1 October 2012 saw the start of radical changes to workplace pensions with the introduction of new rules on automatic enrolment. The most significant change is a requirement on employers to automatically enrol eligible jobholders in a pension scheme and to make minimum contributions each year.
This bulletin summarises the key provisions of automatic enrolment and the steps employers should be taking to ensure they comply with their new duties.
Which employees are eligible?
The auto-enrolment provisions apply only to ‘workers’. A worker means an individual who works under a contract of employment or any contract in which the individual undertakes to do work or perform services personally for another party. The individual must not be acting through his/her own business. Under the legislation, workers fall into three categories, namely ‘eligible jobholders’, ‘noneligible jobholders’ and ‘entitled workers’.
A ‘jobholder’ is a worker who is working or ordinarily works in the UK; is aged at least 16 and under 75 and has ‘qualifying earnings’. The ‘qualifying earnings’ band is between £5,564 and £42,475 for 2012/2013 (this will be reviewed annually). ‘Jobholders’ include permanent and temporary employees and agency staff.
Eligible jobholders To be eligible for auto-enrolment a jobholder must be aged at least 22; be below the state pension age and have qualifying earnings above the ‘earnings trigger’ (£8,105 for 2012/2013).
Non-eligible jobholders A ‘non-eligible jobholder’ is anyone who:
- works or ordinarily works in the UK; is aged at least 16 and under 75 and earns more than the qualifying earnings threshold but less than the earnings trigger; or
- is aged under 22 or has reached the state pension age; works or ordinarily works in the UK and earns more than the earnings trigger.
Entitled workers An ‘entitled worker’ is aged at least 16 and under 75; is working or ordinarily works in the UK and earns less than the qualifying earnings threshold of £5,564.
The Government is currently consulting on the automatic enrolment thresholds for 2013/14.
What are the employer’s key duties?
Employers must automatically enrol eligible jobholders into an automatic enrolment scheme from their automatic enrolment date (‘AED’), unless they are already active members of a qualifying scheme. For existing workers the AED will be the staging date, for new employees it will be their starting date. A jobholder who has been automatically enroled will have a statutory right to opt out within prescribed time limits, but will be able to opt back in at a later date. If an eligible jobholder chooses to opt out of auto-enrolment, the employer must continue to re-enrol him/her every three years whilst he/she remains an eligible jobholder with that employer.
Employers must contribute a minimum of 3 per cent of a worker's earnings. The worker's total combined contributions must be at least 8 per cent of his/her earnings. However, this level of pension contributions will be phased in over the next six years to help employers and individuals adjust. Full contributions will have to be paid from 1 October 2018.
An employer will have a period of one month from the eligible jobholder’s AED in which to auto-enrol him/her. During this time, employers must provide certain information to eligible jobholders. This includes a statement that the jobholder has been or is going to be automatically enroled, the date of auto-enrolment and information about his/her right to opt out.
Employers do not have to automatically enrol non-eligible jobholders. However, non-eligible jobholders do have a right to opt in to an automatic enrolment scheme. If they do, they will be entitled to the same minimum contributions as eligible jobholders. Employers must provide information to the non-eligible jobholder about his/her right to opt in. This must include a statement that a signed written opt-in notice must be given to the employer or, if the opt-in notice is given in electronic form, that the notice must include a statement that the jobholder personally submitted the notice. The information must be provided within one month of the employer’s staging date or (if later than the staging date) within one month of a new employee’s starting date.
Employers do not need to automatically enrol entitled workers, although entitled workers do have a right to join a pension scheme. This does not need to be the same scheme that the employer is using for automatic enrolment and so the employer is under no obligation to make minimum contributions into it.
Employers have an obligation to provide information to entitled workers about their right to join a pension scheme. Again, the information must be provided within one month of the employer’s staging date or (if later than the staging date) within one month of a new employee’s starting date.
When do the duties apply?
The new employer duties will apply with effect from an employer’s ‘staging date’. An employer’s staging date will depend on the number of people in its PAYE scheme on 1 April 2012.
From 1 October 2012 the scheme applies only to the UK’s largest employers (i.e. those with at least 120,000 members in their PAYE scheme), but will be rolled out to all workplaces within the next five years so that all employers will be covered by 2017. Broadly, key staging dates are as follows:
- Employers with 50,000 to 119,000 workers have a staging date of 1 November 2012.
- Employers with between 250 and 49,999 workers have staging dates from 1 January 2013 to 1 February 2014.
- Employers with between 50 and 249 workers have staging dates running from 1 April 2014 to 1 April 2015.
- Employers with fewer than 50 workers have staging dates between 1 June 2015 and 1 April 2017.
- New businesses have staging dates at the end of the overall timetable.
The Department for Work and Pensions has created a staging timetable which can be accessed online at http://www.thepensionsregulator.gov.uk/employers/staging-datetimeline.aspx
Employers can make use of a ‘waiting period’ of up to three months from the staging date if certain requirements are met and the worker is given notice. The effect of this is that the assessment of a worker is postponed along with the corresponding duty. However, if the employer chooses to implement a waiting period it must serve notice of this on all workers.
There are various safeguards to ensure that employers do not try to avoid auto-enrolment or encourage workers to opt out.
- During the recruitment process, employers must not behave in a way which indicates to a candidate that a successful application depends on whether he/she will opt out of an automatic enrolment scheme. For example, employers would be wise to avoid questions on application forms and at interview asking whether a candidate intends to opt out of an auto-enrolment scheme.
- Employers are also prohibited from taking any action for the ‘sole or main purpose’ of inducing a worker or a jobholder to give up membership of a pension scheme.
- In addition, workers have the right not to be subjected to any detriment by an act, or deliberate failure to act, by their employer in relation to its duties. Furthermore, the dismissal of an employee will be automatically unfair where the principal reason for the dismissal was the employer’s auto-enrolment duties or its contravention of those duties. No qualifying period is needed to bring a either of these claims
The Pensions Regulator will enforce the new employer duties and will issue sanctions for non compliance. In the first instance, the Regulator may issue a compliance notice requiring the employer to refrain from, or take, action. If the employer does not comply with the notice the Regulator may impose fixed penalty fines. If the employer is in serious or persistent breach of their duties, the Regulator may impose escalating fines which depend on the size of the employer. Importantly, workers will be able to bring a detriment or unfair dismissal claim in an employment tribunal.
To ensure that employers comply with the new duties from their staging date, we recommend the following steps.
- Identify the staging date. If they have not already done so, employers should confirm their staging date at the earliest opportunity.
- Assess the workforce. Employers should carry out an assessment of the workforce to identify which workers will need to be automatically enroled or opted in to a pension scheme. Whilst ‘blanket enrolment’ may seem an attractive option to avoid the administrative burden of assessing everyone, this may fall foul of the law which prohibits unlawful deductions from wages. Employers are only protected against this where there is a legal requirement to make the deduction which would only be the case for eligible jobholders. For other categories of worker the written consent of the worker, or an express contractual provision, would be needed.
- Review/select a pension scheme. To comply with the new duties an automatic enrolment scheme must be used. This is a pension scheme which meets the automatic enrolment and qualifying criteria set by the legislation. Employers should assess whether their existing pension schemes meet the criteria or set up a new occupational or personal pension scheme.
- Prepare information. Employers must provide varying information to each category of jobholder or worker within the prescribed time limits. It is a good idea to start preparing this information in advance of the relevant staging date.
- Set up payroll. Employers need to make sure that an automatic enrolment payroll process is in place from their staging date and that they are in a position to make the required minimum contributions.
- Register. Employers must register with the Pensions Regulator within four months of their staging date.
- Record Keeping. Employers must ensure records are kept to demonstrate their ongoing compliance with their duties. Records can be used to keep track of jobholders’ and workers’ ages and earnings to ensure that employers are still compliant when individuals move between categories.