PHASING DATES FOR COMPULSORY CONTRIBUTION LEVELS
The minimum contribution rates that an employer must pay into an employee’s pension scheme will be introduced according to its staging date.
• From the employer’s staging date to 30 September 2017: Employer and employee each contribute 1% of salary. Total minimum contribution is 2%.
• From 1 October 2017 to 30 September 2018: Employer contributes 2%, employee contributes 3% of salary. Total minimum contribution is 5%.
• From 1 October 2018 onwards: Employer contributes 3%, employee contributes 4% of salary with a further 1% contributed by the government in the form of tax relief. Total minimum contribution is 8%.
• News: Government confirms new staging dates for auto-enrolment (January 2012)
• Feature: How many staff will opt out after pensions auto-enrolment? (January 2012)
• Feature: Are you ready for auto-enrolment in 2012? (November 2011)
• Special report: Employee Benefits pension reforms supplement 2011 (November 2011)
• Special report: Employee Benefits/JLT Employee Benefit Solutions pensions roundtable discussion (May 2011)
With just months to go before the 2012 reforms start to kick in, Tynan Barton spells out what employers need to know
When the Pensions Bill 2011 received Royal Assent in November 2011, it put into law occupational pension reforms that include measures outlined in the Making automatic enrolment work review, published in October 2010. These have been some time in the making, with the concept of auto-enrolment first set out in the 2006 government white paper Personal accounts: A new way to save.
The new measures, due to begin taking effect from October this year, include the automatic enrolment of all eligible employees into a workplace pension scheme, along with compulsory contributions from both employers and employees. These will be introduced gradually on a sliding scale until reaching the maximum contribution levels in 2018.
Because people are now living longer and so are likely to have a longer retirement, the reforms are being introduced to ensure they are saving enough for their retirement, because many are currently not doing so. The aim is to boost pension pots for employees and get millions more people into the habit of saving for retirement through the workplace.
Employers must automatically enrol all eligible employees, or ‘jobholders’, into a qualifying pension scheme if they work under a contract of employment, or have a contract to perform work or services, and are not undertaking the work as part of their own business. Under the reforms, an eligible jobholder is aged between 22 and the state pension age (SPA), works in the UK and earns above £7,475 a year (the earnings trigger for auto-enrolment).
There is no obligation for employers to enrol non-eligible jobholders, but this group does have the right to opt in. By definition, a non-eligible jobholder is aged 16-21 or between the SPA and 74, works in the UK and earns above £7,475; or is aged 16-74, works in the UK and earns above the lower earnings level for qualifying earnings, currently £5,035, but below £7,475.
There is a third group of employees, entitled workers, who have a right to join the same pension scheme. These individuals are aged 16-74, work in the UK and earn below £5,035.
Employees are able to opt out when they are enrolled in to a pension, but must give the employer notice of their intent to do so during a specific period. An employer has a duty to re-enrol all eligible employees, if they still meet eligibility criteria, every three years from its original enrolment date.
To be deemed a qualifying scheme under the legislation, a pension scheme must meet the auto-enrolment criteria, qualifying criteria and minimum requirements if an employer wants to use it for auto-enrolment or for enrolling any jobholders who may opt in. This can be a new scheme or an employer’s existing plan.
The Pensions Regulator (TPR) has issued guidance on the qualifying criteria that must be met by a pension scheme that is to be used for auto-enrolment. To qualify, a scheme must be an occupational or personal pension and be tax registered. It must also not contain any provisions that: prevent the employer from making the required arrangements to automatically enrol, opt in or re-enrol a jobholder; or require the jobholder to express a choice in relation to any matter, or to provide any information, to remain an active member of the pension scheme.
These minimum requirements differ for defined contribution (DC) and defined benefit (DB) pension schemes. The minimum requirements for DC are based on the contribution rate and require a minimum total contribution level.
For DB, minimum requirements are based on the benefits an employee is entitled to under the scheme.
Auto-enrolment will take effect on different dates depending on the size of the employer. It will begin to be enforced from October 2012, when the UK’s largest organisations, with 120,000 employees or more, will begin to enrol their staff into an occupational pension. Some large organisations will be allowed to auto-enrol their staff three months ahead of their official staging date in July 2012.
In January 2012, the government confirmed a revised timetable for the dates by which employers must comply with auto-enrolment (see box above). Employers with staging dates on or before 1 February 2014 are unaffected, but those with between 50 and 249 employees have been given new staging dates between 1 April 2014 and 1 April 2015. Small employers, with 49 staff or fewer, have been given new dates between 1 June 2015 and 1 April 2017.
In February 2012, TPR published updated guidance for large employers on how to apply postponement. This allows an employer to postpone auto-enrolment for a period of up to three months for one worker, a group of workers or all the workforce. To exercise this option, the employer must issue staff with a postponement notice. But postponement can be used only on certain dates: the employer’s staging date; the first day of employment; or the date a worker meets the criteria to be an eligible jobholder after the employer’s staging date.
Employers must ensure their pension scheme and auto-enrolment systems are in place, and that they have registered their schemes with TPR by their staging date. TPR says its aim is to establish a pro-compliance culture by supporting employers, but it has the power to issue stiff penalties for not fulfilling auto-enrolment duties. These include a fixed-penalty fine of £400 and an escalating penalty with a daily rate, ranging from £50 a day for employers with one to four staff, up to £10,000 for those with 500 or more workers. TPR says the penalties are set at a level to fine an employer the cashflow benefit they are getting by not complying.
It is also important for employers to communicate the changes to their staff because, for many employees, this will be their first time in a pension scheme. It is recommended communications should begin about a year before an employer’s staging date to give staff time to make an informed choice. In January 2012, the government began its consumer media campaign about the reforms, and it is a good idea for employers to tell staff how they will be affected as soon as possible.
Whatever their size, it is necessary for all employers to ensure they are aware of, and remain up to date with, all the requirements of the reforms.
Read more from the auto-enrolment showcase