Under workplace pension reform (WPR) the UK's employers will have to cope with major reforms to workplace pensions. Effective from October 2012, the changes are being implemented in stages over a four-year period and require early preparation to ensure compliance.
WPR will affect all employers, irrespective of size or type of business. Are you ready to comply with the new employer duties? Have you thought through all of the HR implications?
Wragge & Co's experts have prepared an essential WPR checklist to help steer employers through the key issues to consider from the outset. The questions outlined here will help identify immediate action points and are accompanied by some practical guidance.
- Do you know when your staging date is?
If you don't know, you can find out by using the Pension Regulator's online staging date tool. Knowing your staging date is crucial, as it marks the start of your new 'employer duties'. It's essential to plan for implementation well in advance of this date - the Pensions Regulator recommends at least a year for planning.
- Do you know which of your workers will be eligible for auto-enrolment?
You will need to carry out a workforce assessment to determine:
- Which individuals on your payroll are 'workers' for the purposes of WPR;
- If an individual is a 'worker' for the purposes of WPR, are they:
- an eligible jobholder;
- a non-eligible jobholder;
- an entitled worker; or
- outside the scope of the reforms.
Eligible jobholders are subject to the automatic enrolment duty. You will need to check whether such individuals are already members of a qualifying pension scheme and, if not, automatically enrol them into an automatic enrolment scheme.
Note: employers also have employer duties in respect of non-eligible jobholders and entitled workers.
- Have you completed a payroll assessment to determine which of your payroll items will count as 'qualifying earnings'?
Understanding what makes up an individual's 'qualifying earnings' is vital for all employers as it is used in workforce assessment. It is also used to calculate pension contributions if the employer is meeting its obligations by reference to the requirements set out in the Pensions Act 2008 (i.e. it is not using the alternative method of 'certification').
Qualifying earnings is a broad definition that includes: salary or wages, commission, bonuses, overtime and a range of statutory payments (e.g. statutory maternity and paternity pay and statutory sick pay).
- Do you have workers on secondment or based overseas?
WPR applies to all 'workers' who 'work or ordinarily work in the UK'. Employer duties may extend to those workers on secondment (and who are expected to return to the UK). In addition, employers will need to check overseas workers and pay particular attention to any European Economic Area cross-border and tax issues.
- Will you be using an existing scheme or a new provider such as NEST (National Employment Savings Trust) or NOW: Pensions? Have you considered using different schemes for different populations?
As described in point two above, you will have to ensure that all 'eligible jobholders' are members of a qualifying pension scheme and, if not, automatically enrol them into an automatic enrolment scheme.
Many existing pension schemes can be used as a qualifying pension scheme. Employers will need to check to ensure that these meet the minimum quality levels. If the scheme is particularly complicated, they may need to ask the scheme's actuary to certify.
Some employers are amending existing scheme rules so that they can also be used as an automatic enrolment scheme. Others have decided to use one of the new products that have been created by third-party providers.
Employers can use whatever combination of schemes is appropriate to their workforce - a two or three tier approach may, for example, be useful for employers that have a high staff turnover rate.
- If you are planning to use an existing scheme, does it qualify as either a qualifying pension scheme or an automatic enrolment scheme?
Existing schemes will need to be checked to ensure they comply as either a qualifying pension scheme (for existing members and/or for use with contractual enrolment) or an automatic enrolment scheme (for automatic enrolment of jobholders).
Determining qualifying pension scheme status is mainly focused on whether it meets 'quality tests'. For defined contribution schemes, this means a minimum level of employer and total contributions.
Automatic enrolment schemes must meet the tests for qualifying pension scheme status and also satisfy additional criteria to ensure they are suitable for automatic enrolment purposes. In summary, these require that the scheme does not have any barriers to entry (e.g. a requirement to make an investment choice) and removes the need for the prospective member to do anything (e.g. sign a membership form).
- What about automatic enrolment for workers who receive payments into a personal pension scheme?
A personal pension scheme can be used as either an automatic enrolment scheme or a qualifying scheme. The important thing is that the minimum level of employer and total contributions are made. There are some additional information provision requirements which apply to personal pension schemes. The pension scheme provider should be able to help with these.
- Could you self-certify? What happens if you get that wrong?
Certification allows employers with defined contribution (DC) schemes, which calculate contributions from the first pound earned (i.e. do not use qualifying earnings in their definition of pensionable pay), to self-certify that their scheme meets the minimum requirements.
- Do you know what the statutory minimum contribution rates are and how/when these will increase?
At its simplest, at the end of phasing (i.e. when the reforms are in 'steady state'), the minimum level of contributions based on qualifying earnings into a DC (money purchase) scheme will be:
- three per cent of qualifying earnings paid by the employer; or
- eight per cent of qualifying earnings paid in total.
The five per cent between the minimum employer contributions of three per cent and the total minimum contributions of eight per cent may be paid by either the employee or the employer. Employee contributions will usually attract tax relief.
This full amount of contributions will be phased in and the Government has now confirmed the final phasing plan. This will require one per cent employer contributions and two per cent total contributions from an employer's staging date until 1 October 2017.
From 1 October 2017 until 30 September 2018, minimum contributions of two per cent (employer) and five per cent (total) will be required. The final 'steady state' (as outlined above) will be reached from 1 October 2018.
- Have you decided when and how you should communicate with your workforce about automatic enrolment?
Communication is key to successful implementation of WPR. Certain communications are required under WPR regulations and both content and timing are prescribed.
Some employers are going beyond the minimum level of communications to provide additional detail, including pre-staging date communications to 'warm up' and prepare their workforce for the changes. Others are providing intranet sites, presentations and/or helplines.
- What information can or should you give about 'opting out' of automatic enrolment?
You are required to give jobholders details of how they can opt-out of automatic enrolment. You have to tell jobholders what this means and how they can get hold of an opt-out form.
Employers do, however, need to be careful that they are not seen to be inducing workers to opt-out. Inducing workers to opt-out is prohibited under the Pensions Act 2008.
- Do you know about 'postponement' and how you might use it to your advantage?
Employers will be able to introduce a waiting period of up to three months. This is also known as 'postponement'. If an employer uses a waiting period, then its workers' automatic enrolment date will be delayed until the end of the waiting period.
If an employer uses a waiting period, it will have to provide prescribed information in the form of a notification to all affected workers. This notification must be provided within one month of the start of the waiting period.
Employers will be able to issue a generic notice to all workers at the beginning of the waiting period. The employer will then have one month after the end of the waiting period to action the following:
- provide further prescribed information to all its workers;
- automatically enrol all eligible jobholders; and
- complete registration with the pensions regulator.
Employers will therefore have to assess their workforces during the waiting period to ensure they comply with the relevant employer duties for each group of workers.
- Are you familiar with the tax implications of automatic enrolment for senior executives and high earners?
If an employee has either enhanced or fixed protection and doesn't opt-out of the pension scheme within one month of automatic enrolment they will lose their protections. Employers will need to be careful about how such senior employees are handled.
In addition, HMRC is writing to such individuals to make them aware of the consequences of not opting out in time.
- How does automatic enrolment impact on your flexible benefit package?
Automatic enrolment is not necessarily incompatible with a flexible benefits package. There are two things that employers need to be aware of, however:
- that the flexible benefits package has a minimum level of employer and total contributions into a pension scheme to ensure the employer has discharged their employer duties (i.e. that an individual cannot choose lower levels of pension benefits than the statutory minimum); and
- the risk that if an individual can choose other benefits in place of pension provision, the Pensions Regulator could see this as an inducement to opt-out of pension saving.
- Are you familiar with the penalties for failing to comply with automatic enrolment legislation?
The first stage in enforcement is the Pensions Regulator's ability to issue various notices:
- Compliance notices - a notice directing the employer to take steps to remedy a breach.
- Third-party compliance notice - as above, but directed to a third-party if that party is responsible for the breach.
- Unpaid contributions notice - a direction for the employer to pay unpaid contributions.
If a breach is not remedied, the Pensions Regulator may issue financial penalties:
- Fixed penalty notice - a flat rate, fixed penalty notice for failure to comply with a notice. This is currently set at £400, but may increase in the final draft of regulations.
- Escalating penalty notice - a daily fine can be imposed for more serious, prolonged or repeated breaches. The size of the fine depends on the size of the employer. The figure is currently set at £50 per day for employers with one to four workers and £10,000 per day for those with more than 500 workers.
In addition, the Pensions Regulator has the power to fine employers who breach the prohibited recruitment conduct. These fixed penalties will range from £1,000 for employers with one to four workers to £5,000 for employers with more than 250 workers.
The Pensions Regulator can request documents from employers or inspect premises to investigate whether an employer has breached its duties. It can also request data held by HMRC to identify possible breaches.
Finally, there are criminal sanctions for any employer who wilfully fails to comply with the key duties of automatic enrolment, automatic re-enrolment and allowing a jobholder to opt-in. If convicted, the employer will face imprisonment or a fine, or both.