Pensions auto-enrolment: frequently asked questions

Matthew Giles of Squire Sanders continues a series of articles on the pensions auto-enrolment provisions with some frequently asked questions that consider, among other things, whether or not employers that already provide a workplace pension scheme will be affected by the pensions auto-enrolment rules and how much employers must contribute into a pension scheme as a result of the auto-enrolment provisions.

Which employees qualify for automatic enrolment?

The pensions auto-enrolment provisions affect workers. Workers who are eligible for automatic enrolment into a qualifying pension scheme (see below) are known as "eligible jobholders". To fall within the eligible jobholder category, a worker must satisfy certain requirements by reference to his or her age and earnings. He or she 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)).

Workers who are not eligible for auto-enrolment will fall into one of two categories. They will be either a "non-eligible jobholder" or an "entitled worker", depending on their level of earnings. Non-eligible jobholders can choose to opt in to a qualifying scheme and the employer must arrange pension scheme membership and make contributions in respect of them. Entitled workers can also join a pension scheme. However, this does not need to be a qualifying pension scheme under the auto-enrolment rules and the employer does not have to make contributions on their behalf.

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.

Employers need to carry out a contractual analysis to determine how their workforce divides into the different categories.

What is a "qualifying scheme"?

A "qualifying scheme" is a pension scheme that an employer can use for automatic enrolment. The scheme can be a scheme that is registered with HM Revenue and Customs for UK tax purposes or, if the scheme is not based in the UK, it must satisfy additional criteria. It can be an employer's existing occupational or personal pension scheme or a new scheme that the employer establishes for auto-enrolment purposes. Whichever scheme the employer uses, it must satisfy minimum "quality standards". These differ, depending on whether the scheme is a defined-contribution or defined-benefit scheme.

Contracted-out defined-benefit schemes will normally meet the quality standards. For contracted-in defined-benefit schemes, the quality standard is that the scheme is based on a 1/120 accrual and a pension for life at state retirement age. Schemes that are hybrid schemes (ie schemes that provide a mixture of defined-benefit and defined-contribution benefits) need to be assessed to ascertain whether the defined-benefit or defined-contribution quality standards apply to them. Minimum contribution levels apply to defined-contribution schemes (see the next question for details). Specific requirements apply to defined-contribution schemes that are personal pension schemes. For example, these schemes need to be regulated by the Financial Services Authority and must have specific types of agreement in place between the employer, the jobholder and the personal pension provider (such as a direct pay arrangement between the jobholder and the employer).

If an employer does not wish to use a pension scheme that it has already established, it will be able to use a scheme that meets the qualifying criteria and is available in the market place. The National Employment Savings Trust (Nest) is the central scheme set up by the Government for this purpose.

See the Pensions Regulator's detailed guidance on Pensions schemes (PDF format, 725.6) (on its website) for further information about the standards that a scheme must meet to be a qualifying scheme.

How much must employers and employees contribute into their pension scheme?

The contribution rate for qualifying schemes that are occupational defined-contribution pension schemes or personal pension schemes is being phased in between 1 October 2012 and 1 October 2018. Broadly speaking, the total minimum contribution required from 1 October 2018 will be 8% of a specified band of earnings, comprising an employer contribution (3%), an employee contribution (4%) and tax relief (1%). Employers can contribute in excess of the 3% minimum if they choose to do so.

There is a transitional period for contribution rates leading up to 1 October 2018. For employers, this is expected to be a contribution rate of 1% up to 30 September 2017, and 2% between 1 October 2017 and 30 September 2018.

We already provide our employees with access to a pension scheme. Will the auto-enrolment requirements affect us?

Yes. Employers with an existing pension scheme will need to consider whether or not they wish to use this for automatic enrolment and, if they do, if it meets the qualifying scheme criteria (see above). If an employer's existing pension scheme is not a qualifying scheme, it will either need to make changes to the existing scheme or use a different scheme.

Employers with eligible jobholders who are already members of an existing pension scheme that meets the qualifying scheme criteria will not have an automatic enrolment duty for these workers but will have to provide them with certain information (see below).

Do we need to obtain employees' consent for them to join a qualifying pension scheme?

No. A key feature of the auto-enrolment provisions is that eligible jobholders must be automatically enrolled into a qualifying scheme and that no conditions of entry can be imposed. Automatic enrolment is compulsory, although jobholders may choose to opt out of the scheme once they have been enrolled (see the next question). Eligible jobholders must not be required to provide information to join a scheme or sign an application form.

What if some of our eligible jobholders do not want to join the scheme?

Once enrolled into an automatic enrolment 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 a refund of their contributions. Jobholders can choose to opt out at any stage, but they will not be entitled to a cash refund of contributions after the end of the one-month opt-out period.

What is re-enrolment?

Employers will be required to re-enrol eligible jobholders who previously opted out, automatically every three years. This is designed to ensure that jobholders who have opted out are forced to reconsider their decision on a regular basis. Once re-enrolled by his or her employer, a jobholder can choose to opt out again.

What information do we need to provide to employees?

One of the employer duties under the pensions auto-enrolment provisions is to provide certain information to workers. All employers, irrespective of the category into which their workers fall, will have an obligation to provide specified information to their workers within prescribed time limits. For example, employers must give information to eligible employees who are being automatically enrolled. This information must include details of what automatic enrolment means for them, their right to opt out and opt back in and where they can find further information about pensions and savings for retirement. Employers must provide this information by no later than one month after the eligible jobholder's automatic enrolment date. Those eligible jobholders who are already members of a qualifying pension scheme must be provided with information about that scheme within two months of their enrolment date.

All information under the employers' information duty has to be provided in writing, which can include sending information by email, but will not include merely putting information on a company intranet or noticeboard.

The Pensions Regulator has published guidance on employers' information duties (see Information to workers (PDF format, 150K) (on its website)).

How do we deal with pension entitlement for new recruits?

Assuming that a new recruit meets the criteria to be an "eligible jobholder" and the employer has passed its staging date, it will be required to enrol him or her automatically in to a qualifying pension scheme when he or she joins the employer. As a general rule, employers will need to enrol new recruits on their first day of employment, unless they take advantage of the provisions that entitle employers to postpone the automatic enrolment date for up to three months.

Next week's topic of the week article will be a checklist to help employers prepare for pensions auto-enrolment and will be published on 26 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.