Pension auto-enrolment phased in over four years
The auto-enrolment of employees into a pension scheme to which the employer must contribute starts in 2012. The requirement to automatically enrol eligible employees is being staged over a four-year period, while the minimum level of employer contribution will not be fully effective until October 2017. We describe the requirements.
On this page:
Who must be automatically
enrolled?
Staging arrangements
Quality
test and minimum contribution levels
Pensionable
earnings
Who can opt in?
Auto-enrolment
process
Opt-out arrangements
Re-enrolment arrangements
Monitoring
compliance
Early planning
Our
research
References
Table 1: Staging
dates for auto-enrolling.
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Key points
|
Around seven million people are not saving enough for their retirement, according to the Department for Work and Pensions (DWP). The new, rather complex legislative provisions requiring the auto-enrolment by employers of the great majority of employees into a work-based pension scheme of a specified standard, are intended to combat that problem, with inertia keeping employees who are auto-enrolled in membership. Additional annual saving of £10 billion is forecast. Many of those automatically enrolled are expected to be joining a scheme for the first time, but anyone will be able to opt out after having first been enrolled. As Angela Eagle, the minister responsible for their introduction, acknowledged, "the challenge of implementing these reforms is unprecedented," with more than one million employers affected.
Auto-enrolment starts in 2012 and implementing Regulations1, supplementing provisions in the Pensions Act 2008, have now been made. By late 2016, all eligible employees will need to have been automatically enrolled into a pension scheme that meets the quality standard and by late 2017, employers must be making a contribution of 3% of relevant earnings where the scheme is a defined-contribution (DC) arrangement. If employers do not have a satisfactory scheme, or do not wish to use their existing scheme, employees must be automatically enrolled into the National Employment Savings Trust (Nest) arrangement (originally known as personal accounts).
The new responsibilities apply to employers, not trustees. However, trustees will no doubt want to prepare for an influx of new members if their scheme is to be used for automatic enrolment.
Below we explain how the obligation to auto-enrol employees will be staged, when the minimum contribution levels will be phased in, how the process will work, what the opt-out arrangements are and when employees who opt out must be re-enrolled.
Who must be automatically enrolled?
The new provisions on auto-enrolment apply to all employees working in Great Britain who are at least 22 years of age, but under state pension age, and who are earning more than £5,035 a year in 2006/07 terms (a figure that is expected to be uprated before the provisions are effective, and presumably annually thereafter). Such workers are described as jobholders. Other workers can be automatically enrolled, as now, but there is no requirement to do so. Agency staff will be covered, but the agency will be responsible for implementing the automatic enrolment if it pays the agency workers. Equivalent provisions are being applied in Northern Ireland.
The automatic enrolment provisions apply separately to each employer. So if an employee has earnings below the minimum level from different employers, even though the total is above the threshold, they do not need to be automatically enrolled.
Employers are not required to take any action in respect of existing members of a pension scheme they offer, provided the scheme meets the quality test. If it does not do so, its members must be treated like any non-member and automatically enrolled into a scheme that does meet the standard.
Schemes that meet a "high-quality" test will be able to postpone enrolment for three months, so schemes will be able to operate a waiting period. Consequently they will be able to delay first enrolling workers until three months after their staging date. The waiting period is three months or nothing.
This dispensation applies to all defined-benefit (DB) and hybrid schemes that meet the basic quality test and any DC schemes that require a total contribution of 11% of relevant earnings, with at least 6% being paid by the employer. However, employers will not be permitted to postpone enrolment for anyone whose enrolment has already been postponed by that employer within the previous 12 months. This was a change made following consultation to provide some protection to those on short-term contracts.
Individuals must be enrolled automatically on becoming eligible, so employers will need to have a mechanism for identifying when employees turn 22 and when their earnings increase above the threshold.
Staging arrangements
The start date for auto-enrolment is to be "staged" in. DC contribution rates are to be "phased" in, which is different (see below).
The enrolment of jobholders into DB or hybrid schemes will not be staged. Eligible employees will not need to be enrolled until October 2016, and this could be postponed for a further three months if the scheme meets the high-quality test. But from that point members will need to accrue full benefits under the scheme.
Employers that are to auto-enrol jobholders into a DC arrangement, including Nest, will need to do so at some point between October 2012, the start date originally proposed, and September 2016 (subject to the possible additional three-month waiting period). This is rather complicated and has proved contentious. As the table on this page shows, eligible employees of employers with 120,000 or more individuals on PAYE earnings must auto-enrol employees from 1 October 2012. When auto-enrolment applies for smaller employers will be determined by the number of employees they have, with smaller and smaller employers coming within scope month by month until employers with under 50 employees are covered by 1 February 2016. Employer size will be based on information held by the regulator at April 2012.
New businesses set up after 1 April 2012 will be required to operate auto-enrolment by a date between 1 March 2016 and 1 September 2016. However, some smaller employers, chosen randomly on the basis of their PAYE reference code, will need to auto-enrol employees ahead of other firms of a comparable size. The explanatory notes to the Regulations suggest this is so that the process can be tested on some small employers.
This staging arrangement does mean that small employers have a cost advantage over larger employers. Employer bodies, especially those representing small firms, regard this as sensible. Some others regard it as scandalous and believe there should be a level playing-field for all employers. Minister for Pensions Reform and the Ageing Society Angela Eagle has acknowledged the dilemma2: "Inevitably, staging of employers by size, including the temporary and agency sector, can affect the ability of all employers to compete with each other in the short term as some employers will face the cost of administering the reforms and contributing to their employees' pensions sooner than employers staged later." However, she believes the short-term impact on competition will be "outweighed by the overall positive benefits".
Employers can bring their staging date forward if they wish, provided the scheme concerned and the regulator are notified.
Quality test and minimum contribution levels
Employers will be able to choose into which pension scheme they automatically enrol jobholders, and it could be the Nest arrangement. However, the scheme offered must meet a quality test. If employers offer different schemes to different groups, they will need to ensure that this is not unlawful discrimination, because, for example, women are largely in the least good scheme.
All DB schemes that are contracted out, as a result of meeting the reference scheme test, meet the quality standard. Contracted-in DB schemes must have an accrual rate of 1/120th, or better, if they are to qualify for use in auto-enrolment. There are special provisions for hybrid schemes. As noted above, auto-enrolment will not apply to DB and hybrid schemes until October 2016, but from that date full benefits must accrue. Eventually DC schemes will be required to have a minimum total contribution rate of 8%, with at least 3% coming from the employer, if they are to meet the quality standard.
Both DB and DC schemes will be able to require a minimum member contribution. The 2008 Act allows the Government to introduce regulations specifying a maximum amount that members can be required to contribute, so that a prohibitively high rate cannot be set that effectively prevents most employees from joining. To date no such regulations have been made.
The required contributions are being phased in for DC arrangements. Until October 2016, there must be a total contribution of at least 2% of relevant earnings where jobholders are enrolled into a DC arrangement. Employers must pay at least 1% of qualifying earnings and they can require employees to contribute the other 1%. From October 2016 to September 2017, the total contribution must be at least 5%, with employers paying at least 2%, and thereafter the total must be 8%, with employers paying at least 3%. In all cases, the jobholder contribution is based on gross pay between upper and lower limits.
Pensionable earnings
The band of earnings on which minimum contributions will be calculated ("qualifying earnings") is that between £5,035 and £33,540 a year, based on 2006/07 figures.
One of the issues that has been most contentious during consultation on auto-enrolment has been how the DC quality standard applies where an employer currently uses a different definition of pensionable earnings; in particular, where some variable element of pay, such as a bonus or overtime, is not pensionable. In some instances, an employer could make a higher contribution than that required by the legislation, but apply that to only a portion of earnings, say, basic pay. There could be schemes that would pay higher contributions for the great majority of members, but where a small minority might not receive the minimum contributions to which they are entitled under this legislation because of earnings that are not pensionable under their scheme's rules. Some employers argue that making all earnings between the lower and upper limits pensionable presents a major administrative headache.
It was thought that this problem had been overcome by a compromise announced by the DWP, which would allow self-certification by employers that members of their scheme would receive the minimum level of contributions. However, the provisions to effect this have not been included in the Regulations and, in the response to its consultation on Regulations, the DWP says it is to review the process and consult again.
There are different definitions of pay reference periods for (a) identifying employees who are earning above the minimum threshold and (b) judging whether DC schemes provide the contributions necessary to meet the quality requirement. In relation to (b), the period always ends 12 months after the staging, even if particular employees joined the employer or became eligible after others were enrolled, or if auto-enrolment was postponed because the scheme qualified as high quality. In these circumstances a proportional adjustment is made.
Who can opt in?
Employees under the age of 22 and those aged over state pension age but under 75 will be able to choose to opt in to the work-based pension arrangement being offered to others. They will also qualify for the compulsory minimum employer pension contribution.
Those earning below the earnings threshold will also be able to opt in, although their employer will not be required to make a contribution, but could of course do so.
In addition, those who opt out can choose to opt in later, but employers are only required to permit this once a year.
Auto-enrolment process
Jobholders have to be enrolled with effect from their "automatic enrolment date", and employers have to ensure this happens within a month of the relevant date. However, the process is different for occupational and personal pensions.
Employers must also ensure automatically enrolled members are provided with specified information within a month and begin deducting any scheme contributions promptly.
Opt-out arrangements
Jobholders will be able to opt out of membership having been automatically enrolled. They can only opt out after having been entered into membership; individuals cannot ask not to be enrolled in the first place.
An opt-out can be effected at any time, but if it happens within a month of being enrolled the member and the employer receive a refund of their contributions and the employee is treated as having never been a member. To avoid hassle trying to reclaim contributions from pension providers, contributions deducted before the end of the opt-out period do not have to be paid across to the scheme until the last day of the second month following the month in which automatic enrolment occurs.
A form for use in opting out is set out in the Regulations. Employers must advise those opting out if the form has been completed incorrectly.
Re-enrolment arrangements
Jobholders who opt out of scheme membership must be re-enrolled automatically at regular intervals. The first re-enrolment date must be within one month of the three-year anniversary of the original "staging" date. Subsequent re-enrolment exercises must be carried out after a further three years within a month either way of the previous exercise.
Jobholders who have opted out in the 12 months prior to the employer's re-enrolment exercise are excluded. But, clearly, they could be automatically enrolled twice in a 13-month period.
Monitoring compliance
The Pensions Regulator is responsible for monitoring and trying to ensure compliance.
Employers must provide information on how they have complied with the requirements to the Pensions Regulator within two months of the staging date, a process known as registration. That information will need to be updated every three years, following each re-enrolment exercise. Employers will also be required to maintain specified records and to keep them for six years. Other compliance provisions require interest to be added to contributions not paid by the due date, and if not paid within three months the employer may be liable for the member's portion too.
There are also provisions aimed at preventing employers from pressurising or inducing employees to opt out, or from attempting to screen out during the recruitment process those who are likely to remain in membership.
Early planning
As the new provisions do not come into effect until 2012 at the earliest, there is no need for urgent action. However, employers may be wise to consider now what policy to adopt. Many will no doubt want to produce a budget of the likely expenditure, especially where a large proportion of current staff are not members of a scheme, or where changes to the pension arrangements on offer are envisaged.
The regulator will apparently be writing to all employers about 12 months before they will first be required to automatically enrol workers, and again three months prior, to inform them of the need to comply with the new legislation and to tell them what they need to do.
Our research
This feature is based on the Pensions Act 2008, the Regulations referenced, the accompanying explanatory notes, the DWP's consultation response, summaries on the DWP's website and help from Eversheds, Freshfields Bruckhaus Deringer and JLT Benefit Solutions.
References
1. Employers' Duties (Implementation) Regulations 2010 (SI 2010/4), Employers' Duties (Registration and Compliance) Regulations 2010 (SI 2010/5), Public Interest Disclosure (Prescribed Persons) (Amendment) Order 2010 (SI 2010/7) and Occupational and Personal Pension Schemes (Automatic Enrolment) Regulations 2010 (SI 2010/772) (on the Office of Public Sector Information website).
2. Hansard (HC), 25.1.10, col. 576W.
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Table 1: Staging dates for auto-enrolling | |
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Employer (by number of employees being paid under PAYE tax) |
Staging date |
|
120,000 or more |
1 October 2012 |
|
50,000-119,999 |
1 November 2012 |
|
30,000-49,999 |
1 January 2013 |
|
20,000-29,999 |
1 February 2013 |
|
10,000-19,999 |
1 March 2013 |
|
6,000-9,999 |
1 April 2013 |
|
4,100-5,999 |
1 May 2013 |
|
4,000-4,099 |
1 June 2013 |
|
3,000-3,999 |
1 July 2013 |
|
2,000-2,999 |
1 August 2013 |
|
1,250-1,999 |
1 September 2013 |
|
800-1,249 |
1 October 2013 |
|
500-799 |
1 November 2013 |
|
350-499 |
1 January 2014 |
|
250-349 |
1 February 2014 |
|
Less than 50, with specified PAYE numbers |
1 March 2014 |
|
240-249 |
1 April 2014 |
|
150-239 |
1 May 2014 |
|
90-149 |
1 June 2014 |
|
50-89 |
1 July 2014 |
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Less than 50, with other PAYE numbers (17 different categories based on PAYE numbers) |
1 August 2014 to 1 February 2016 |
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New employers (four categories based on date when PAYE income was first payable) |
1 March 2016 to 1 September 2016 |
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Source: Based on Employers' Duties (Implementation) Regulations 2010 (SI 2010/4), which set out full details of which PAYE reference numbers are applicable to which date for employers with less than 50 employees. | |
