Question 1 - I've heard about NEST - do we have to start using this scheme? What about our existing company scheme?
The National Employment Savings Trust (or NEST) has been set up by the Government as a trust-based, occupational pension scheme. It will be open to all employers to enable them to discharge their new duties to automatically enrol eligible jobholders under workplace pension reform.
The employer duty is 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.
NEST is just one of the qualifying pension schemes employers will be able to use to fulfil these duties. Employers will be able to use an existing company scheme (as long as it meets certain criteria to qualify it as a 'qualifying workplace pension arrangement' - see question 2 below for the quality thresholds). In addition it is anticipated that other commercial providers will provide qualifying schemes with different features for employers to choose.
Question 2 - How do I know if my company's defined contribution (DC) scheme is a qualifying workplace arrangement? Do we have to use it to fulfil our employer duties to new employees?
For a DC scheme to be classed as a qualifying workplace pension scheme there will have to be a minimum of 3% employer contributions and a total of at least 8% contributions overall. This can be achieved by requiring 5% employee contributions (which will be a 4% net contribution after tax relief is applied).
A qualifying DC scheme cannot require that the member make any choices (including investment choices) or provide any information before enrolling. In addition a qualifying DC scheme cannot have any rules which prevent an eligible jobholder from joining (e.g. having a probationary or waiting period prior to joining (unless the 'quality' scheme exemption applies - see question 7 below).
Employers do not have to use an existing scheme to fulfil their employer duties for existing or new employees. This is an especially important point for employers who offer generous schemes for certain employees (e.g. those with longer service or for more senior staff). Employers can use any qualifying workplace pension arrangement to discharge their duties, including, but not limited to, the NEST scheme. An employer could therefore have a "two tier workforce" with different categories of employees in different schemes.
Question 3 - I've heard all this has been delayed. We won't have to do anything for ages, will we?
There has been no delay to the start date for the implementation of workplace pension reforms - these will begin as planned from 1 October 2012. The Government did, however, announce a lengthening in the 'staging' process from three years to four years. This means that the smallest and newest employers will not have to comply until 2015 or even 2016.
Employer duties will commence at different times for different sizes of employers (based on the size of their payroll). The largest (those employing over 120,000 eligible jobholders) will be subject to the duties from 1 October 2012. By 1 March 2013 all employers employing more than 10,000 eligible jobholders will be subject to employer duties, and those with over 500 eligible jobholders will have reached their staging date by 1 November 2013 at the latest.
Question 4 - Our company scheme uses "basic pay" as a definition for salary, and doesn't include any overtime or bonuses. Is this alright?
No. The minimum contributions required for employers to fulfil their duties are calculated against an eligible jobholder's 'qualifying earnings'. These are earnings between £5,035 and £33,540 (in 2006/7 terms - it is anticipated this band will be approximately £5,700 - £37,960 by 2012 and will increase annually in line with growth in the level of earnings) and covers "salary, wages, commission, bonuses and overtime".
Using basic pay or a similar definition which omits overtime and bonuses could result in an employer failing to discharge their duties under the reforms. This will be especially problematic if the employer makes the minimum level of contributions required under the reforms but only does so in respect of basic pay.
Question 5 - Our supermarket chain has a number of low paid workers who do not earn enough to take them over the lower threshold over the course of a year. Some of these employees do a bit of overtime over Christmas. What happens if they cross the earnings threshold just for December? Will they have to be enrolled?
No. The regulations have been drafted so as to reduce the numbers of eligible jobholders accidentally or temporarily brought within the duty to automatically enrol. An employer may use a pay reference period of 12 months (from the employer's staging date and each subsequent anniversary) for employees whose "basic" contractual pay is less than the threshold and for whom the employer does not expect pay to exceed the threshold over a 12-month period.
If an eligible jobholder is expected to have pay that exceeds the threshold, however, the duty will start to apply. This could occur if a part-time worker takes on more hours on a permanent basis, regularly works overtime or is given a pay rise.
Question 6 - We have several employees that work different shifts at different pubs in our chain. They have two different employers but these are companies within the same group. How do we work out their qualifying earnings? Should their earnings from the two jobs be combined or considered separately?
In this example, the earnings from the two jobs can be considered separately. Where an eligible jobholder has more than one employer, the employer duties apply separately in relation to each 'employment'.
Therefore, if a jobholder earned £4,000 in each of his two jobs with different employers (even if they are companies within the same group), he would not have sufficient qualifying earnings with any single employer to qualify for automatic enrolment.
This could be different if a jobholder worked two jobs at two branches of the same company. If that jobholder was employed by the same employer, e.g. a company that employed all the employees in a chain of shops, then their qualifying earnings would have to be combined for the purposes of determining if employer duties apply and, if they did, for calculating the employer's contributions. How this will be achieved in practice is difficult to say unless an employer's payroll system is robust enough to identify employees with multiple jobs (i.e. through National Insurance numbers).
Question 7 - We operate a defined contribution scheme that offers 5% employer and 5% employee contributions and currently has a three-month waiting period. Can we keep the waiting period?
Not without changing the level of employer contributions. The regulations permit a waiting period of up to three months for a "quality" qualifying workplace pension arrangement. A defined contribution scheme will qualify as a quality scheme if the employer contributes at least 6% of the jobholder's qualifying earnings and the total contributions are at least 11%.
In this example, if the employer wanted to keep a three-month waiting period, employer contributions would have to be raised to 6% and gross employee contributions would have to be at least 5% to ensure total contributions were at least 11%.
Question 8 - We operate a quality scheme which will have a three-month waiting period. Do we have to automatically enrol temporary employees who have rolling two-month contracts, or can we just postpone their automatic enrolment each time their contract is renewed?
Employers will now not be able to postpone auto-enrolment for a worker who has already been postponed in the preceding 12 months. This means that an employer may postpone the enrolment of a worker once, but can not repeatedly postpone their enrolment. This is to prevent workers on a series of short-term contracts from repeatedly postponing auto-enrolment thereby never joining a pension scheme.
Question 9 - We are planning to give an opt-out form to employees in their joining pack. Is this okay?
No. An opt-out form can only be provided by the pension scheme, not from the employers. This has been implemented to prevent employers from pressuring jobholders to opt out.
Employers will be required to provide certain proscribed information to all jobholders within one month of their automatic enrolment date, including a statement that the jobholder has the right to opt out of the scheme during the opt out period and where the jobholder can obtain an opt-out notice.
The opt-out notice will be in a form set out in the regulations and, although it has to be obtained from the scheme, must be returned by the jobholder to the employer.
Question 10 - Our scheme does not have a default investment option because we want employees to choose their investments. Can we carry on doing this?
Not if you want to use the scheme as a qualifying workplace pension arrangement for new joiners. New joiners cannot be asked to make any choices (including investment choices) or provide any information in order to become an active member.
This means that in order to be a qualifying workplace pension arrangement the scheme must provide a default fund. Once enrolled, a member may be offered investment choices, but can not be forced to make a choice in order to continue their membership.
Question 11 - I understand we will have to re-enrol jobholders every three years - do we have to track each employee's three year anniversary date?
No. Employers will be required to re-enrol eligible jobholders every three years, but can do so for all eligible jobholders on a single day. This day will have to be within one month of the three-year anniversary of their starting date (and each subsequent three-year anniversary).
One important practical exception is that jobholders who have opted out in the 12 months immediately before the re-enrolment date will not have to be re-enrolled in this triennial sweep up.
Question 12 - We pay minimum wage - can we deduct the employee's 4% or do we need to give a pay rise?
You will be able to deduct the employee's contributions from their pay and will not need to give a pay rise to ensure continued compliance with the national minimum wage. Pension contributions are one of the deductions that do not reduce national minimum wage pay for the purposes of determining compliance with the national minimum wage legislation.
Question 13 - We have an employee who earns £60,000. He doesn't think we need to auto-enrol because he earns more than the upper limit. Is this right?
No. The employer's duty applies to all eligible jobholders, including those who earn more than the upper limit for calculating eligible earnings.
The employer is, however, only required to make contributions in respect of eligible earnings between £5,035 and £33,540 (in 2006/7 terms as set out in question 4 above), and so would not need to make contributions in respect of this employee's earnings between £33,540 and £60,000 in order to comply with their employer duties.
Question 14 - What about employees on maternity leave? Do we have to pay contributions for them? And at what rate?
Maternity pay qualifies as 'eligible earnings' under the Pensions Act 2008. The payment of contributions for employees on maternity leave is, however, determined more by existing equality and sex discrimination legislation than the workplace pension reform regulations.
The same rules will apply for the continued payment of contributions to employees on maternity leave as currently applies to such employees in respect of their pension contributions. See our alert on maternity leave and non-cash benefits for more information.
Question 15 - How are we going to have to operate refunds contributions for people who opt-out in time?
Jobholders will have the right to opt-out of active membership of a qualifying workplace pension arrangement. This will be achieved by giving the employer a completed opt-out notice within one month of the later of the jobholder:
- becoming an active member of the scheme
- receiving the enrolment information.
A jobholder who opts out will be treated as never having been an active member. They will be entitled to a full refund from the employer of any contributions they have made and any contributions that have been made on their behalf (i.e. also including any employer contributions that have been made). The only exception to this is any part of the refund that is required to be paid as tax.
Question 16 - We have a number of students who work in our bars. Most are aged between 18 and 21. We don't need to do anything different for these workers, do we?
Yes, you do. The employer must inform jobholders who are younger or older than the age for eligible jobholders of their entitlement to join a qualifying scheme if they wish to do so. If any of these jobholders choose to join, the employer will be required to pay contributions for them at the minimum agreed level under a registered pension scheme (as long as they earn above the minimum level of eligible earnings - see question 17 below). This applies to jobholders aged between 16 and 21 or between state pension age and 75.
Question 17 - We have a group of employees who earn between £3,000 and £4,000 per annum - do we need to do anything in respect of these employees?
Yes. The legislation requires employers to provide jobholders who do not earn above the earnings threshold with certain information and to arrange for them to become a member of a registered pension scheme if they ask to join. Unlike for the younger or older jobholders outlined in question 16 above, the provided scheme doesn't have to be a qualifying scheme and the employer has no obligation to make contributions on their behalf.