The Administration Regulations have been amended in preparation for the introduction of automatic enrolment. These changes, which come into force on 1 October 2012, fundamentally change the way that employees of admission bodies and Regulation 8 employers will become members of the LGPS. This will have significant implications for admission agreements entered into after 1 October 2012. The amended Regulations also give rise to several other important issues that LGPS employers and admission bodies need to be aware of.
What is automatic enrolment?
New legal requirements are being introduced that will place a duty on all employers in England, Scotland, Wales and Northern Ireland (including public sector employers), to automatically enrol ‘eligible jobholders’ into a pension scheme that meets certain minimum requirements, known as an ‘automatic enrolment scheme’. The automatic enrolment duty is being phased in from 1 October 2012, starting with the largest employers. An employer must be prepared to comply with these new legal requirements from its ‘staging date’, which (broadly speaking) is determined by the number of people in its largest PAYE payroll scheme immediately prior to 1 April 2012.
How have the LGPS regulations been amended?
The Administration Regulations have been amended in preparation for the introduction of automatic enrolment. The amended Regulations, which come into force on 1 October 2012, provide for:
- all eligible employees of Scheme employers under Part 1 of Schedule 2 to be automatically enrolled into the LGPS when their employment commences (or when their employer becomes a Scheme employer (if later)), apart from those with employment contracts of less than 3 months, where application for membership will be required, and
- an eligible employee of an admission body or of a Scheme employer under Part 2 of Schedule 2 or under Regulation 8 of the Administration Regulations who is designated as being eligible for membership of the LGPS by their employer, to become an active member on the day the designation has effect, apart from those with employment contracts of less than 3 months, where application for membership will be required.
We understand that these changes are intended to only apply to new eligible employees who are employed or designated as being eligible on or after 1 October 2012 under a new or existing admission agreement. However, this is not made clear in the amended Regulations and there is uncertainty over whether these changes could also apply to eligible employees who were employed before 1 October 2012 or designated as being eligible under an admission agreement before that date.
Issues for admission bodies
The amendments to the Administration Regulations will fundamentally change the way in which employees of admission bodies become members of the LGPS. Employees of admission bodies currently have to apply for LGPS membership. However, under the new regulations, an employee who is designated as being eligible for membership of the LGPS will become an active member of the scheme on the day the designation has effect.
It is currently common practice on a TUPE transfer pursuant to an outsourcing contract, to list all the transferring employees in the admission agreement as being eligible for LGPS membership, irrespective of whether they are active members of the LGPS immediately before the TUPE transfer. This is on the basis that they must apply for membership. If this practice was to continue after 1 October 2012, all transferring employees will become active members of the LGPS on the commencement of the admission agreement (although employees do have the right to opt out of membership).
Whilst we understand that the changes are intended to only apply to new admission agreements from 1 October 2012, the implication of this change for existing admission agreements in place before 1 October 2012 is not entirely clear. We are seeking clarification on this from the Department for Communities and Local Government.
The amended Regulations give rise to a number of other potential issues for LGPS employers and admission bodies. In particular:
- the changes will have effect from 1 October 2012 and are not linked to an employer's staging date (as originally proposed). This means that on their staging date some employers may need to re-enrol employees who have opted-out of the LGPS between 1 October 2012 and the employer’s staging date. For example, new eligible employees who join a Scheme employer after 1 October 2012 and who opt-out of the LGPS before the employer’s staging date will need to be re-enrolled into the LGPS with effect from the employer’s staging date if they are ‘eligible jobholders’, for the purposes of the automatic enrolment legislation, on that date. To avoid this employers may wish to bring forward their staging date to 1 October 2012 or apply the transitional period in respect of eligible jobholders who are eligible to join the LGPS but are not active members of the LGPS on the employer’s staging date. Use of the transitional period would enable the employer to defer its statutory automatic enrolment obligations until October 2017;
- the opt-out provisions under the amended Regulations do not fit well with the automatic enrolment requirements. Under the amended Regulations employees that are automatically enrolled into the LGPS may opt out and, significantly, they will continue to be able to give notice to their employer before their employment commences. However, if an employee opt-outs before their employment commences their employer will still need to comply with the statutory automatic enrolment requirements (assuming the employer’s staging date has passed), on the basis that the statutory automatic enrolment requirements do not apply until an individual commences employment. This means that the employee will still need to be automatically enrolled into the LGPS and will then need to opt-out again after they have been automatically enrolled. We understand that this issue is being taken up with the DCLG;
- there is no express power under the amended Regulations by which an employer can automatically enrol its existing staff into the LGPS on its staging date or automatically re-enrol its staff into the LGPS as and when it is required to do so under the automatic enrolment legislation. However, we understand that the DCLG is relying upon the fact that employers will have a general power under the Pensions Act 2008 to automatically enrol their eligible staff into an automatic enrolment scheme to enable LGPS employers to do this; and
- an employee employed under a contract of employment of less than 3 months is not eligible to be automatically enrolled as an active member of the LGPS under the amended Regulations although such a person can apply to become a member. To comply with its auto-enrolment requirements, an employer will have to issue a 'postponement notice' to defer the requirements for up to 3 months in respect of any such employees who are ‘eligible jobholders’ for the purposes of the automatic enrolment legislation.
What happens next?
We are in discussion with the Department for Communities and Local Government to understand how the new eligibility rules for designated employees will affect existing admission agreements. We will also be raising the other issues described above with them. However, with the introduction of the new statutory automatic enrolment requirements fast approaching, urgent action needs to be taken to clarify these issues and it is possible that further changes to the Administration Regulations may be necessary.