In an attempt by the government to face up to the looming national pension savings gap, the legislation requiring all employers and employees to contribute a minimum amount to a qualifying pension plan for (almost) all employees will come into force from 2012.
Unfortunately this is not as simple as offering any current pension savings facility to all employees.
When Will This Apply to Each Employer?
The staggered compulsory pensions auto-enrolment of employees is based on number of employees and PAYE reference numbers:
- beginning on 1 October 2012 for the largest employers (with 120,000 employees or more);
- followed by additional employers almost every following month (in tranches of number of employees down to 250) by 1 February 2014;
- then the remaining employers by number of employees and PAYE reference numbers by 1 September 2016.
Employers therefore need to start preparing for these changes as soon as possible and, of course, there is nothing to prevent employers implementing any changes for compliance ahead of their specific compliance deadline.
Can Current Pension Saving Facilities Be Used?
It may well be possible for current occupational pension schemes and/or stakeholder pension schemes to be used as a vehicle for compliance. However these will require review and potential amendment to meet specific tests to count as qualifying workplace pension schemes to enable full compliance with the new requirements in areas such as:
- ‘Auto-enrolment’: rather than offering the facility (membership) to employees, employees need to be automatically enrolled into the scheme. An employee is permitted to opt-out of membership under the legislation but cannot be encouraged to do so and will be automatically re-enrolled (with a subsequent opt-out option) every three years. Therefore any current membership application procedures, documentation and governing rules of the schemes may need to be amended to ensure compliance.
- Contributions: for money purchase (defined contribution) pension schemes there will be minimum contribution requirements of 5%, including 1% tax relief, from employees and 3% from employers – the full contribution levels being phased in over a five-year period.
There are other similar tests for defined benefit (final salary and career average) retirement schemes and particular care will have to be taken for hybrid schemes.
Is there an alternative national/default scheme which can be used?
In short, yes. The government has established the National Employment Savings Trust (NEST), which is able to accept contributions from employers and employees as well as other bodies including staffing agencies and contractors, however there will be limitations, which may result in NEST not being suitable for your employer’s remuneration policies, such as the NEST limit on the annual contributions permitted per member.
In addition, we understand that some trade associations are considering establishing alternative industry-wide options for their members to use for compliance purposes (with a particular intention to enable transient employees within the industry to accumulate their pension savings under one scheme).
Will all employees need to be automatically enrolled?
As a rule of thumb, all employees aged between 22 and state pension age (SPA) earning over £7,475pa (pro rata) will need to be automatically enrolled.
However in order to fully assess the workforce, an understanding of the different legislative categories; eligible jobholders, non-eligible jobholders and entitled workers, will be required. We summarise these categories below:
- Eligible jobholders are workers aged between 22 and SPA, are working or ordinarily working in the UK and have qualifying earnings payable by the employer in the relevant pay reference period above the earnings trigger for automatic enrolment (currently £7,475pa pro rata over pay reference periods).
- Non-eligible jobholders include workers who are either:
- Aged between 16 and 75, working or ordinarily working in the UK and have qualifying earnings above the lower earning level but below the earnings trigger for automatic enrolment; or
- Aged between 16 and 22 or between SPA and 75, working or ordinarily working in the UK and have qualifying earnings above the earnings trigger for automatic enrolment.
- Entitled workers are aged 16 to 75, working or ordinarily working in the UK with qualifying earnings below the lower earnings level for qualifying earnings.
Particular care will need to be taken in respect of temporary/casual staff particularly when considering:
- whether they are classed as employees of an agency for auto-enrolment purposes; and
- their qualifying earnings may fluctuate between pay reference periods as such their classification as eligible employees (and related contribution/membership requirements).
Additional Practical Considerations
Finance/affordability
Auto-enrolment will undoubtedly have a significant impact not only to employers’ financial commitments but also employees. A number of companies are factoring this into their long-term budgeting now and are expecting a knock-on effect on any salary reviews.
Employers need to be aware however that they cannot offer employees a ‘salary increase or pension contribution’ option as this could be deemed as encouraging an employee to ‘opt-out’.
Given both employers and employees will be making pension contributions, there will be a negative impact on employees’ take-home pay if they are not currently contributing to pension schemes.
As such, communication with employees is a key aspect and we would recommend that as much information is provided as early as possible to lessen the shock to employees at implementation.
Terms and conditions of employment
Compliance could result in a significant change of employment contract terms and it is recommended that these are reviewed both for current and new employees to ensure they reflect the new regime.
Procedures – HR department
In addition to being able to assess each employee’s earnings during each pay reference period (usually the payment period) in line with the triggers and related requirements for auto-enrolment and make the relevant deductions, the HR departments will need to ensure that their procedures meet the new record-keeping requirements and are able to refund any contributions deducted from a jobholder who subsequently opts out during the opt-out period.
If you have concerns, questions, or would like to know more about staging dates, please do not hesitate to contact Martin Jenkins.
By Martin Jenkins, national head of pensions, DWF LLP. E-mail: martin.jenkins@dwf.co.uk.
DWF’s writers can be reached via the DWF LinkedIn group ‘In Touchº - Keeping In-House Lawyers Informed’.
