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- 1. All about automatic pension enrolment Craig Looker, Associate 14 September 2012
- 2. Agenda • Employer duties • When will the automatic enrolment duties apply? • Assessing eligibility • What is an automatic enrolment scheme? 2
- 3. Key employer duties 1. Enrol “eligible jobholders” automatically into an automatic enrolment scheme 2. Pay minimum DC contributions or provide minimum DB benefits 3. Re-enrol eligible jobholders who opt-out approx every 3yrs 3
- 4. Other employer duties • Provide eligible jobholders, non-eligible jobholders and entitled workers with prescribed information • Register with Pensions Regulator & provide specified information – within 4 months of “staging date” • Keep records of auto-enrolments, opt-ins, opt-outs and contributions – legally, for at least 6 years (4 years for opt-outs) – practically, for much longer • Not to induce opt-outs 4
- 5. When? • Auto-enrolment introduced gradually - larger employers first; smaller employers later • „Staging date‟ determined by number of people in employer‟s PAYE payroll scheme on 1 April 2012 • See www.tpr.gov.uk/staging 5
- 6. When? • What about: – an employer with more than one payroll scheme? – multi-employer payroll schemes? – small employers in large payroll scheme? • Employers can bring staging date forward 6
- 7. Waiting period - postponement • Employers can operate waiting period of up to 3 months by giving notice (within 1 month) • May help with: – casual/seasonal workers – temporary workers – quick leavers – alignment of auto-enrolment with payroll • Jobholders‟ right to opt-in 7
- 8. Transitional period for DB & hybrid schemes • Employers with DB/hybrid schemes can delay auto- enrolment until 1 October 2017 • Only applies to certain eligible workers • Must give notice • Must auto-enrol into appropriate scheme at end of transitional period • Worker can still opt in 8
- 9. Eligible jobholders • An “eligible jobholder" is a worker who: – is aged 22 to state pension age – is working, or ordinarily working, in the UK – earns at least £8,105 per annum (2012/13) • Employer will need to monitor age and earnings • Pay reference periods • Already a member of a qualifying scheme 9
- 10. Eligible jobholders • What about: – agency workers? – casual workers/zero-hours contractors? – overseas workers? • Multiple contracts of employment 10
- 11. Non-eligible jobholders • A non-eligible “jobholder” is a worker who is working, or ordinarily working, in the UK and: 1. earning more than £5,564 and less than £8,105 (2012/13) and aged between 16 and 75, or 2. earning more than £8,105 (2012/13) and aged between 16 and 22 or state pension age and 75 • Right to opt-in & receive minimum employer contributions/DB benefits 11
- 12. Entitled workers • Entitled workers have a right to join a workplace pension scheme • Not entitled to receive employer contributions/ minimum benefits 12
- 13. Summary of worker categories Earnings Age 16-21 Age 22-SPA SPA- age 75 Non-eligible Eligible Non-eligible jobholder – jobholder – jobholder – £8,105 or may opt-in to must be auto- may opt-in to more an automatic enrolled into an an automatic enrolment automatic enrolment scheme enrolment scheme scheme £5,564 - Non-eligible jobholder – may opt-in to an £8,105 automatic enrolment scheme Entitled worker – can request to join a pension Less than scheme (but it does not have to be a qualifying £5,564 scheme and not entitled to employer contributions) 13
- 14. Assessing workers‟ eligibility • A worker‟s eligibility must be assessed on: – employer‟s staging date (for existing staff) – „deferral date‟ (where waiting period is applied) – worker‟s start date (for new recruits after staging date) – worker‟s 22nd birthday (where this is after staging date) – 1st day of each pay reference period after staging date (for non-eligible jobholders/entitled workers) – date on which opt-in notice/joining notice is received – day after transitional period for DB/hybrid schemes ends (where employer makes use of this option) • Carry out initial assessment before staging date 14
- 15. Automatically enrolling everybody • Why might an employer want to do this? • Issues to consider: – opt-outs and refunds – authority to auto-enrol and deduct contributions from pay – data protection – automatic re-enrolment 15
- 16. Contractual enrolment • Where employer enrols workers into a pension scheme pursuant to a contractual agreement • Legal duty under s3 PA2008 does not apply, so: – no statutory right to opt-out – more limited information requirements • Reduces need to treat different workers differently • May work better with enrolling everybody 16
- 17. Opting-out • Eligible jobholders and non-eligible jobholders who opt-in can opt-out within 1 month and receive a refund of their contributions, but: – not before they have been auto-enrolled – opt-out paperwork must come from scheme – employer must not incentivise opt-outs – employers must re-enrol every 3 years (within 6 month window) • Can leave scheme after statutory opt-out window • Beware workers with enhanced/fixed protection! 17
- 18. What is an automatic enrolment scheme? • An automatic enrolment scheme: (i) must be a qualifying pension scheme, and (ii) must not contain any provisions which: – prevent the employer fulfilling its auto- enrolment and re-enrolment duties, and – require a member to make a choice or provide information 18
- 19. What is a qualifying pension scheme? • To be a qualifying pension scheme, a scheme must: – be an HMRC registered occupational or personal pension scheme operating automatic enrolment; and – meet minimum "quality standards" 19
- 20. Qualifying pension scheme - DC • Total contributions of 8% of “qualifying earnings” (min 3% employer) OR • Total contributions of 9% of “pensionable earnings” (min 4% employer) – where pensionable earnings are equal to or greater than basic pay OR • Total contributions of 8% of “pensionable earnings” (min 3% employer) - where at least 85% of total earnings of all eligible jobholders is pensionable OR • Total contributions of 7% of “earnings” (min 3% employer) – i.e. contributions are payable on all earnings 20
- 21. Minimum DC contributions • Minimum employer DC contributions to be phased-in over 5 years Date Minimum employer Minimum total contribution contribution (i.e. employer and employee contributions and tax relief) Oct 2012 – 1% 2% Sept 2017 Oct 2017 - 2% 5% Sept 2018 From Oct 3% 8% 2018 21
- 22. Qualifying pension scheme - DB • Contracted-out OR • Contracted-in with: – pension for life at state pension age – annual accrual rate of 1/120th of average “qualifying earnings” in last three tax years preceding the end of pensionable service up to maximum of 40 years, and – statutory revaluation and pension increases 22
- 23. Reviewing scheme rules • A scheme‟s rules need to be reviewed to ensure they meet statutory requirements • In particular, employers need to review: – eligibility and admittance (already mentioned) – employer and member contribution rates and definition of Pensionable Earnings (already mentioned) – rules on leaving the scheme and refunds – enhanced/fixed protection rules – flexible retirement rules 23
- 24. Making changes to an existing scheme • An employer may also want to: – change employer and member contribution rates – close existing scheme to new members – reduce/cease future accrual • Consultation requirements – minimum 60 days • May need trustee consent • Amending contracts of employment 24
- 25. Salary sacrifice • Salary sacrifice arrangements can be continued • Care needs to be taken to ensure that it is valid and implemented consistently with the employer‟s automatic enrolment duties • HMRC has issued guidance on opting out, and has confirmed there is no longer a requirement for the arrangement to be in force for 12 months
- 26. Useful links • The Pensions Regulator‟s „Pensions reform & auto-enrolment‟ homepage - http://www.thepensionsregulator.gov.uk/pensions-reform.aspx • The Pensions Regulator‟s detailed auto-enrolment guidance - http://www.thepensionsregulator.gov.uk/pensions-reform/detailed- guidance.aspx • The Pensions Regulator‟s „Staging date timeline‟ - http://www.thepensionsregulator.gov.uk/pensions-reform/staging-date- timeline.aspx • The Pensions Regulator „How to bring your staging date forward‟ - http://www.thepensionsregulator.gov.uk/pensions-reform/bringing- staging-date-forward.aspx • Follow us on Twitter @pensionlawyers and @ready2autoenrol 26
- 27. Any Questions?
Notas do Editor
- From their staging date (which I will go on to talk about in more detail), employers will be required to automatically enrol all eligible workers (known as “eligible jobholders” ) into an automatic enrolment scheme. Automatic enrolment means enrolling an individual into a pension scheme without the individual needing to take any action.Once an individual is enrolled, an employer will need to provide them with a minimum level of contributions (for a DC scheme) or a minimum level of benefits (for a DB scheme).Workers will have the right to opt-out or leave the scheme at any time after they have been auto-enrolled, but employers will be required to re-enrol any eligible jobholders who opt-out on the third anniversary of their staging date, and every 3 years thereafter (unless the individual has opted-out within the 12 months prior to the re-enrolment date). (Note: there is some flexibility which allows employers to choose a re-enrolment date 3 months either side of the 3 year anniversaries).
- Employers must also: provide eligible jobholders with specified information (e.g. details of the scheme, informing them that they are being automatically enrolled and when, details of employer and employee contributions, informing the individual of their right to opt-out) – this must be provided in writing (which includes email) within 1 month of the individual’s automatic enrolment date (i.e. the first date on which they became eligible for automatic enrolment under section 3 Pensions Act 2008). Employers are also required to provide information to non-eligible jobholders and entitled workers about their new rights. register with the Pensions Regulator within 4 months after their staging date and provide the Regulator with specified information keep auto-enrolment records (e.g. details of contributions, opt-outs, opt-ins, joining requests etc) for at least 6 yearsIn addition, employers are prohibited from inducing an individual to opt-out of their pension scheme.
- The automatic enrolment duty is being phased in from October 2012, starting with the largest employers. Employers must be prepared to comply with these new legal requirements from their ‘staging date’. An employer’s staging date is determined by reference to the number of people in its PAYE payroll scheme on 1 April 2012. An employer’s staging date will not change even if the number of people in its payroll scheme changes significantly after this date.An employer can confirm its staging date on the Pension Regulator’s website.
- If an employer operates more than one PAYE payroll scheme (and therefore has more than one PAYE number) its staging date will be determined by the number of people in its largest payroll scheme on 1 April 2012.If an employer participates in a multi-employer payroll scheme (under which all employers have the same PAYE number) each participating employer’s staging date will be the same as it will be determined by the total number of people in the scheme on 1 April 2012. Employers can bring forward their staging date (within certain prescribed limits) by giving notice to the Pensions Regulator. An employer may want to do this to align its staging date with payroll processes or to avoid busy periods (e.g. Christmas or year end). An employer’s staging date cannot be put back.
- Employers can operate a 3 month waiting period – deferment of an individual jobholder's automatic enrolment date by up to three months is possible by giving notice to the jobholder. The notice must be given within one month of the employer’s staging date/the jobholder commencing employment/the individual becoming eligible (whichever is earlier). This waiting period is intended to provide an administrative easement for employers, particularly those who would otherwise have to automatically enrol short-term workers who leave soon after starting work. However, it may also be used by employers to align the auto-enrolment requirements with payroll process/periods and/or to delay the requirement to pay minimum employer contributions.Note: Jobholders will still be entitled to opt-in to a qualifying scheme and receive employer contributions during the waiting period and they must be notified of this right by their employer.[Detail re notice procedure (if you have time): Where an employer intends to operate a waiting period it must give written notice to the affected workers within one month of the date on which they become an eligible jobholder whilst employed by that employer. The written notice must contain certain prescribed information, which must include: a statement that the employer has deferred automatic enrolment until the deferral date, the deferral date, the fact that the worker will be automatically enrolled with effect from the deferral date (if they still meet the criteria to be an eligible jobholder on that date), and the fact that if the worker is a jobholder they have the right to opt-in to a qualifying scheme during the deferral period and receive minimum employer contributions or a minimum level of benefits. An employer may choose to produce a generic notice which it can send to all staff which includes information about the waiting period and which also includes the mandatory information that must be provided to non-eligible jobholders, entitled workers and jobholders who are already members of a qualifying pension scheme. Alternatively, an employer can produce a tailored notice which will only be sent to affected workers. One advantage of sending out a generic notice to all staff is that it means that the employer can postpone the need to assess the eligibility status of its workers until the deferred date.]
- Transitional arrangements enable employers operating aDB or hybrid scheme to delay their auto-enrolment duty in respect of certain eligible jobholders until 1 October 2017. If an employer so chooses (and provides written notice to the relevant employees within 1 month of the employer’s first enrolment date (i.e. the first date on which the new auto-enrolment duty applies to the employer) the auto-enrolment duty is modified for those employees during the transitional period. Note that where an employer chooses to postpone the application of the auto-enrolment duty, this does not prevent an eligible jobholder from opting-in to a QPS during the transitional period, if they wish to do so. But by postponing the auto-enrolment duty the employer is likely to reduce take-up during this period. In detail: the transitional period will end on the earlier of 1 October 2017 or the date any of the conditions (below) cease to be met in respect of an eligible jobholder. The transitional period does not delay auto-enrolment for all eligible jobholders, it can only apply to those that meet the following conditions (where the employer gives them the statutory notice): the worker meets the criteria to be an eligible jobholder on the employer’s first enrolment date the eligible jobholder has been employed by the employer for a continuous period before the employer’s first enrolment date at a point before the employer’s first enrolment date, the eligible jobholder was entitled to become an active member of a DB or a hybrid pension scheme (it doesn’t seem to matter if they are only eligible to join the DC scheme) the eligible jobholder is, and always has been since that point, entitled to become an active member of a DB or a hybrid pension scheme, and that DB or hybrid pension scheme is a qualifying scheme, as is any such pension scheme the eligible jobholder is entitled to become an active member of, on or after the employer’s first enrolment date.Once satisfied that the worker is an eligible jobholder and the conditions are all met, an employer can apply the transitional period to that eligible jobholder by giving the jobholder written notice, within the prescribed period, of their intention to defer automatic enrolment. During the transitional period, the employer must monitor that the conditions continue to be met. If they cease to be met at any time, the modification falls away and the transitional period ends. What must happen at the end of the transitional period differs depending upon whether the transitional period comes to an end: 1. at the end of the statutory transitional period; or 2. because the member ceases to be entitled to join the relevant DB or hybrid scheme (e.g. because the scheme is closed to new members) or because the scheme ceases to be a qualifying scheme. In scenario 1, at the end of the transitional period ,the individual must be auto-enrolled into a DB or hybrid scheme which meets the qualifying criteria. In scenario 2, the individual must be either: (i) auto-enrolled into a DB or hybrid scheme with effect from the day after the individual ceased to be entitled/the scheme ceased to be a qualifying scheme, or(ii) auto-enrolled into a DC scheme with effect from the eligible jobholder's original automatic enrolment date (i.e. as if the transitional period had not applied). The employer is required to pay contributions with effect from the original automatic enrolment date and the jobholder can do so if they want to but they do not have to.The Regulator's Guidance contains a helpful summary of the position.
- For automatic enrolment purposes, workers will fall into 3 categories:eligible jobholdersnon-eligible; and entitled workers An eligible jobholder is a person who is:(i) working, or ordinarily working, in the UK(ii) aged at least 22 and under state pension age, and (iii) earnings at least £8,105 pa (2012/13).Whether someone is earning above the earnings trigger £8,105 needs to be checked in every pay reference period (i.e. the period by reference to which the worker’s regular salary is paid (e.g. weekly or monthly)) after an employer’s staging date. If a worker’s earnings exceed the trigger (on a pro-rata basis) during a pay reference period they will need to be auto-enrolled, assuming they meet the other eligibility criteria, even if the employee’s increase in earnings was temporary. This means that employers will need to monitor worker’s pay on an ongoing basis and it may mean that the duty to auto-enrol could be triggered by a one-off pay spike.If an eligible jobholder is already a member of a qualifying pension scheme the employer is deemed to have already met their legal duty in respect of that worker.
- Agency workers: the obligation to auto-enrol agency workers and pay the minimum employer contribution will fall on the person who is responsible for paying the worker or, if that is unclear, whoever actually pays them. Where the agency is responsible for auto-enrolling it is likely that the costs (including the minimum employer contribution) will be passed on. The staging date (SD) for agency workers will be the SD of the agency. An employer should ask its agency when their SD is and whether they plan to transfer the costs of auto-enrolment. Agencies will have different SDs meaning costs may rise for some agencies before others.Casual workers/zero-hours contracts i.e. workers who have entered into a contract with a company but on a very flexible, no obligation basis: A casual worker may be in one week and not the next. How do you deal with them for auto-enrolment purposes? If a casual worker exceeds the earnings trigger in a pay reference period they would need to be auto-enrolled (assuming they meet the other eligibility criteria). One way of avoiding the need to auto-enrol temporary/casual workers as soon as they exceed the trigger would be to operate a waiting period. Overseas workers: In summary, anyone who works, or ordinarily works, in the UK will have to be auto-enrolled by their employer. Whether or not an individual works in the UK is a question of fact and will be determined by factors such as who the employer is and where they are located, where the individual works, where the individual is paid and in what currency. Even if someone is working overseas they may still be considered to be “ordinarily working in the UK” if they are representing a UK business overseas. Therefore, the position of anyone who works overseas for a UK employer needs to be considered carefully. [Further detail if time permits: Where an employer operates an occupational pension scheme as its automatic enrolment scheme, it will not need to comply with the automatic enrolment duties in respect of certain European workers known as ‘qualifying persons’, even if they satisfy the relevant eligibility criteria. A ‘qualifying person’ is a person who is employed under a contract of service and whose place of work under that contract is sufficiently located in an EEA state other than the UK that his relationship with his employer is subject to the social and labour law relevant to the field of occupational pension schemes of that EEA state. These workers have been excluded from the automatic enrolment regime, where their employer operates an occupational pension scheme as its automatic enrolment scheme, on the basis that if they were enrolled into an occupational pension scheme, that scheme would need to register as a cross-border scheme and comply with the regulatory requirements applicable to such schemes. This could be costly, especially for defined benefit occupational pension schemes, as any funding deficit would need to paid off immediately. This exception does not apply where the employer operates a contract based scheme as its automatic enrolment scheme.)]Multiple contracts: The Regulator’s Guidance 2 says that “An employer should assess each contract separately, even if they have more than one contract with an individual. If an employer has multiple contracts with the same individual, they will need to consider if the totality of those contracts constitute a single employment relationship with the worker. The employer may wish to consider taking appropriate advice, if they are unsure.” This issue may arise more frequently in a public sector context.
- A non-eligible jobholder is a person who is working or ordinarily working in the UK and:earning more than £5,564 and less than £8,105 per annum and aged between 16 and 75, orearning more than £8,105 (2012/13) and aged between 16 and 22 or state pension age and 75.Non-eligible jobholders must be given the opportunity by their employer to opt-into a qualifying pension scheme. Where a non-eligible jobholder opts-in their employer is then under a duty to enrol the individual into a qualifying scheme and to pay the minimum employer contributions/provide minimum benefits.To opt-in a non-eligible jobholder must give an ‘opt-in’ notice to their employer. The opt-in notice must meet certain statutory conditions.
- A worker who is not an eligible jobholder or a non-eligible jobholder is known as an “entitled worker” (even though they are not entitled to very much!). Entitled workers must be given the opportunity to join a workplace pension scheme. However, they are not entitled to receive minimum employer contributions/ minimum benefits.
- This table is designed for delegates reference – it contains a summary of the different eligibility categories for AE purposes.
- This slide sets out the dates on which a worker’s eligibility for automatic enrolment must be assessed.An employer may also want to carry out an initial assessment of its workforce to determine which categories its workers are likely to fall into. This will help it to predict the number of workers who will need to be auto-enrolled on the employer’s staging date, the likely take-up rate and the likely increase in its pension costs.
- To avoid the need to continually monitor workers’ eligibility, some employers may decided to simply enrol all of their workers into a qualifying pension scheme, regardless of eligibility. Whilst enrolling all workers sounds straightforward, there are a number of issues that need to be addressed if an employer wants to do this: 1. Under the AE legislation, eligible jobholders are entitled to opt-out within the first month and receive a refund of their contribution. However, non-eligible workers do not have this right. Where a non-eligible jobholder is enrolled automatically into an occupational pension scheme, they will have the right to receive a refund where they opt-out within the first month in any event. However, non-eligible jobholders who are auto-enrolled into a contract based scheme (such as a GPP) will not have this right. This might cause an employee relations issue if some workers can opt-out within the first month and get a refund of contributions but others cannot. One way around this (if a GPP is used) would be to delay paying member contributions to a scheme for as long as possible under the legislation, giving workers maximum time to opt-out. another way to deal with this is to use contractual enrolment (see next slide). 2. Authority to auto-enrol and deduct contributions - the legislation gives employers statutory authority to automatically enrol eligible jobholders and deduct contributions from their pay. However, this does not apply to non-eligible workers. Therefore, a specific contractual power to auto enrol and deduct contributions will need to be included in the contract of employment for non-eligible workers. 3. Data protection – the contracts of employment of non-eligible workers should also give the employer consent to pass personal data about the employees to the pension scheme into which they will be auto-enrolled. 4. What do you plan to do about automatic re-enrolment? Will you automatically re-enrol to everyone who opts-out or just eligible jobholders?
- The Pensions Regulator’s automatic enrolment guidance refers to the concept of ‘contractual enrolment’. Contractual enrolment occurs where an individual is enrolled into a qualifying pension scheme with effect from their first day of employment pursuant to a contractual agreement (such as their contract of employment). Where an employer contractually enrols a worker into a qualifying pension scheme on or before the date on which the statutory duty to automatically enrol the worker under section 3 of the Pensions Act 2008 arises, the statutory automatic enrolment duty does not apply in respect of that worker when they are contractually enrolled. One advantage to this is that the statutory right to opt-out and receive a refund of contributions also does not apply to that worker. This is administratively simpler and reduces the need to treat different workers differently - as the worker in the same position as non-eligible jobholders and entitled workers who, if they want to opt-out, must do so in accordance with the rules of the relevant scheme. A further advantage to the employer is that the information it must provide to a worker in these circumstances is more limited and the information processes simpler than where an individual is automatically enrolled pursuant to the statutory automatic enrolment duty under section 3. If contractual enrolment is used, the employer must still register with the Pensions Regulator and provide information to confirm that it has complied with its automatic enrolment duties.[If time permits: Where a worker who has been contractually enrolled into a qualifying pension scheme leaves the scheme, their employer will need to assess the worker’s status in the next pay reference period and determine what eligibility category the worker falls into. The action that an employer will then need to take depends upon which eligibility category the worker falls into on the assessment date and whether they were an eligible jobholder at some time while they were an active member of the scheme: If the worker was an eligible jobholder at some time while they were an active member of the scheme and the assessment reveals that they are still an eligible worker then their employer will not need to assess their status again until the employer’s next re-enrolment date. If the worker is still an eligible jobholder at that time they will need to be re-enrolled into a qualifying pension scheme (unless they left the scheme within the past 12 months). If the worker did not meet the criteria to be an eligible jobholder at some time while they were an active member of the scheme then their employer will need to need to assess their status on an ongoing basis. If the worker subsequently becomes an eligible jobholder or, if they are a non-eligible jobholder and they exercise their right to opt-in, their employer will need to automatically enrol them into a qualifying pension scheme at that time. Therefore, an employer may wish to monitor the status of workers who are contractually enrolled into a qualifying pension scheme while they are members of the scheme, even though it is not required to do so. What happens if an employer brings a worker’s membership of a scheme to an end after they have been contractually enrolled? In these circumstances the employer would be required to comply with its statutory automatic enrolment duties and make arrangements for any eligible jobholders to become active members of a qualifying pension scheme with effect from the day after active membership ceased. The employer would also need to notify non-eligible jobholders and entitled workers of their respective right to opt-in or to join a pension scheme.]
- Eligible jobholders and non-eligible jobholders who opt-in can opt-out within the statutory 1 month ‘opt-out period’. If they do so, they will be treated as if they never joined the scheme and will be entitled to a refund of their contributions. For occupational pension schemes the statutory ‘opt-out period’ is the period of one month starting from the later of when the jobholder: became an active member of the scheme, or received the written enrolment information.For personal pension schemes the statutory ‘opt-out period’ is the period of one month starting from the later of when the jobholder is: given the terms and conditions of the agreement to become an active member, or provided with written enrolment information.An individual can leave the scheme after the statutory ‘opt-out period’ has ended in accordance with the rules of the relevant scheme.Employers must re-enrol eligible jobholders who opt-out or leave their scheme every 3 years (unless they have opted-out within the 12 months prior to re-enrolment). The initial 3 year period runs from the employer’s staging date. Employer’s have some flexibility to choose their re-enrolment date but it must fall within the period 3 months either side of the 3 year anniversary. Subsequent re-enrolment dates must fall within 3 months either side of the 3 year anniversary of the employer’s last re-enrolment date.Non-eligible jobholders who opt-in and entitled workers will be able to leave the scheme in accordance with the scheme’s rules.Individuals with enhanced/fixed protection will lose their protected status if they accrue further benefits under a registered pension scheme (which is likely to have serious tax consequences for them). They will have to opt-out within the first month to avoid this. Therefore, you will need to ensure that you inform members who may be affected by this of the consequences if they remain in the scheme.
- Employers must automatically enrol all eligible jobholders into an automatic enrolment scheme. To be an automatic enrolment scheme a scheme must be a qualifying pension scheme and it must not contain any provisions which: prevent the employer from making arrangements for eligible jobholders (and non-eligible jobholders who opt-in) to become active members of the scheme, prevent the employer from complying with its re-enrolment duty, require members to make a choice on any matter or provide any information to remain an active memberThis may be the employer’s own scheme or the National Employment Savings Trust (NEST).It will be necessary to review the eligibility criteria of the Scheme to ensure that it complies with the AE regime.Trustees must offer a default fund as part of its Scheme structure.
- To be a qualifying scheme, a scheme must: be an HMRC registered occupational or personal pension scheme operating automatic enrolment; and satisfy certain minimum "quality standards“.
- To be treated as a qualifying scheme, a DC scheme must meet one of the minimum contribution requirements set out on the slide. An employer can self-certify that these requirements are met.Earnings includes:(i) salary, wages, commission, bonuses and overtime(ii) statutory sick pay(iii) statutory maternity pay & ordinary/additional statutory paternity pay, and(iv) statutory adoption pay. Qualifying earnings is a jobholder’s gross earnings between £5,035 and £33,540 (these figures will be increased before auto-enrolment is launched). Pensionable earnings means the earnings of the jobholder on which contributions are payable to the pension scheme by the employer and jobholder. Basic pay means the earnings of the jobholder, disregarding any commission, bonuses, overtime or similar payments.It is important that contributions rules are reviewed to ensure they comply with the AE regime. Employer matching of member contributions is permitted, provided the above minimum levels are met.
- Employer contributions towards money purchase schemes will be phased in over a five year period from October 2012 (note: this has been extended by 1 year following changes to the staging dates for smaller employers). Employers will be required to pay minimum contributions of 1% of qualifying earnings until Sept 2017, followed by 1 year at 2%. This will rise to 3% of qualifying earnings in October 2018. The minimum total contributions are also being phased in starting at 2% of qualifying earnings from Oct 2012 and rising to 8% of qualifying earnings by October 2018 (note: the employee remaining 1% (to bring the total contribution up to 8%) will come from tax relief). Employees may choose to contribute more, although employers will not be required to match any voluntary contributions. Phasing contributions does not apply to defined benefit schemes, which must comply with the statutory funding requirements at all times. However, employers operating DB schemes may be able to postpone the auto-enrolment requirements until 1 October 2017.
- A DB occupational pension scheme that has its main administration in the UK meets the quality requirement if:(i) the jobholder is in contracted-out employment; or(ii) it meets the “test scheme standard”.A scheme will meet the test scheme standard wherethe pensions to be provided to relevant members of the scheme are broadly equivalent to, or better than, those that would be provided for them under the statutory “test scheme”. A scheme will meet the test scheme standard if either:(i) it provides members with a pension for life commencing at age state pension age (SPA), (ii) the annual rate of the pension at SPA is equal to or more than 1/120 of average qualifying earnings in the last three tax years preceding the end of pensionable service multiplied by the number of years of pensionable service (up to a maximum of 40 years), and(iii) it provides statutory revaluation and pension increases.An employer can self-certify that its scheme meets these requirements where it is clear that it does so. In other cases the scheme actuary should be asked to certify that a DB scheme meets the quality requirements.Note: Additional requirements apply to average salary schemes and hybrid schemes.
- Where an employer plans to use its existing scheme for automatic enrolment purposes the scheme’s rules will need to be reviewed (and changes may need to be made) to ensure that it satisfies the statutory quality requirements. In particular, an employer will need to review: eligibility and admittance rules – to ensure that everyone who is eligible can be automatically enrolled into the scheme and that they are not required to do anything to join the scheme (e.g. submit application form/medical evidence) or required to make a choice (e.g. of investment option).employer and member contribution rates and definition of Pensionable Salary – to ensure these meet the minimum requirements (for DC schemes).rules on leaving the scheme and refunds – to ensure eligible jobholders can exercise their statutory right to opt-out and receive a refund of their contributions. The Rules currently provide that a member may cease to be a member by giving one month’s notice in writing to the Trustees (this will need amendment so that eligible jobholders can opt out within the first month). Members who have less than 3 months’ Qualifying Service may elect a refund of contributions. However, there are restrictions which prevent a member who has failed to join the Scheme at the first opportunity being able to rejoin (he or she must have completed 5 years’ Service and be under age 60). This will require amendment. rules on fixed/enhanced protection – any rules preventing ‘relevant benefit accrual’ for fixed or enhanced protection members will need to be reviewed. If an individual joins an arrangement or makes a further benefit accrual, then enhanced protection or fixed protection would be lost. So this could happen if an individual is automatically enrolled into a qualifying workplace pension. The Rules provide that if a member elects for protection, the Principal Employer and the Trustees, with the consent of the member may agree to make arrangements to accommodate the election. They also provide that the Trustees shall not be liable for and “Relevant Benefit Accrual” that occurs before the Trustees have been provided with a copy of the certificate issued by HMRC which confirms that the individual has registered for enhanced protection. flexible retirement rules – members who take flexible retirement must be able to continue to accrue benefits under the scheme (unless the employer plans to offer a different qualifying scheme in these circumstances). The Rules require amendment to accommodate this.
- Where an employer plans to set up a new scheme/section which it intends to use for automatic enrolment purposes the employer may need to close an existing scheme to new members and/or future accrual. In addition, due to the increased costs associated with auto-enrolment some employers may want to reduce the pension benefits that they currently offer to their workers. Employers with more than 50 employees will need to comply with the statutory duty under s259 PA2004 to consult “affected members” (which includes active and prospective members) before they make certain so-called “listed changes” to an occupational pension scheme or a personal pension scheme (this includes GPPs and stakeholder schemes). Listed changes include:reducing or ceasing employer contributionsincreasing member contributionsclosing a scheme to new members (occupational pension schemes only) - this may apply where an employer is setting up a new scheme/section for auto-enrolment purposes. reducing/ceasing future accrual (occupational pension schemes only).The consultation period under the pensions legislation must be at least 60 days long and it is important that the employer is prepared to listen to employees’ comments and concerns and to take them into account before making a final decision on the proposed changes. An employer may also need to comply with any consultation arrangements that it has previously agreed with a trade union or other employee representatives. This may extend the consultation period that applies to beyond 60 days. Where contractual changes need to be made an extended consultation period may also apply (see next slide).
- An employer will be able to continue to operate a salary sacrifice arrangement in connection with the payment of members’ pension contributions following the introduction of automatic enrolment. In fact, employers may be attracted to salary sacrifice as a means of paying members’ pension contributions as the resulting national insurance savings could be used to offset some of the additional costs associated with automatic enrolment. However, care will need to be taken over how and when any salary sacrifice arrangement is implemented to ensure that it is valid and that it is implemented in a way that is consistent with an employer’s automatic enrolment duties (for example, an employer cannot make becoming, or remaining, an active member of an automatic enrolment scheme conditional upon entering into a salary sacrifice arrangement).HMRC has recently issued updated guidance on salary sacrifice in which it confirms that: 1. an employer can use salary sacrifice arrangements for its automatic enrolment scheme2. the employer should ensure that, when the arrangement is implemented, an effective variation of the contractual terms and conditions has taken place reducing the employee's cash earnings 3. if the employee subsequently opts out of the pension scheme or decides to stop paying into the scheme the salary sacrifice arrangement may be revised, varying the employee’s terms and conditions relating to remuneration (this can be done at any time and there is no longer a requirement for the salary sacrifice arrangement to be in force for at least 12 months), and4. where an employee exercises their statutory right to opt-out of the pension scheme within the statutory opt-out period, such that the employee will not become a member of the scheme, the employer can reimburse the employee’s sacrificed salary, if it chooses to do so. Any such payment should be made subject to the deduction of income tax and national insurance contributions.