Pensions auto-enrolment: overview

Matthew Giles of Squire Sanders begins a series of articles on the pensions auto-enrolment provisions with an overview. Most employers will be caught by the pensions auto-enrolment provisions and will have to auto-enrol their workers into a qualifying pension scheme at some stage. 

Introduction

Workplace pensions law is changing. Starting from 1 October 2012, employers will, for the first time, have to enrol workers into a suitable pension scheme and pay contributions for them. Pension reforms are being introduced because of concerns about the lack of pension saving in the UK. The Department for Work and Pensions (DWP) has estimated that approximately 670,000 employers offer no pension provision (Impact Assessment of Pension (Automatic Enrolment) Regulations 2009 (PDF format, 107K) (on the DWP website)).

What are the duties?

There are two key employer duties, which are to:

There are also a number of ancillary duties. Employers must:

  • register with the Pensions Regulator;
  • provide workers with certain information about auto-enrolment and how it will affect them; and
  • keep various records.

The Pensions Regulator has published a number of detailed guidance documents on the workplace pensions reforms (on its website).

When are the changes taking place?

The new employer obligations are to be phased in, starting on 1 October 2012. Each employer will be allocated a "staging date", which is the date on which the duties will first apply to it. The staging date is based on the number of workers in the employer's PAYE scheme on 1 April 2012. Large employers will be affected first, but ultimately all employers will be caught. The Government recently announced proposed changes to the previously intended staging date timetable so that employers with fewer than 250 workers will have more time to prepare. Employers with fewer than 50 workers will not be staged into the employer duties until June 2015 at the earliest. The DWP is due to consult on the proposed changes to the staging timetable. The staging dates for employers with 250 or more workers in their PAYE scheme remain unchanged. Details of the current staging dates, which are indicative, are on the Pensions Regulator's website.

Employers will be able to bring forward their staging date, provided that the Pensions Regulator is informed. However, they cannot pick a later date than the one they are allocated.

What do employers need to do?

Once an employer has established its staging date, it needs to identify who is going to be affected by the changes. This will involve it carrying out an assessment of its workforce to work out who will be entitled to automatic enrolment.

The first thing to bear in mind is that automatic enrolment will affect workers, ie it is not restricted to employees. The definition of worker is very broad and will cover agency workers and casual workers as well as employees. The definition may also catch independent contractors and consultants if they are not genuinely self-employed.

In the majority of cases it will be easy to identify whether or not an individual is a worker for these purposes. However, where there is uncertainty, the employer will need to examine the nature of the contract under which the individual is working.

Once an employer has identified that it has workers, the next step is for it to establish what types of worker it has, since it will have different duties in respect of each.

There are three categories of worker for the purpose of the auto-enrolment provisions, namely:

  • eligible jobholders, ie jobholders who are eligible for auto-enrolment into a qualifying scheme;
  • non-eligible jobholders, ie jobholders who are not eligible for auto-enrolment but who can choose to opt in to a qualifying scheme, in which case the employer must arrange pension scheme membership and make contributions; and
  • entitled workers, ie workers who are entitled to join a pension scheme, in which case the employer must arrange pension scheme membership with a scheme that is registered with HM Revenue and Customs (but that is not necessarily a qualifying scheme under the auto-enrolment provisions) but is not required to make contributions.

The category into which a worker falls will be determined by reference to his or her age and earnings. For the "eligible jobholder" category, the worker must be:

  • aged between 22 and the state pension age;
  • working or ordinarily working in the UK; and
  • earning above a certain amount (set at the income tax threshold of £8,105 per annum (according to the draft Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2012)).

The Pensions Regulator's detailed guidance on Employer duties and defining the workforce (PDF format, 474K) (on its website) includes further information on the different categories of workers.

Qualifying schemes

Once an employer has assessed its workforce and identified those workers who will be eligible for automatic enrolment, it will need to choose a pension scheme that it can use for automatic enrolment. This could be an existing occupational or personal pension scheme set up by the employer that counts as a "qualifying scheme" or a new scheme that meets the various criteria. Alternatively, it could use the central scheme set up by the Government for these purposes, the National Employment Savings Trust (Nest).

Broadly, an employer's scheme will be a qualifying scheme if it is either an occupational or group personal pension scheme that satisfies certain minimum "quality standards". The standards differ depending on whether the pension is a defined contribution or defined benefit scheme (see the Pensions Regulator's detailed guidance on Pensions schemes (PDF format, 725.6) (on its website) for further information). Employers that offer a defined contribution scheme will be required to make a minimum contribution level to the scheme.

The contribution rate for defined contribution pension schemes and personal pension schemes is being phased in between 2012 and 2018. Broadly speaking, the total minimum contribution required from October 2018 will be 8% of a specified band of earnings. The 8% breaks down as 3% employer contribution, 4% employee contribution and 1% tax relief. However, it is the overall level of contributions that matters - an employer can contribute in excess of the 3% minimum. A reduced contribution rate applies for a transitional period. For employers, this is expected to be a contribution rate of 1% up to September 2017, and 2% between October 2017 and September 2018.

Employers that offer a defined benefit pension scheme (or an appropriate hybrid scheme) will be able to take advantage of transitional arrangements that will allow them to defer automatic enrolment. This is subject to various conditions (see Pensions schemes (PDF format, 725.6) (on the Pensions Regulator's website) for further information).

A qualifying scheme cannot impose barriers on membership, such as a probationary period. Further, it cannot require staff to make an active choice or take other action to join, for example by requiring them to sign a form or provide extra information to the scheme prior to joining.

When must employers auto-enrol workers?

Once an employer has identified that a worker is an eligible jobholder it must automatically enrol him or her from what is known as the "automatic enrolment date". This is the first date that the worker meets all the criteria to be an eligible jobholder. For existing workers this will usually be the employer's staging date. For new recruits it will usually be their first day of employment.

An employer will be able to postpone an eligible jobholder's automatic enrolment date for up to three months by giving the jobholder prior notice.

Opting-out

Once enrolled into a pension scheme, eligible jobholders (or non-eligible jobholders who have opted in to the scheme) will be entitled to opt out of the scheme. There is an opt-out period of one month from entry (or one month from the date on which they are provided with certain information about their enrolment) within which jobholders will be entitled to their contributions back. Jobholders can choose to opt out at any stage, but they may not be entitled to a cash refund of contributions after the end of the one-month opt-out period.

If jobholders opt out within the one-month opt-out period they will be treated as if they have never been a member of the scheme. The employer must stop deducting contributions and any contributions deducted from qualifying earnings must be refunded to the jobholder.

Employers will be required to re-enrol eligible jobholders automatically every three years. This is designed to ensure that eligible jobholders who have opted out are forced to reconsider their decision on a regular basis.

Incentives to opt out

Employers should not offer workers incentives to opt out, for example by telling them that they will be entitled to a one-off payment if they opt out of the pension scheme. This could constitute inducement, which will be unlawful under the new regime. The Pensions Regulator will have the ability to issue compliance notices to employers that have breached these provisions, and penalty notices if they fail to comply.

Employment protection and prohibited recruitment practices

Workers will also have a right not to suffer a detriment or to be unfairly dismissed in relation to the auto-enrolment provisions, and will be able to bring proceedings in the employment tribunal if these rights are breached. As an example, this right would protect a worker who has been denied promotion because of his or her decision not to opt out of pension scheme membership.

Employers must ensure that they do not screen job applicants on any grounds relating to potential pension scheme membership, as this will also be prohibited. The Pensions Regulator will have the power to issue compliance and penalty notices to employers that breach these safeguarding measures.

These safeguards are due to come into force in July 2012 for all employers, rather than from an employer's staging date. See the Pensions Regulator's detailed guidance on Safeguarding individuals (PDF format, 284K) (on its website) for further details of the provisions.

Information requirements and record-keeping

Employers will need to provide their workers with information about their rights in relation to auto-enrolment. This information has to be provided in writing, which can include information sent by email, but will not include merely putting information on a company intranet or noticeboard. See the Pensions Regulator's resource document Information to workers (PDF format, 150K) (on its website) for more details.

Employers must also keep certain records relating to auto-enrolment for six years (or four years in relation to opting out). The Pensions Regulator can require employers to produce records. The Pensions Regulator's detailed guide on Keeping records (PDF format, 310.5K) (on its website) provides more information.

Next week's topic of the week article will be a case study around auto-enrolment and will be published on 12 March.

Matthew Giles (matthew.giles@squiresanders.com) is a partner in the pensions team at Squire Sanders.

Further information on Squire Sanders can be accessed at www.squiresanders.com.