The pension auto-enrolment scheme
The Pensions Act 2008 includes proposed improvements to the State Pension and extending people's working lives. However, the key reforms for employers involve making it easier for more people to save for retirement by means of automatic enrolment into a pension scheme.
Under the new pension auto-enrolment scheme, all employers will have to automatically enrol eligible jobholders into a qualifying pension scheme. This could, for example, be an existing pension scheme (if it meets, or can be changed to meet, the necessary automatic enrolment criteria), or the new National Employment Savings Trust (NEST).
The first step for an employer is to determine whether they employ anyone classed as a 'worker'. A worker may be:
- An employee, or
- A person who has a contract to provide work or services personally and is not undertaking the work as part of their own business.
There are three categories of workers: eligible jobholders; non-eligible jobholders; and entitled workers.
Workers for whom automatic enrolment will be required are those who are:
- Aged between 22 years and the State Pension Age (SPA)
- Earning over the minimum qualifying earnings threshold (£10,000 in 2015-16)
- Working or ordinarily working in the UK
- Not already a member of a qualifying pension scheme.
These are categorised as 'eligible jobholders'. Most workers will fall into this category unless the employer already has a qualifying pension scheme.
As well as 'eligible jobholders', employers also have certain duties to other types of workers who do not meet the criteria for automatic enrolment. Depending on their classification, these workers may have the right to 'opt in' (i.e. join a scheme).
Earnings cover all of the following pay elements (gross):
- Statutory sick pay
- Statutory maternity, paternity and adoption pay.
Contributions will be payable on earnings between the lower threshold of £5,824 and the higher threshold of £42,385 for 2015-16. The earnings between these amounts are called qualifying earnings. The thresholds will be reviewed by the Government each tax year.
What is a qualifying scheme?
A qualifying scheme may be a UK scheme (one with its main administration in the UK) or a non-UK scheme (with its main administration outside of the UK). For a UK pension scheme to qualify it must:
- Be an occupational or personal pension scheme;
- Be tax registered; and
- Satisfy certain minimum requirements (the requirements differ according to the type of pension scheme).
Further information on the minimum features required can be found on the Pensions Regulator's website.
All businesses will need to contribute at least 3% of the qualifying pensionable earnings for eligible jobholders. However, to help employers to adjust, compulsory contributions will be phased in, starting at 1% before eventually rising to 3%.
There will also be a total minimum contribution which will need to be paid by employees if the employer does not meet the total minimum contributions. If the employer only pays the employer's minimum contribution, employees' contributions will start at 1% of their salary, before eventually rising to 4%. An additional 1% in the form of tax relief will mean that there is a minimum 8% contribution rate.
Auto-enrolment is being phased in over a number of years, starting from 2012 (larger employers first, smaller employers last). Each employer will be allocated a 'staging date' from when their duties will begin.
The staging date is based on the number of people in the employer's PAYE scheme. Employers with the largest numbers of workers in their PAYE schemes will have the earliest staging date. The date is based on their size (fixed by the number of HMRC employee records on file as at 1 April 2012) or the letters in their PAYE scheme reference. Employers can check their staging date at www.thepensionsregulator.gov.uk/staging.
Postponement offers additional flexibility for employers, by allowing them to choose to postpone automatic enrolment for a period of up to three months.
From the relevant staging date, unless employers are following the company scheme route, they will have to enrol each eligible worker into a NEST. These are designed to be a simple low-cost way for low to moderate earners to save, based on the following features:
- NEST is free of charge for employers to use
- NEST charges for members have been set at a 0.3% annual management charge and an initial 1.8% charge on contributions. For many people these charges will be lower than alternative defined contribution schemes
- There will be a limited choice of investment funds and a default fund for those who do not make a choice
- An annual contribution limit will apply. This is the combined total from the member, their employer and the Government (via tax relief). However, this restriction is set to be removed from 2017.
Employers will have to register how they will deal with auto-enrolment, comply with the opt-out rights and make payments on time.
In summary the employer must do the following in respect of eligible jobholders:
Provide information to the pension scheme about the eligible jobholder - This includes their name, gender, date of birth, automatic enrolment date, residential address and national insurance number.
Give enrolment information to the eligible jobholder - The employer must provide the eligible jobholder with certain enrolment information. The information must be provided in writing or via email and should inform the employee that they have been, or will be, automatically enrolled and what this means to them. It should also tell them about their right to opt out and their right to opt back in, as well as where to find information about pensions and retirement planning.
Arrange active membership for the eligible jobholder - They can do this by making arrangements with either the trustees or managers of an occupational pension scheme, or the provider of a personal pension. These arrangements differ depending on the type of pension scheme the employer chooses to use.
If the postponement provision is not used, the information will need to be given during the 'joining window', which is a one month period from the eligible jobholder's automatic enrolment date. The 'joining window' has been extended to six weeks from 1 April 2014.
Key steps for employers
Whatever your staging date, it is essential for employers to plan for the changes in good time. Consider the following action points:
- Nominate a point of contact
- Know your staging date and develop a plan
- Assess your workforce
- Review your pension arrangements
- Communicate the changes to all workers
- Automatically enrol eligible jobholders into a pension scheme
- Register with the Pensions Regulator and keep records
- Contribute to your workers' pensions
Further information on pension reform is available at www.thepensionsregulator.gov.uk