As described in Client Alert 1170 in April 2011, from October 2012, the new UK pensions auto-enrolment regime will start to apply to the largest employers in the UK, being employers with 120,000 or more “eligible jobholders” (described below). The regime will be introduced in stages, applying to employers with lower numbers of eligible jobholders gradually over time, with the latest application date being 1 February 2018. The date on which this regime applies to an employer is known as its “staging date.”
What are the requirements of the employer in relation to “eligible jobholders?”
Initially, the regime will simply require employers, from their staging date, to automatically enrol eligible jobholders into the employer’s designated pension plan and make contributions equal to at least 1 percent of the eligible jobholder’s “qualifying earnings” to that plan. The minimum employer contributions will rise in stages, increasing to 2 percent on 1 October 2017, and then to 3 percent from 1 October 2018 onwards. “Qualifying earnings” are the gross earnings payable to the jobholder (including bonuses, overtime and statutory maternity pay) which, when annualised, exceed £5,564 but do not exceed £42,475. This means that the highest employer contributions pursuant to the auto-enrolment regime will be £1,107.33 per year per jobholder, being 3 percent of the largest qualifying earnings range1.
This is a significant change to the current minimum pension plan requirements in the UK, which simply require an employer of five or more people in the UK to designate — but not make contributions to — a stakeholder pension plan. A stakeholder pension plan is a type of low cost defined contribution pension plan where the obligation of the employer is limited to meeting the low administrative costs of the plan, providing information to eligible employees about the plan and facilitating payroll deductions should the eligible employees choose to contribute to the plan. The UK government intends to repeal the legislation concerning stakeholder pension plans, but it has not yet done so, and for the time being, employers who become subject to the auto-enrolment requirements will need to comply with both sets of requirements (which may be best achieved by choosing a pension plan for auto-enrolment purposes which is sufficient to exempt the employer from designating a stakeholder pension plan).
Eligible jobholders must be automatically enrolled into the designated pension plan, but they may choose to “opt-out” of this plan. If they do opt-out (which they must do within one month of being automatically enrolled), the employer is obliged to refund their contributions to the plan and to re-enrol them every three years (on the third anniversary of the employer’s staging date, the sixth anniversary of its staging date, etc.). Each time they are auto-enrolled, an eligible jobholder may opt-out of the plan. A survey by Legal & General, reported by the National Association of Pension Funds, has estimated that one third of employees will opt-out of auto-enrolment2. Employers are not permitted to issue opt-out forms to eligible jobholders, or to offer them inducements to opt-out.
The employer is obliged to inform eligible jobholders:
- when they have been auto-enrolled;
- what enrolment means for them;
- of their right to opt-out of the regime; and
- of their right to opt back in if they do opt-out.
The employer is also obliged to inform the pension plan provider of certain information concerning the eligible jobholder and to register with the Pensions Regulator.
The eligible jobholder is also required to contribute so that the minimum contributions from the employer and the jobholder are not less than 2 percent from the staging date to 30 September 2017, not less than 5 percent from 1 October 2017 to 30 September 2018, and not less than 8 percent from 1 October 2018, in each case of the jobholder’s qualifying earnings.
What type of pension plan will satisfy the requirements of the new regime?
The most significant requirements for a pension plan to be compliant with the new regime are:
- There must be no “waiting period” before the eligible jobholder can join the plan;
- There must be no age limit to joining the plan (although an employer will cease to be obliged to auto-enrol an eligible jobholder when he reaches UK state pension age);
- There must be no requirement for the eligible jobholder to fill out any application form, or otherwise provide information or consent before he is auto-enrolled; and
- There must be no requirement for eligible jobholders to make investment choices. If the employer does not wish to use an employer-specific pension plan for this purpose (for example, because the employer’s existing plan would need to be amended to meet the above requirements), or it does not have its own plan, it may auto-enrol relevant workers into the National Employment Savings Trust (known as “NEST”), which has been established by the UK government to ensure that all employers can easily access a pension plan which enables them to comply with their auto-enrolment duties. There are a number of other low-cost pension products available as alternatives to NEST.
What is an eligible jobholder, and what are the requirements in relation to people who are not “eligible jobholders?”
The auto-enrolment regime applies to workers, being individuals obliged to personally perform services under a contract (which includes employees), who work or ordinarily work in the UK. The legislation divides workers into three groups, and different requirements apply to each.
An “eligible jobholder” is someone:
- aged 22 or older, but who is below UK state pension age; and
- who is entitled to earnings exceeding £8,1053 per annum (known as the “earnings trigger”) under that contract.
A “non-eligible jobholder” is someone who is either:
- outside the age range for eligible jobholders and earns more than £8,105 per annum under their contract; or
- Is aged between 16 and 74 and earns less than £8,105 per annum but more than £5,5644.
An “entitled worker” is someone:
- who is aged between 16 and 74; and
- who does not earn £5,035 per annum.
Non-eligible jobholders are entitled to receive information about the pension plan from the employer and to opt-in to join that plan should they wish to. If a non-eligible jobholder opts-in to the plan, the employer is then obliged to make the same level of contributions to that plan in respect of them as it is for eligible jobholders (i.e. 1 percent until 1 October 2017, 2 percent until 1 October 2018 and then 3 percent thereafter).
Entitled workers are entitled to receive information about the pension plan used for auto-enrolment from the employer, and to join the pension plan should they wish to, but the employer is not obliged to make contributions for their benefit (although the employer is obliged to facilitate payroll deductions so that the entitled worker can make contributions to it).
How will the new regime interact with an employer’s existing pension arrangements?
If the employer does not currently have a pension plan: The employer will need to set-up a new pension plan, or designate NEST as the plan, that it will use to meet its auto-enrolment obligations. The designated pension plan must meet the statutory requirements.
If the employer already has a pension plan and wishes to use that plan for autoenrolment: A survey by the Association of Consulting Actuaries5 found that 73 percent of respondent employers planned to use an existing pension plan for autoenrolment purposes. This may mean that changes are required to be made to that plan in order to meet the above requirements, and the process involved depends on whether the plan is an occupational plan or a non-occupational plan.
- If the plan is an occupational pension plan (being a plan governed by trust deed and rules that is specific to the employer or the employer’s group and is run by trustees), the employer will need to ensure that the plan complies with the statutory requirements for auto-enrolment. Should the plan require amending, this will require the agreement of the plan’s trustees, and depending on the nature of the changes required, the employer may need to consult with representatives of the employee members of that plan6. The pre-existing employee communications concerning this plan provided to new hires are unlikely to be sufficient to satisfy the communication requirements for auto-enrolment (which are quite prescriptive), and so these will need changing and will need to be sent to all eligible jobholders. In addition, given the automatic enrolment component of the new regime, the employer will need to set up an effective system of collecting and communicating the necessary data to the trustees. Sufficient time should be allowed to agree these changes with the plan trustees. The legislation includes transitional arrangements where the occupational pension plan is a defined benefit or hybrid pension plan.
- If the plan is a group personal pension or a stakeholder pension plan, or another type of plan operated by an insurance company, the process of amending the plan to meet the auto-enrolment requirements is likely to be simpler. These plans are, in effect, individual contracts between the plan provider and the employee.
The plan operator is likely to be familiar with the required amendments, since other employers using similar plans may well have asked the provider to amend the plan to accommodate the requirements of this new regime. Depending on the nature of the changes required, and whether the employer’s existing pension arrangement is a contractual entitlement of the employees, these changes may require notification to be sent to and consultation undertaken with the employees affected by the proposed changes.
If the employer already has a pension plan (occupational or non-occupational), but the employer does not wish to use the existing plan for auto-enrolment: The employer should liaise with a provider of an auto-enrolment-compliant plan, or NEST, about designating that plan for auto-enrolment purposes. If the employer wishes to terminate its existing pension arrangements and replace them with an auto-enrolment compliant plan, this may require consultation with trustees (if the plan is an occupational pension plan), employee representatives7 and/or employees, and it may require amendments to the employees’ contracts of employment, staff handbooks, flexible benefit programs, etc. Depending on the generosity of the pension plan the employer is looking to terminate, this could cause employee relations issues.
Changing categorisation: It is possible that the classification of a worker will change over time, as the worker ages, or with changes to earnings, or sometimes simply because of the date that the worker begins work. It will therefore be important for employers to keep up-to-date records of this information from the employer’s staging date onwards.
- In the case of casual workers, unusual spikes in earnings (e.g. in connection with short-term demands of seasonal work), may mean that their earnings temporarily reach the earnings trigger for auto-enrolment.
- New recruits may, ordinarily, earn above the earnings trigger, but because of the date they commence employment, they may, for their first month of employment only, earn less than the earnings trigger. This means that the employer owes different auto-enrolment obligations to this employee in the first month of employment to the second. In the first month, he is entitled to opt-in to the pension plan designated for auto-enrolment but he will not be automatically enrolled into it. However, when he begins his second week of employment, he is entitled to be auto-enrolled because his earnings will be deemed to exceed the earnings trigger in respect of that month.
These problems may be mitigated by the employer electing to defer the application of the auto-enrolment regime for that individual, which it is permitted to do for up to three months.
Agency workers: The person responsible for compliance with the auto-enrolment regime (being either the agent or the person receiving the worker’s services) will be the person who pays the agency worker.
One-person companies: Where the only employee of the company is also a board director of that company (commonly established in connection with the provision of consultancy services), the individual and the company will not be subject to this regime.
Changes in number of workers: The staging date for employers will be based on the number of people in the employer’s Pay As You Earn (known as “PAYE”) scheme (the system for the collection of income tax and National Insurance contributions by employers) as at 1 April 2012. Even if the number of workers engaged by the employer changes dramatically following this date, that will not change the employer’s staging date.
Group structures: Different employing entities in a corporate group may have different staging dates — in this case, each group entity will be obliged to comply with the auto-enrolment regime only from its own staging date (i.e. employee numbers are not amalgamated for the purposes of determining the staging date). This may raise employee relations issues if some workers start to receive employer pension contributions simply because they are part of a larger employee population than other group members. In these circumstances, the smaller employers may choose to apply auto-enrolment early8.
M&A: If employees are transferred from one entity to another as a result of a corporate transaction, the auto-enrolment regime will apply to the transferring employees from the date that it applies to their new employer.
When will I need to worry about this?
The staging dates for employers of various sizes are set out below.
Click here to view tables.
What should I be doing now?
- Work out your staging date and consider the interaction of that staging date with other key dates in your calendar (e.g. payroll dates, annual deadline for employees to make changes to flexible benefit allocations, salary and benefit review dates)
- Decide which pension plan to use for auto-enrolment, and if using an existing pension plan, consider whether changes need to be made to it in order for it to satisfy the legislative requirements (carrying out consultation with trustees and/or employees/employee representatives if required)
- Prepare to register with the UK Pensions Regulator (employers with at least one worker must register within four months of their staging date). You will be obliged to provide the Regulator with details of your business, the pension plan you will use to comply with your auto-enrolment obligations, and the number of eligible jobholders you have enrolled into your pension plan
- Set up systems to monitor the age and earnings of workers
- Consider which workers will fall into which categories (i.e. eligible jobholders, non-eligible jobholders and entitled workers)
- Estimate the costs of auto-enrolment, and consider whether this may have an impact on salary reviews
- Prepare communications to send to workers about auto-enrolment
- Liaise with payroll provider and pension plan operators/trustees about autoenrolment
- Set up systems to record auto-enrolment compliance, i.e. who is enrolled, the level of employer contributions in respect of those workers, who has opted-out and re-enrolment dates