The legislation concerning auto-enrolment is contained predominantly in the Pensions Act 2008 (the “Act”). On 27 October 2010 (following the 2010 General Election), the DWP published results of an independent review, “Making Automatic Enrolment Work” (the “MAEW Review”) of the previous Government’s proposals for auto-enrolment. The Pensions Bill 2011 (the “Bill”) will implement the changes recommended by the MAEW Review and will introduce other technical amendments. With Parliament currently in summer recess, however, the Bill is now scheduled to be enacted in autumn 2011. In this “Auto‑enrolment – where are we now?” briefing, we catch up on:
- issues that the DWP has consulted on (including draft regulations);
- unresolved issues and potential areas of difficulty for employers in relation to the auto-enrolment regime; and
- guidance issued by the Pensions Regulator and the DWP.
We will, also, shortly be issuing our “Countdown to automatic enrolment – a call to action” briefing which looks at how employees and trustees can start to plan for automatic enrolment implementation.
The automatic enrolment duties: a recap
We summarise below the key auto-enrolment duties for employers (as amended by the Bill).
Duties on the employer
- Employers must automatically enrol “Eligible Jobholders” into a qualifying pension scheme unless they are already members of such a scheme or they choose to opt out. A “Jobholder” under the Act is a worker:
- who works, or ordinarily works, in Great Britain under a contract; and
- who is aged at least 16 but less than 75; and
- who is paid “qualifying earnings” (£5,035 to £33,540).
In this report, we have called “Jobholders” who are aged at least 22 but under pensionable age and who have earnings of more than £7,475 “Eligible Jobholders”.
- As well as automatically enrolling Eligible Jobholders, employers must enrol all other Jobholders into a qualifying pension scheme if those Jobholders request it.
- A qualifying pension scheme can be the employer’s existing occupational pension scheme or a new scheme set up by the employer or a personal pension scheme, if it meets certain statutory requirements. Otherwise, employers will have to enrol Eligible Jobholders and Jobholders who request to opt in into NEST (a central, defined contribution scheme set up by the Government).
- Employers must make contributions on behalf of Eligible Jobholders and Jobholders who request to opt in to the qualifying pension scheme.
- Employers must enrol workers with earnings of less than £5,035 (but who would otherwise be Jobholders) into a pension scheme if those workers request it. However, employers do not need to make contributions to the scheme for these workers.
- These duties are to be phased in between October 2012 and 2016. If the employer is designating a defined benefit or hybrid scheme, however, an employer can defer automatic enrolment for up to four years.
Note: we anticipate that the date for complying with the auto-enrolment requirements (the “staging date”) for most of our clients will be between 2013 and 2014.
The role of trustees
Auto-enrolment duties are owed by employers. Third parties (such as pension scheme trustees and scheme administrators) may, however, be subject to:
- civil penalties from the Pensions Regulator; and
- a “Third Party Compliance Notice” requiring compliance action to be taken,
if the employer fails to comply with its auto-enrolment obligations because of the act or omission of that third party. Trustees of pension schemes will, therefore, need to help the employer to comply with its auto-enrolment obligations. In this regard, section 32 of the Act gives pension schemes trustees a statutory power to modify the scheme rules, by resolution, to comply with some of the auto-enrolment requirements, including, with the employer’s consent, (1) increasing contributions to the scheme (or the basis on which contributions are calculated); and (2) removing any impediments in scheme provisions that could prevent the employer from auto‑enrolling Eligible Jobholders.
Regulations and consultations
The regulations (draft and final)
Much of the detail around auto-enrolment and NEST is contained in regulations made under the Act. To date, 12 sets of regulations have been passed. A further four draft regulations are being consulted on under the 19 July consultation (see below).
On 28 April 2011, the DWP issued an informal consultation outlining plans for amendments to secondary legislation to implement the MAEW Review recommendations, together with some technical amendments. This was followed on 19 July 2011 by a formal consultation, entitled “Workplace Pension Reform – Completing the legislative framework for Automatic Enrolment.” The latter consults on proposed amendments to regulations made in exercise of powers under the Act and proposed regulations to be made under powers to be introduced by the Bill. Four sets of draft regulations are being consulted on which will introduce a number of changes to the auto-enrolment regime, including:
- Early staging: Employers with staging dates in October and November 2012 will be able to bring forward their staging dates to as early as 1 July 2012 if they want, as long as they notify the Pensions Regulator first.
- Completion and registration formalities around waiting periods: A key change introduced by the Bill is a provision allowing employers to operate a three month waiting period for complying with their auto‑enrolment duties. A Jobholder may, however, require his employer to enrol him in this three month waiting period by serving notice on the employer. Under the draft regulations, employers will be given a further month after the end of the waiting period to complete the auto‑enrolment process and registration formalities.
- Registering with the Pensions Regulator: employers will be given four months (an increase from the two months specified currently under regulations) after their staging date within which to register auto-enrolment information with the Pensions Regulator.
- Closing or changing a qualifying scheme: the draft regulations require an employer to tell Jobholders of the employer’s duty (imposed under provisions under the Bill) to provide a qualifying scheme if active membership is lost as a result of the employer closing or changing its scheme (but not because of the Jobholder’s own act or omission).
- Waiting period notices: formal requirements around waiting period notices that have to be sent to Eligible Jobholders will be introduced; notably, Eligible Jobholders have to be told that they have a right to opt into the employer’s designated scheme during the waiting period.
- Self-certification: new regulations will be introduced to implement the alternative self-certification regime for employers with occupational money purchase or personal pension schemes. Employers will have to be satisfied that their scheme meets at least one of the following criteria for each Jobholder:
- a minimum 9% contribution of the Jobholder’s pensionable earnings (inclusive of a 4% employer contribution); or
- a minimum 8% contribution of the Jobholder’s pensionable earnings (inclusive of a 3% employer contribution) provided that the total pensionable earnings of all Jobholders to whom this criteria applies in aggregate constitutes at least 85% of their total earnings; or
- A minimum 7% contribution of the Jobholder’s total earnings (inclusive of a 3% employer contribution).
Note: “Pensionable earnings” is the higher of the employer’s definition of pensionable earnings or basic pay.
The DWP plans to bring these draft regulations into effect in early 2012.
Unresolved issues/problem areas
Despite the measures contained in the Bill and the regulations (those already enacted and the draft regulations being consulted on), a number of unresolved issues and problem areas exist for employers in complying with auto‑enrolment:
Employers using salary sacrifice arrangements to pay pension contributions must ensure that the terms around salary sacrifice do not restrict a Jobholder from being auto‑enrolled into the employer’s pension scheme. Neither the Bill nor the regulations deal with salary sacrifice. In its guidance (see the Schedule to this report), the Pensions Regulator has stated the following in relation to salary sacrifice:
- salary sacrifice is not necessarily incompatible with auto‑enrolment;
- where a Jobholder has to consent to a salary sacrifice arrangement, however, this will be a breach of the auto‑enrolment requirements; and
- for Jobholders who do not want to use a salary sacrifice arrangement, the employer will have to make available an alternative payment method.
In view of these guidelines, we consider that employers can only operate salary sacrifice arrangements to pay pension contributions if they combine it with ‘a non-salary sacrifice’ alternative (for Jobholders who do not want to use a salary sacrifice arrangement). The precise terms of such an arrangement should be thought through carefully.
Where pension provision forms part of a flexible benefits package, the Pensions Regulator’s guidance states that the sole or main purpose of a flexible package arrangement must not be to induce individuals to opt out of a qualifying scheme. Particular care must also be exercised in relation to the statutory minimum contributions required for the scheme to constitute a qualifying pension scheme; employees must not be allowed to “flex down” below the statutory minimum in exchange for another benefit.
As the legislation is currently drafted, Eligible Jobholders are first automatically enrolled into a scheme and only then have the choice of opting out. People who have registered for enhanced protection (ie so that they are not subject to the lifetime allowance for any pensions savings that have accrued before 6 April 2006) will lose that protection if they are auto-enrolled into a qualifying pension scheme (as one of the terms of enhanced protection is that the person claiming it should not accrue any further benefits).
Although there is no obligation on employers to do so, employers may wish to ensure that employees are made aware, prior to being auto-enrolled, that they could lose enhanced protection. They may need to do so again if the employee opts-out and has to be auto-enrolled again three years later. In its January 2010 consultation, the DWP has stated that providing factual information about the implications of membership for those who have claimed enhanced protection should not count as an inducement to opt-out of auto-enrolment.
Currently, agency workers do not have to be provided with the same pension arrangements as the rest of the workforce. Under section 89 of the Act (yet to be brought into force), employers or agencies would be obliged to make pension arrangements for agency workers in the same way that they have to provide for the rest of their workforce (ie auto-enrolment, compulsory contributions etc).
Broadly, under section 89 of the Act, it is the person who is responsible for paying the agency worker who has to comply with the auto-enrolment requirements for that worker. Companies employing agency workers should, therefore, review their contracts with agencies to ensure who is responsible for meeting the auto-enrolment requirements under the contract and who bears the cost.
We consider below two key problems in relation to overseas workers (arising out of legislation as currently drafted):
- If UK Jobholders working in the European Economic Area (EEA) are enrolled into a UK scheme, the scheme would have to satisfy not only the requirements of the auto-enrolment legislation but also, under the IORPS Directive 2003/41/EC, the legal and regulatory requirements of the country in which the Jobholder is working. It would be very difficult for UK schemes to satisfy the requirements of another country in the EEA.
On 12 July 2001, the Public Bill Committee considered a clause in the Bill which would allow for regulations to be made to exempt certain cross-border employment from the auto-enrolment duties. It is hoped that the clause will be enacted and the regulations passed so that employers with Jobholders in the EEA will not have to comply with the auto-enrolment requirements for them.
- No exemption exists for expatriates (workers from overseas working in the UK). Employers who employ expatriates will need to enrol them into a qualifying pension scheme. However, it is possible that these workers will already be members of a pension scheme abroad and for such a scheme to be a qualifying pension scheme for auto-enrolment purposes, certain statutory conditions need to be satisfied – broadly, an Eligible Jobholder must be receiving employer contributions of at least 3% and there must be a regulatory body regulating the scheme in that country. In practice, the overseas scheme may not satisfy these requirements. Alternatively, if these Jobholders are to be enrolled into a private UK scheme, this may be particularly disruptive or costly if they are working in the UK for a relatively short period – where that period is three months or less, the employer may use the three month waiting period so as not to have to enrol them into the scheme, subject to the worker’s right to opt-in during that period.
Group personal pension schemes
For a group personal pension scheme to satisfy the quality requirements for auto-enrolment purposes, there must, under section 26 of the Act, be an agreement in place between the insurance company providing the personal pension arrangement and the employer, requiring the employer to pay minimum contributions to the scheme. If there is a shortfall in the employer’s contributions and 8% of the jobholder’s “qualifying earnings”, under an agreement between the insurance company and the Jobholder, the Jobholder must pay the shortfall.
Difficulties may be encountered in practice in getting Jobholders to enter into such an agreement with the insurance company concerned and to enforce them.
In its July 2011 consultation, the DWP said that it has no plans to issue further regulations once the four draft regulations that it is consulting on in this consultation have been enacted (likely to be in early 2012). This is subject to any changes the DWP may make to the provision of information requirements under the auto‑enrolment regime as part of its review of the statutory disclosure requirements for pension schemes – we understand that the DWP is planning to formally consult about this later this year. With a number of unresolved issues and the likelihood of practical problems emerging as employers take steps to comply with their auto-enrolment requirements, however, it is more than likely that more regulations and guidance will be required in the not too distant future to fine-tune the autoenrolment regime.
Guidance (and other information) from the Pensions Regulator and DWP
To assist with understanding the auto-enrolment requirements, the Pensions Regulator and the DWP have issued guidance (and other information) in relation to the regime (the table below lists the main guidance):
Click here to see table.
In May 2011, the Pensions Regulator also announced that:
- It will write to almost 600 of the UK’s largest companies and organisations marking 18 months to their staging dates.
- It will run a form of hardship policy for employers who cannot afford to comply with the employers’ auto‑enrolment duties. So far, no details of that policy have been revealed, but we consider that it is likely to apply in exceptional circumstances only and with the aim of helping employers overcome obstacles to complying.