The staging of workplace pension reform (WPR) has taken a decidedly civilised pause for the Christmas period. This month brought an extra month's breathing space for employers with between 30,000 and 49,999 workers, as there was no staging date for employers on 1 December 2012. Instead, these organisations will have until the start of the New Year to get ready for WPR.
So, does this mean a leisurely December of long festive lunches and office parties for those involved in WPR projects? Unfortunately not; 2013 promises to be even busier in the implementation of WPR. The coming weeks and months will see employers and their advisers fully occupied with preparing to meet staging dates that fall throughout 2013.
But before employers take a break for the festive season and in the spirit of Christmas miscellanies and quizzes, Wragge & Co's pensions experts have put together their ABC of WPR. A light hearted look at the wonderful world of WPR, it highlights some of the important points to consider, while also finding suitable entries for X, Y and Z.
A is for automatic enrolment
Automatic enrolment is the most attention grabbing element of WPR - so much so that the phrase is often used as shorthand for the magnificent whole of WPR. We pedantically call it 'workplace pension reform' to highlight that automatic enrolment is just one of the employer duties that arise under WPR.
From an employer's staging date, the employer will have to automatically enrol any eligible jobholders who are not already members of a qualifying pension scheme into an automatic enrolment scheme. Unfortunately, there is nothing automatic about complying with this employer duty - most employers will need to consider carefully how they implement WPR solutions.
B is for basic state pension
Basic state pensions are exactly that - a basic level of state provided pensions for old age. The prospect of people relying solely on this low level of income was the primary reason for setting up the Pensions Commission in 2002. The Commission considered evidence and eventually published its recommendations in the Turner Report of 2004 and 2005.
WPR was one of the three main solutions set out in the Turner Report. It responded to the need to encourage pension saving among the millions of working age people not currently saving for retirement or not saving enough to provide them with the lifestyle they expected. The National Employment Savings Trust (NEST) has distilled this thinking in its latest advertising campaign, asking people whether they would prefer to be a 'grandma' or a 'glam-ma'.
C is for certification
Certification usually refers to the alternative method of testing whether a money purchase pension scheme meets the quality requirements set out in the Pensions Act 2008 and underlying regulations. Employers using money purchase schemes which satisfy their employer duties will be required to report to the Pensions Regulator and confirm they have either met the test set out in the Pensions Act 2008 (i.e. paying a minimum level of contributions on a jobholder's qualifying earnings) or fall into one of the three tiers of contribution levels defined in the alternative certification regime.
C can also stand for complicated, as certification also describes the process by which an employer or actuary will certify that a defined benefit (or final salary) or hybrid pension scheme meets reference scheme tests set out in regulations. Finally, if you've read through the guidelines for certification, you'll probably agree that 'C' is sometimes short for confused.
D is for daunting
Workplace pension reform can seem daunting. Employers are discovering that implementing legally compliant solutions to WPR is administratively difficult, time consuming and may require significant alterations to existing business practices and systems. Fortunately, there is considerable help available from the Pensions Regulator (see guidance below) and advisers. Wragge & Co's WPR specialists have been working at the cutting edge of WPR for five years. So, if you are feeling daunted, dazed, disorientated or even discombobulated, please call or email a member of the Pensions team.
E is for eligible jobholder
The most onerous set of employer duties apply in respect of eligible jobholders. These are workers who are aged between 22 and their state pension age, and who earn above the 'automatic enrolment threshold' in any pay reference period (the automatic enrolment threshold is equal to an annual salary of £8,105 in 2012/13 terms). Employers will need to check whether eligible jobholders are members of a qualifying pension scheme and, if not, automatically enrol them into an automatic enrolment scheme.
F is for final salary pension schemes
With so much attention focused on money purchase pension schemes (see NEST below), what roles will final salary schemes have under WPR? Final salary schemes can be used as either automatic enrolment or qualifying schemes.
To be classed as either, each scheme will need to meet certain minimum quality requirements and be certified as meeting those requirements by either the employer or an actuary (see certification above). There is also a possibility that final salary schemes will be given a new lease of life under the Government's plans for encouraging defined ambition - expect to see much more discussion of cash balance and risk sharing schemes in 2013.
G is for guidance
Workplace pension reform was never going to be simple. WPR had to set a difficult course between the devil of the UK's complex pension system and the dark blue sea of its voluminous employment legislation. The Pensions Regulator has thrown a life boat onto the choppy waters in the form of its 'Detailed Guidance'. Originally comprising nine chapters, the guidance is now in its fourth version and includes three supplementary sections. In addition, the Regulator has issued template notices, flowcharts and checklists to help employers comply.
If the hundreds of pages in the Detailed Guidance are too much to take in one go, Wragge & Co's comprehensive guide to WPR weighs in at a much more manageable 22 pages.
H is for HMRC
Although the Pensions Regulator is the main source of information on WPR, additional resources and guidance are available from the Department for Work and Pensions (DWP) and HMRC. In particular, HMRC has provided the most detailed coverage of how salary sacrifice will interact with WPR and a clear view that salary sacrifice schemes can be used as part of WPR solutions.
I is for investment
With so many people enrolled into pension saving for the first time, it's crucial that investment is given the right attention and, in particular, the default investment option. Automatic enrolment schemes need a default investment option - one of the requirements of automatic enrolment schemes is to have no barriers to entry.
Experience suggests that many members will stick with this default option and so employers need to ensure the default is still suitable. Automatic enrolment providers have carried out a lot of work to develop new investment models (see NEST below) and the DWP has issued guidance to employers on selecting a default investment option.
J is for jobholder
Jobholders are workers aged between 16 and 74, who work or ordinarily work in the UK and who earn more than £5,564. Jobholders are either eligible jobholders (see eligible jobholders above) or non-eligible jobholders. Employers face the unenviable task of assessing their workforce and dividing it into four categories - eligible jobholders, non-eligible jobholders, entitled workers and out-of-scope or non-entitled workers. Fans of Harry Potter will be disappointed to learn that the 'Sorting Hat' is not available to perform this assessment.
K is for kainotophobia
If you suffer from kainotophobia then taking on a WPR implementation project is probably not the job for you. Kainotophobia is the fear of change and WPR marks the biggest shake up in occupational pension provision for a generation. New concepts such as automatic enrolment and minimum level employer contributions will transform the pensions landscape. Those of a kainotophobic disposition should look away now.
L is for lower earnings threshold
The lower earnings threshold is a key definition that separates jobholders from workers. If you are aged between 16 and 74 and earn more than £5,564 a year, you will be classified as a jobholder. Those earning less than the lower earnings threshold are classified as entitled workers. As fits with the sometimes curious terminology of WPR, entitled workers are not entitled to very much.
M is for money
As Clare Boothe Luce wrote, "Money can't buy happiness, but it can make you awfully comfortable while you're being miserable". For those looking to ensure a comfortable retirement, money is crucial. But where will the money come from? Under WPR, money takes the form of contributions into qualifying pension schemes.
The legislation sets out a minimum level of employer contributions and a minimum level of total contributions (which can either come from the employer or the employee). From 1 October 2018, the minimum respective levels of employer and total contributions into money purchase schemes will be 3% and 8% of a worker's qualifying earnings.
N is for NEST
The National Employment Savings Trust goes by the snappier acronym of NEST, perfect for pension puns such as 'building up a nest egg'. NEST is an automatic enrolment pension scheme set up by the Government to ensure that all employers have a pension scheme they can use to discharge their employer duties (see universal below). Since its launch, NEST has faced a raft of competition from new multi-employer schemes such as NOW: Pensions, the People's Pension and products from many other established pension providers.
O is for opt-out and opt-in
Of all the administrative processes being introduced under WPR, what really strikes fear into the hearts of pension managers is the prospect of managing worker opt-outs and opt-ins. Any jobholder who is enrolled into pension saving will be able to opt-out within the specified opt-out period. Jobholders will also be able to opt-in to membership of an automatic enrolment scheme. All of this is detailed in prescriptive regulations and has to be implemented on a tight timescale.
P is for phasing
The minimum level of contributions into money purchase pension schemes is being phased in over a number of years. The following amounts are percentages of a worker's total qualifying earnings:
- From an employer's staging date until 30 September 2017: one percent employer and two percent total;
- From 1 October 2017 - 30 September 2018: two percent employer and five percent total; and
- From 1 October 2018 onwards: three percent employer and eight percent total.
Q is for qualifying pension scheme
An employer's main WPR duty is to ensure eligible jobholders are members of a qualifying pension scheme. If they are not, they need to be automatically enrolled into an automatic enrolment scheme. A qualifying pension scheme must meet the qualifying criteria and the minimum requirements - in summary, it must be a registered occupational or personal pension scheme and have either contributions or benefit accrual that meets quality tests.
R is for re-enrolment
Employers who grumble at the administrative burdens of automatically enrolling workers at their staging date are often aghast at the prospect of going through a similar process once every three years under automatic re-enrolment.
Re-enrolment is just that - any eligible jobholders who have opted out in the relevant period (or who have otherwise fallen through the net of enrolment) will be re-enrolled. Employers fear a raft of complaints, annoyed employees and opt-out forms to process. The Government expects recalcitrant employees will eventually capitulate and remain in pension saving. We'll see who is correct in three, six and nine years' time.
S is for staging date
Workplace pension reform is being introduced over a number of years in monthly stages. The UK's largest employers were staged on 1 October 2012 and by 1 February 2018 all UK employers will be subject to the new employer duties. The New Year opens with a 1 January 2013 staging date for those employers employing between 30,000 and 49,999 workers. By the end of 2013, any employer with more than 500 workers will be subject to WPR.
T is for transitional period
For those employers operating open final salary or hybrid schemes, the transitional period is a key aspect of WPR. During this period, workers who were eligible for automatic enrolment on the employer's staging date need not be enrolled, provided that they have had a continuous right to join the final salary or hybrid scheme. The transitional period will end on 30 September 2017.
U is for universal
Workplace pension reform is a universal change - it will apply to all workers aged between 16 and 74 (albeit how the reforms will apply is dependent on an individual's worker classification) and to all employers. Once staging is complete, (see staging date above) all UK employers will be subject to employer duties. There are no exemptions, exceptions or de minimis provisions.
V is for volumes
By any measure, 2013 is going to be a busy period for pension advisers and providers. There are two key peaks next year which will see huge volumes of employers and workers enrolled into pension saving. Up to five hundred employers employing approximately five million workers have staging dates on 1 March and 1 April 2013.
The second peak will come between September and November 2013, when up to 4,300 employers have staging dates and another four million workers will be enrolled. In total, the Pensions Regulator estimates that between 13 and 15 million workers will be subject to the reforms by the end of 2013. The pensions industry faces a real challenge in ensuring it can meet the unprecedented demand for assistance, legal advice and pension products.
W is for waiting periods
One of the most useful amendments to WPR for employers came from the introduction of three month waiting periods (otherwise known as postponement). Employers can now delay the onset of their employer duties for up to three months.
While useful, this is not a silver bullet for employers - jobholders can request to join at any point during the waiting period and any such request has to be made effective from the start of the jobholder's next pay reference period. It will, however, be a useful tool to help employers align their WPR obligations with existing payroll practices and administration.
X is for xenagogy
The letter X is always tough for compilers of an A to Z list. You can either bottle out and use a word that includes the letter X but doesn't start with it (e.g. ex-eligible jobholders). Or, you can plumb the depths of the Oxford English Dictionary and use an almost inevitably obscure word - in this instance xenagogy.
Xenagogy is a rather wonderful, if admittedly obsolete, word for a guide book. We have put together our own xenagogy - the Comprehensive Guide to WPR which is available alongside other useful information, analysis, videos and links on our dedicated WPR micro-site. The guide contains a lot more detail on WPR and is written in plain English - no more obscure words.
Y is for young workers
The thirty-something writer of this ABC of WPR might vainly (and, admittedly, in vain) attempt to suggest that a young worker is anyone under the age of 40. The Pensions Act 2008 callously disagrees, providing that young workers are those aged 16 and above and under 22. Workers aged 22 and over and with sufficient qualifying earnings are defined as eligible jobholders, while those aged under 16 are out of the scope of the reforms.
Z is for zero
Zero. Zip. Zilch. This is the amount of contributions an employer has to pay in respect of entitled workers. In short, entitled workers are not entitled to any employer contributions. They only have a right to request membership of a pension scheme and for any of their own contributions to be deducted from their wages and paid to the scheme by their employer.