One month on from the introduction of automatic enrolment under new workplace pension reforms, how are businesses dealing with the changes?
The 1 October 2012 milestone date affected just four of the UK's largest employers. However, by June 2013, all employers with more than 4,000 workers in their largest PAYE scheme will be subject to the new duties.
While many employers are well advanced in preparing for the reforms, some are still wrestling with what they mean for their business. According to a survey by the Association of Consulting Actuaries, the majority of small businesses are yet to plan or budget for automatic enrolment. But with the countdown on, companies will need to act quickly to meet their "staging dates".
Workplace pension reform responds to fears that the British public are not saving enough to provide for themselves in retirement. This is because life expectancy is increasing and salary-linked pension schemes are being closed.
The situation leaves two unattractive possibilities: either a generation of older people will be forced to live in poverty, or state pensions will have to increase massively.
When faced with a decision about pensions, most individuals do not take any action. This reflects the fact that worrying about income in old age takes second place to more pressing day-to-day problems; also, the complexity of the UK pensions system can make informed decision-making impossible, even for those who wish to try.
That is why the most significant reform to workplace pensions in recent times is automatic enrolment. If a worker does nothing, the result of his inertia will be that he ends up in a workplace pension scheme. If he wishes to avoid this, he has to take positive steps to opt out.
There is, however, more to workplace pension reform than automatic enrolment. Employers will be under a duty to pay contributions into their workers' pension arrangements - no such duty existed before. Also, even those workers who fall outside the automatic enrolment requirement will still have new rights.
Experience so far
Much preparation has taken place for this, both by employers and their professional advisers. Although the above principles are simple enough, the way they have been implemented by legislation has, in practice, been complicated.
The legislation itself has not always helped and it would be fair to describe it as "over-engineered" (and many would be less complimentary than that). To an extent, this is caused by a desire to prevent employers from avoiding the requirements by finding legal loopholes.
Also, the Department for Work and Pensions has repeatedly changed, corrected or added to the legislation; the constantly shifting statutory requirements have made it difficult for employers to prepare.
In our experience, employers who have focused on meeting the minimum requirements, and whose circumstances do not fall outside those anticipated by the legislation, have not had too many problems. The problems start when employers want to go beyond basic compliance, or have aspects of their reward packages that were not considered when the legislation was drafted.
Key points of the legislation
As stated above, the legislation is tricky and complicated, but the broad outlines are as follows:
- The workforce is divided into three categories: "eligible jobholder", "non-eligible jobholder" and "entitled worker", depending on age and earnings.
- The requirements apply to each employer on its "staging date". Staging date depends on PAYE size.
- Employers must automatically enrol new recruits who are eligible jobholders into an "automatic enrolment scheme".
- Workers can opt out, but only after, not before, they have been automatically enrolled.
- Non-eligible jobholders must be enrolled into an automatic enrolment scheme only if they choose to opt into it.
- Entitled workers are only entitled to be enrolled into a registered pension scheme if they choose to request this - but there are no minimum requirements for the scheme.
- Existing workers who are eligible jobholders at the staging date must also be automatically enrolled unless they are already active members of a "qualifying scheme".
- To make things easier, employers are able to postpone the automatic enrolment of workers for up to three months.
- There are highly prescriptive requirements on the information that must be provided to eligible jobholders and non-eligible jobholders.
Qualifying schemes and automatic enrolment schemes
A scheme will be a qualifying scheme if it meets all the following requirements (this list is not exhaustive):
- It is a registered pension scheme with HMRC.
- It is an occupational or personal pension scheme.
- It satisfies the quality requirements (for a defined contribution scheme, the quality requirements are for contributions above the minimum levels, as outlined below).
A scheme will be an automatic enrolment scheme if it meets all the following requirements:
- It meets all the above requirements for a "qualifying scheme".
- The scheme does not require any choices to be made, or any information to be provided, for the new recruit to become an active member.
- The scheme does not put any barriers in place for an employer automatically enrolling workers (e.g. waiting periods, mandatory health checks etc).
There are various different definitions used in workplace pension reform when talking about earnings. Earnings are categorised either as:
- Qualifying earnings: earnings between £5,564 and £42,475 - this is a wide definition that includes pay, salary, commission, overtime, bonuses and various statutory payments.
- Basic pay: all earnings except commission, overtime, bonuses or allowances, but including statutory pay e.g. maternity pay.
- Pensionable pay: a pension scheme's own definition of what pay is pensionable, which will vary from scheme to scheme.
A defined contribution scheme meets the quality requirement if in a one-year reference period, the employer contributes at least 3% of a worker's qualifying earnings, and total contributions (i.e. employer plus worker contributions) are at least 8% of the worker's qualifying earnings. Here, we refer to this as the "standard" approach.
These amounts are applicable from 1 October 2018 and are being phased in by reference to the timetable described under the section below on phasing in of contribution rates.
Defined contribution schemes typically have their own definition of pensionable pay, which will not usually be the same as Qualifying Earnings. This means that schemes will not easily know whether the contributions being paid are above the minimum quality threshold or not.
To make life easier for employers, a scheme will meet the quality requirements if it can satisfy one of the alternative tests set out below, known as Tier 1, Tier 2 and Tier 3.
The table below sets out rates for the standard approach and three tiers, for easy reference. However, note that until October 2018, lower rates apply - see below.
To view table click here.
The principle underlying this approach is: the more inclusive the definition of pensionable pay, the lower the contribution rates can be.
If an employer wishes to rely on Tier 1, Tier 2 or Tier 3, he must "self-certify" compliance under a statutory procedure.
Phasing in of contribution rates
The above contribution rates are being phased in as follows:
To view table click here.
Updated guidance from the Pensions Regulator
The legislative position regarding staging dates and self-certification has been continuously evolving. Over the summer, the Pensions Regulator has updated its helpful guidance for employers on how to comply with the requirements as they currently stand.
The Department for Work and Pensions has responded to its consultation on how to treat the inevitable small defined contribution pots that will be left in workplace schemes as workers move from job to job.
The Government's preference is for the "pot follows member" solution: unless members request otherwise, small pots will automatically be transferred to the pension scheme of their new employer.
The details of this development are yet to emerge.
Earnings thresholds for 2013/14
The Department for Work and Pensions has launched a consultation for where the earnings thresholds should be set for 2013/14. It is seeking views on the factors it should take into account when raising the thresholds. The new thresholds are expected in November 2012.
Local Government pensions
Where local authorities outsource functions to private sector contractors, they are often obliged to offer employees the right to continue to accrue benefits in the Local Government Pension Scheme (LGPS), or a broadly comparable scheme. One way to do this is for the contractor to participate in the LGPS directly, under an "admission agreement".
The LGPS Regulations have been amended so that such contractors can comply with the automatic enrolment requirements. Rather than needing to apply to join the LGPS, new employees of contractors that have signed up to an admission agreement will be automatically enrolled into the LGPS.
One question that has often been raised, but not answered, is where workplace pension reforms will leave the previous attempt to promote workplace pension savings; namely stakeholder pensions.
The stakeholder pension requirements were abolished with effect from 1 October, with some limited transitional protection.
Where to find information
The above provides a short overview of the most relevant points and more detailed information is available through guidance issued by the Pensions Regulator