All about automatic pension enrolment

Craig Looker, Associate14 September 2012

Agenda

• Employer duties

• When will the automatic enrolment duties apply?

• Assessing eligibility

• What is an automatic enrolment scheme?

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Key employer duties

1. Enrol “eligible jobholders” automatically into an automatic enrolment scheme

2. Pay minimum DC contributions or provide minimum DB benefits

3. Re-enrol eligible jobholders who opt-out approx every 3yrs

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Other employer duties• Provide eligible jobholders, non-eligible jobholders

and entitled workers with prescribed information

• Register with Pensions Regulator & provide specified information – within 4 months of “staging date”

• Keep records of auto-enrolments, opt-ins, opt-outs and contributions – legally, for at least 6 years (4 years for opt-outs)– practically, for much longer

• Not to induce opt-outs

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When? • Auto-enrolment introduced gradually - larger

employers first; smaller employers later

• ‘Staging date’ determined by number of people in employer’s PAYE payroll scheme on 1 April 2012

• See www.tpr.gov.uk/staging

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When?

• What about:– an employer with more than

one payroll scheme?– multi-employer payroll

schemes?– small employers in large

payroll scheme?

• Employers can bring staging date forward

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Waiting period - postponement

• Employers can operate waiting period of up to 3 months by giving notice (within 1 month)

• May help with:– casual/seasonal workers– temporary workers– quick leavers– alignment of auto-enrolment with payroll

• Jobholders’ right to opt-in

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Transitional period for DB & hybrid schemes• Employers with DB/hybrid schemes can delay auto-

enrolment until 1 October 2017

• Only applies to certain eligible workers

• Must give notice

• Must auto-enrol into appropriate scheme at end of transitional period

• Worker can still opt in

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Eligible jobholders

• An “eligible jobholder" is a worker who:– is aged 22 to state pension age– is working, or ordinarily working, in the UK– earns at least £8,105 per annum (2012/13)

• Employer will need to monitor age and earnings

• Pay reference periods

• Already a member of a qualifying scheme

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Eligible jobholders• What about:

– agency workers?– casual workers/zero-hours contractors?– overseas workers?

• Multiple contracts of employment

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Non-eligible jobholders

• A non-eligible “jobholder” is a worker who is working, or ordinarily working, in the UK and:

1. earning more than £5,564 and less than £8,105 (2012/13) and aged between 16 and 75, or

2. earning more than £8,105 (2012/13) and aged between 16 and 22 or state pension age and 75

• Right to opt-in & receive minimum employer contributions/DB benefits

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Entitled workers

• Entitled workers have a right to join a workplace pension scheme

• Not entitled to receive employer contributions/ minimum benefits

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Summary of worker categoriesEarnings Age 16-21 Age 22-SPA SPA- age 75

£8,105 or more

Non-eligible jobholder – may opt-in to an automatic

enrolment scheme

Eligible jobholder – must

be auto-enrolled into an automatic enrolment scheme

Non-eligible jobholder –

may opt-in to an automatic enrolment scheme

£5,564 - £8,105

Non-eligible jobholder – may opt-in to an automatic enrolment scheme

Less than £5,564

Entitled worker – can request to join a pension scheme (but it does not have to be a qualifying

scheme and not entitled to employer contributions)

Assessing workers’ eligibility• A worker’s eligibility must be assessed on:

– employer’s staging date (for existing staff)– ‘deferral date’ (where waiting period is applied)– worker’s start date (for new recruits after staging date)– worker’s 22nd birthday (where this is after staging date)– 1st day of each pay reference period after staging

date (for non-eligible jobholders/entitled workers)– date on which opt-in notice/joining notice is received– day after transitional period for DB/hybrid schemes ends

(where employer makes use of this option)

• Carry out initial assessment before staging date

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Automatically enrolling everybody

• Why might an employer want to do this?

• Issues to consider:– opt-outs and refunds– authority to auto-enrol and deduct contributions

from pay– data protection– automatic re-enrolment

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Contractual enrolment• Where employer enrols workers into a pension

scheme pursuant to a contractual agreement

• Legal duty under s3 PA2008 does not apply, so:– no statutory right to opt-out– more limited information requirements

• Reduces need to treat different workers differently

• May work better with enrolling everybody

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Opting-out• Eligible jobholders and non-eligible jobholders who

opt-in can opt-out within 1 month and receive a refund of their contributions, but:– not before they have been auto-enrolled– opt-out paperwork must come from scheme– employer must not incentivise opt-outs– employers must re-enrol every 3 years

(within 6 month window)

• Can leave scheme after statutory opt-out window

• Beware workers with enhanced/fixed protection!

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What is an automatic enrolment scheme?

• An automatic enrolment scheme:(i) must be a qualifying pension scheme, and (ii) must not contain any provisions which:– prevent the employer fulfilling its auto-

enrolment and re-enrolment duties, and– require a member to make a choice or provide

information

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What is a qualifying pension scheme?

• To be a qualifying pension scheme, a scheme must:– be an HMRC registered occupational or

personal pension scheme operating automatic enrolment; and

– meet minimum "quality standards"

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Qualifying pension scheme - DC• Total contributions of 8% of “qualifying earnings” (min

3% employer)

OR

• Total contributions of 9% of “pensionable earnings” (min 4% employer) – where pensionable earnings are equal to or greater than basic pay

OR

• Total contributions of 8% of “pensionable earnings” (min 3% employer) - where at least 85% of total earnings of all eligible jobholders is pensionable

OR

• Total contributions of 7% of “earnings” (min 3% employer) – i.e. contributions are payable on all earnings

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Minimum DC contributions• Minimum employer DC contributions to be

phased-in over 5 years

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Date Minimum employer contribution

Minimum total contribution (i.e. employer and employee

contributions and tax relief)

Oct 2012 – Sept 2017

1% 2%

Oct 2017 - Sept 2018

2% 5%

From Oct 2018

3% 8%

Qualifying pension scheme - DB

• Contracted-out

OR• Contracted-in with:

– pension for life at state pension age– annual accrual rate of 1/120th of average

“qualifying earnings” in last three tax years preceding the end of pensionable service up to maximum of 40 years, and

– statutory revaluation and pension increases

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Reviewing scheme rules • A scheme’s rules need to be reviewed to ensure

they meet statutory requirements

• In particular, employers need to review:– eligibility and admittance (already mentioned)– employer and member contribution rates and

definition of Pensionable Earnings (already mentioned)

– rules on leaving the scheme and refunds– enhanced/fixed protection rules– flexible retirement rules

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Making changes to an existing scheme

• An employer may also want to:– change employer and member contribution rates– close existing scheme to new members– reduce/cease future accrual

• Consultation requirements– minimum 60 days

• May need trustee consent

• Amending contracts of employment

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Salary sacrifice

• Salary sacrifice arrangements can be continued

• Care needs to be taken to ensure that it is valid and implemented consistently with the employer’s automatic enrolment duties

• HMRC has issued guidance on opting out, and has confirmed there is no longer a requirement for the arrangement to be in force for 12 months

Useful links

• The Pensions Regulator’s ‘Pensions reform & auto-enrolment’ homepage - http://www.thepensionsregulator.gov.uk/pensions-reform.aspx

• The Pensions Regulator’s detailed auto-enrolment guidance - http://www.thepensionsregulator.gov.uk/pensions-reform/detailed-guidance.aspx

• The Pensions Regulator’s ‘Staging date timeline’ - http://www.thepensionsregulator.gov.uk/pensions-reform/staging-date-timeline.aspx

• The Pensions Regulator ‘How to bring your staging date forward’ - http://www.thepensionsregulator.gov.uk/pensions-reform/bringing-staging-date-forward.aspx

• Follow us on Twitter @pensionlawyers and @ready2autoenrol

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Any Questions?