The automatic enrolment requirements came into force on 1 October 2012 and have already started to apply to the largest employers. In our previous briefings "Countdown to Automatic Enrolment" and "Auto-Enrolment – where are we now?"), we considered the legislation as it stood at the time and how employers should assess their workforce. In this bulletin, we outline the steps that employers and trustees of existing occupational pension schemes should take so that the scheme satisfies the new employer duties under the Pensions Act 2008. (Different arrangements, which are not covered in this bulletin, will apply where employers are intending to use personal pension schemes for automatic enrolment.)
1. What are the new employer duties?
Employers are required to make 'arrangements' with the trustees of an 'automatic enrolment scheme' so that 'eligible Jobholders' are automatically enrolled into the scheme and re-enrolled approximately every 3 years. An 'eligible Jobholder' is a worker based in the UK, aged between 22 and state pension age who has earnings in excess of the trigger for auto-enrolment (currently £8,105 for the 2012/13 tax year). 'Jobholders' who opt-in to auto-enrolment ('opted-in' Jobholders) must also be enrolled, these being workers based in the UK aged between 16 and 74 who are paid 'qualifying earnings' (£5,564 to £42,475 for the 2012/13 tax year). Employers must also pay contributions or fund benefits for eligible and opted-in jobholders under the automatic enrolment scheme which satisfy the minimum statutory standard.
Eligible jobholders are entitled to 'opt out' of auto-enrolment, provided that they do so within one month of being enrolled. Where an eligible jobholder opts out, the employer must refund the pension contributions deducted from the jobholder's pay within the prescribed period, which will generally be one month.
Employers must also arrange for 'entitled workers' with earnings of less than £5,564 (for the 2012/13 tax year) to be enrolled into a pension scheme if those workers request it. However, employers do not need to make contributions to the scheme or fund benefits for these workers.
2. How should the auto-enrolment 'arrangements' be documented?
The legislation does not specify how the arrangements should be documented. However, employers and trustees are likely to record them in writing to evidence compliance and to ensure there is flexibility to change the arrangements at a later date without undue formality.
3. The company currently contributes to an occupational pension scheme for employees. Do active members of this scheme need to be auto-enrolled?
It will not be necessary to automatically enrol active members of an existing occupational pension scheme, providing it is a 'qualifying scheme'.
4. What is a 'qualifying scheme'?
A 'qualifying scheme' must:
- be registered with HM Revenue and Customs;
- have its main administration in the UK; and
- satisfy the statutory 'quality requirement' (which varies, depending on whether the scheme is a money purchase, defined benefit or hybrid scheme).
Money purchase schemes
For money purchase schemes, the quality requirement is based on contribution rates paid by reference to 'qualifying earnings'. Until 30 September 2017, at least 2% of a jobholder's 'qualifying earnings' must be paid to the scheme with a minimum employer contribution of 1%. This increases to a total minimum contribution of 5% on 1 October 2017 (minimum employer contribution of 2%) and ultimately, to a total contribution of at least 8% on 1 October 2018 (minimum employer contribution of 3%).
Alternatively, employers may certify that the scheme satisfies one of the three following quality requirements (which are calculated by reference to the jobholder's pensionable earnings under the scheme, and must be at least equivalent to basic pay):
- a total contribution of at least 9% of the jobholder's pensionable earnings (minimum employer contribution 4%); or
- a total contribution of at least 8% of the jobholder's pensionable earnings (minimum employer contribution 3%), provided that the aggregate pensionable earnings of all jobholders amounts to at least 85% of their total earnings; or
- a total contribution of at least 7% of the jobholder's pensionable earnings (minimum employer contribution 3%), provided that 100% of earnings are pensionable.
Defined benefit (DB) schemes
The quality requirement for a DB scheme is automatically met if the scheme is contracted out of the state second pension. DB schemes which are not contracted-out must satisfy the 'test scheme standard' (broadly, accrual under the scheme must be at a rate of 1/120th of average qualifying earnings in the 3 tax years which immediately precede the end of service and pension must be payable from the age of 65). If the scheme is a career average scheme or a cash balance scheme, the test scheme standard for DB schemes is applied in a modified form.
5. Can the company's existing occupational pension scheme be used to auto-enrol employees?
Yes. However, the rules are likely to require amendment to ensure that the scheme meets the statutory requirements for an automatic enrolment scheme. This means that, in addition to being a qualifying scheme, the scheme must not contain any provisions which prevent an employer from automatically enrolling or re-enrolling eligible jobholders or jobholders who have opted in. Further, there must not be any provisions in the rules of the scheme that require jobholders to express any choice or provide any information in order to remain active members.
6. What about multi-employer schemes where only some employers are using the scheme for auto-enrolment?
In most cases, the rules can be amended so that the auto-enrolment provisions are layered over the current wording and apply only to employers who use the scheme as an automatic enrolment scheme. The existing provisions will continue to apply to employers who do not auto-enrol employees into the scheme.
7. Which rules will need to be amended for a scheme to be an automatic enrolment scheme?
This will vary from scheme to scheme and depending on the arrangements being adopted. Although it is not possible to compile an exhaustive list, the table below lists some of the points to watch out for:
Click here to view table.
8. What other obligations are imposed on employers?
The Pensions Act 2008 imposes a number of new administrative requirements on employers and trustees designed to ensure that the automatic enrolment regime operates effectively. For example, employers must provide the trustee with prescribed 'jobholder information' within a month of the jobholder's automatic enrolment date and keep written records of this information for at least 6 years.
9. Is it necessary to amend employment contracts?
Employers should review existing employment contracts and standard templates to ensure that they do not contain any provisions which restrict eligibility to join a pension scheme by age or length of service. For example, if the standard employment contracts provide that employees will be eligible to join the company's occupational pension scheme after completing a year's service, this provision will need to be removed.
Employers will want to consider whether they wish to take advantage of 'contractual enrolment'.
10. How does 'contractual enrolment' fit in?
According to recent guidance issued by the Pensions Regulator, employers will be exempt from the automatic enrolment requirements of the Pensions Act 2008 if they enrol employees into a qualifying scheme by way of contractual enrolment. Employers who use contractual enrolment will include provisions for the immediate enrolment of employees, from their first day of work, in the employment contracts or some other binding arrangement. This will authorize the employer to deduct the necessary pension contributions from the employee's salary. Employees will be enrolled outside the provisions of the Pensions Act 2008 and will not have a statutory right to opt out and receive a refund of contributions unless the rules of the qualifying scheme allow for this.
Typically, contractual enrolment will be used by employers who wish to enrol all employees into a qualifying scheme so that they can avoid monitoring the different categories of employees with rights under the auto-enrolment regime. The Pensions Regulator's guidance has also confirmed that employees will be contractually enrolled if their pension contributions are paid by way of a salary sacrifice arrangement.