach to segment the market according to the risk presented to member benefits”; this means targeting regulatory oversight on those parts of the market where breaches are most likely
Automatic enrolment and NEST
What is NEST?
The National Employment Savings Trust.
NEST is a money purchase occupational pension scheme set up by the Personal Accounts Delivery Authority for the Government, and designed to give employers an alternative to choosing their own occupational or personal pension scheme for automatic enrolment.
Who can join NEST?
NEST is open to any employer. NEST is obliged to accept any employees qualifying for automatic enrolment and those non-qualifying employees who opt in to the scheme.
How is NEST governed?
NEST can be regarded as a trust-based occupational pension scheme, broadly subject to the same regulations as other trust-based schemes and registered under the Finance Act 2004. The NEST Corporation is the sole trustee of NEST, with powers to manage the scheme in the interest of its members. The NEST Corporation is required to consult with members and employers on the operation and development of the scheme, but all executive and operational tasks are delegated to a management board.
What are NEST’s terms?
Employers using NEST are required to meet the minimum contribution requirements applying to defined contribution schemes: 3 per cent employer contributions and 8 per cent total contributions. These contribution rates are subject to the same transitional periods as other defined contribution schemes.
NEST initially has an annual management charge of 0.3 per cent and a contribution charge of 1.8 per cent. The contribution charge will only apply until the costs of establishing the scheme are met.
There is a contribution limit, which is currently GBP 4,400 and will increase in line with average earnings. Transfers in and out of NEST are generally banned to allow NEST to target moderate/low income earners. From 2017, the contribution limit will be removed and the transfer ban will be subject to further review. There has been some pressure for the Government to remove the contribution limit before 2017.
Does my business have to join NEST?
No. NEST is designed to be available to those employers who do not want the trouble of finding their own pension scheme that meets the quality standards outlined in the legislation. Automatic enrolment is not optional, but it is up to each individual employer to find a suitable pension scheme for their business.
Because it is possible to run NEST concurrently with other qualifying pension schemes, it has been suggested that NEST will be used by smaller employers or by employers of lower-income workers who qualify for automatic enrolment but whom the employer does not wish to enrol into its main pension scheme.
A number of providers have established “Master Trusts” which are occupational pension schemes open to all employers and which are designed to compete with NEST.
Clyde & Co comment
Automatic enrolment will affect every employer in the country and represents a shift from paternalistic to compulsory pension provision. The impact on pension saving will be profound.
Employers will need to decide which scheme to use for automatic enrolment. Employers which currently provide pensions will need to consider whether their scheme needs to be amended to comply with the requirements, and will need to identify workers who do not participate in their scheme at the moment but will be subject to automatic enrolment. HR and payroll processes will need reviewing to ensure that workers are automatically enrolled at the right time. Offer letters, employment contracts and staff handbooks may also need to be changed.
The regulations are complex, which partly reflects the nature of UK pensions and the different options available. Specific issues we are seeing arising on a recurring basis include the interaction of automatic enrolment of salary sacrifice, the treatment of “pensions allowances” instead of contributions (especially for fixed term employees) and the treatment of workers being seconded to and from the UK and whether they fall within the scope of automatic enrolment.
We also suspect that the introduction of automatic enrolment will further accelerate the trend away from defined benefit schemes.
The question of whether automatic enrolment will achieve its aim – improving the pension saving of lower paid employees – is debatable. The minimum contribution rate during the first transitional period would mean contributions of only around GBP 600 per annum for a member with full qualifying earnings. This would not provide much in the way of pension. For lower-paid workers in particular, it was been feared that automatic enrolment may simply reduce means-tested benefits available in retirement. However, the Government’s decision to reform the state pension from 2016 to increase it to around GBP 144 a week and remove means tested benefits and the State Second Pension removes that concern.
Table 1 – Staging dates
Special provisions are being made for employers (“small employers”) who, on 1 April 2012, had fewer than 50 full-time equivalent workers and belonged to a PAYE scheme with 50 or more members. Such small employers are automatically prescribed a specific staging date under special provisions of the legislation, as set out below.
Click here to see table.
Table 2 – Enrolment information to be given to jobholders
- A statement that the jobholder is being automatically enrolled to help save for retirement
- The jobholder’s automatic enrolment date (or automatic re-enrolment date)
- Contact details of the pension scheme
- The value of any contributions payable to the scheme by the employer and the jobholder
- A statement that any contributions payable to the scheme by the jobholder will be deducted from earnings
- Confirmation as to whether tax relief will be relief at source (personal or stakeholder pensions) or relief under net pay arrangements (occupational pension schemes)
- A statement that if the jobholder involuntarily ceases to be an active member of a qualifying scheme (without ceasing to be employed by the employer), the employer must make arrangements by which the jobholder becomes an active member of an automatic enrolment scheme with effect from the day following that event
- A statement that the jobholder has a right to opt out of the scheme and the source from which an opt out notice may be obtained
- The start and end date of the opt out period (if known) or alternatively how the start and end date are determined
- A statement that opting out means that the jobholder will be treated as not having become an active member of the scheme on that occasion and that any contributions paid by the jobholder will be refunded by the employer
- A statement that where the jobholder opts out, the jobholder may subsequently opt in and the employer is required to arrange for that jobholder to become an active member of a scheme once in any 12 month period
- A statement that after the opt out period the jobholder may cease to make contributions towards their pension in accordance with scheme rules
- A statement that a jobholder who opts out (or who ceases active membership) will normally be automatically re-enrolled into a scheme in the future
- A statement that a written notice from the worker must be signed by the worker or, if it is given electronically, must include a statement that the worker personally submitted the notice
- A statement giving details of where to obtain further information about pensions and saving for retirement
Table 3 - Information which the employer must provide to the scheme
- Jobholder’s name, address, gender, date of birth, auto-enrolment date and NI number
- Unless told not to provide by the Scheme, information regarding gross earnings or each jobholder, the value of contributions during the pay reference period, jobholder work addresses and jobholder e-mail addresses
Table 4 – Registration and record keeping
Registration information to be given to the Pensions Regulator:
- Employer’s name, address and registered company number (or, where applicable, its industrial and provident society number, registered charity number or VAT registration number)
- Contact details of person providing information to Pensions Regulator
- Number of auto-enrolled jobholders (broken down for each scheme if more than one is used)
- Deferral date, or the last deferral date where the employer uses more than one, and the number of jobholders automatically enrolled with effect from that date
- Number of jobholders affected by the transitional period for defined benefit/hybrid schemes
- Number of PAYE paying jobholders already active members of a scheme
- Number of PAYE paying jobholders not automatically enrolled
- Contact details of the pension scheme and the employer pension scheme reference
The information has to be provided again after each automatic re-enrolment date.
Employer record keeping requirements
- Contact details of the pension scheme and the employer pension scheme reference
- For an occupational pension scheme, a contracting-out certificate or evidence that the scheme satisfies the test scheme standard
- Name, NI number and date of birth of jobholders or workers in the pension scheme was achieved
- Completed opt-out notices and notices from workers requesting to join a scheme
- Jobholders gross earnings and evidence that employer’s contributions satisfy the requirements of the Act. The contributions payable by an employer and the date on which the contributions were paid to the pension scheme
- The certificate for each period for which a scheme is self-certified and a record of the assessment made by the employer for each renewal of the self-certification
Records must be kept for six years (except for opt-out notices, which are kept for four years).