If you read nothing else, read this . . .
• In order to meet the auto-enrolment requirements under the 2012 pension reforms, employers need to hold information that will identify whether each employee meets the eligibility criteria.
• It is an employer’s duty to keep accurate and current records.
• Time is critical for employers to ensure they hold data that complies with the legislation’s record-keeping requirements.
• Employers have a duty to automatically re-enrol employees every three years, so they will need to keep and maintain the data held on each individual.
Employers will have to hold and maintain certain data on their employees to comply with the pension reforms, says Tynan Barton. Here are the key questions and answers
With the 2012 pension reforms drawing ever closer, employers must ensure that, to comply successfully, they are aware of the correct data they need to hold on all employees.
This data will be essential to managing both the automatic enrolment of eligible employees into a workplace pension scheme, and the re-enrolment every three years of those who choose to opt out.
To achieve this, there are several questions about the collection and storage of employee data that employers should consider.
What employee data do employers need to have before the reforms come into effect?
To comply with the new legislation, which was set out in the Pensions Act 2008, employers must automatically enrol and pay contributions for all eligible employees aged between 22 and the state pension age. The contributions are paid as a percentage of qualifying earnings between the thresholds of £5,715 and £38,185.
To meet auto-enrolment requirements, employers need to hold information that will identify whether an employee meets these eligibility criteria. Tim Middleton, technical consultant at the Pensions Management Institute (PMI), says: “The first thing employers will need to know is if they have enough data to establish whether or not the people working for them are eligible jobholders. They will need to know if the employee falls within the age range for auto-enrolment and also if their earnings are within the right band.”
The key data required is the normal type of information collected during the induction process for new joiners. An organisation will collect information such as an employee’s date of birth and national insurance (NI) number, which it will need for payroll deductions of tax and NI.
The Pensions Regulator has set out employer guidance notes on record-keeping. In addition to the information mentioned above, employers must also keep data on an employee’s auto-enrolment date, their opt-in and opt-out notice, as well as information on the pension scheme, including scheme name and address, and the employer pension scheme reference.
This information will help inform the employer what category employees fall into, for example whether they are eligible for auto-enrolment, are ineligible, or will be eligible in the future. James Markham, managing director at SBC Systems, says because different groups of the workforce, as defined in the legislation, are subject to different treatment, employers have to be able to segment staff by age or earnings.
“To apply the treatment, the employer has to be able to segment those groups and process each of them against the different sets of rules,” he says. “That kind of segmentation, or those benefits where they have to have that sort of segmentation, is something that many employers may have avoided because of the technological difficulties of doing this.”
Source: Keeping records: Records that must be kept by law under the new employer duties, The Pensions Regulator
How should employers collect and store the relevant data?
Most employers will already have the necessary information, perhaps stored by their HR or payroll department. The changing nature of the pensions landscape, as set out by the reforms, could mean employers face a logistical nightmare. They must deal with increasing contribution levels, from a minimum of 1% in October 2012 to 3% in October 2017, as well as the fact that the number of eligible employees will increase and decrease according to age and earnings.
The Pensions Regulator says an employer can use electronic or paper systems as long as the records are legible, or can be produced in a legible way. Using technology can be an effective way for an employer to ensure its data is accurate, up to date and consistent across all its departments. Jamie Fiveash, director of customer solutions at B&CE, says: “The new way of working is going to have to be electronic because contributions are going to change all the time, and there will be a lot more employees coming in and out [of the pension scheme], so the encryption of the data passing from the employer to the provider will be an important issue.”
Markham says employers will have to manage eligibility changes dynamically because in any one year, someone may go over the age or salary threshold. “It is the employer’s obligation to track that,” he says. “It cannot do that in an annual audit, or even on a monthly basis, because it has an obligation to observe the legislation, particularly at the point when applicable, not when it is convenient for an employer’s administration systems to do it.”
To ensure it continues to comply, an organisation’s full employee demographic profile will have to be maintained constantly and be continuously available to the system as it processes according to the rules.
“The ability to manage requires continuous access to the HR data profile,” says Markham. “All of that is very difficult unless [an employer] can record it electronically in a full accessible manner.”
Are there any legal requirements concerning the storage and transfer of data to a provider?
Employers must ensure they comply with guidelines laid out by the Information Commissioner in the Data Protection Act 1998, which means they must have accurate, up-to-date information that is relevant to the purposes for which they need it. To ensure the data they hold meets these requirements, data testing and cleansing is essential, says Simon Butler, policy and proposition manager at Friends Life. “The best thing to do is get confirmation of what data is required, and run the data as a test as soon as possible,” he says. “Then have a look at it with completely objective eyes and ask: ‘Is this the right data? Is the quality of the data up to standard?'”
It is also crucial that data security is robust because it is an employer’s duty to keep accurate and current records, says Butler. “Data security is extremely important, and it would be treated as a hygiene factor throughout the industry. We are talking about personal data, which has to be treated with the appropriate respect.”
When passing information to a third party, such as a pensions provider, the employer is obliged to ensure the provider is compliant with data protection legislation. “That obligation sits with the employer, not with the third party,” says Markham. “It is the data controller that is responsible for ensuring compliance with the Data Protection Act.”
Source: Keeping records: Records that must be kept by law under the new employer duties, The Pensions Regulator
When should an employer check that it has the necessary data to comply with the legislation’s requirements?
With auto-enrolment for the largest organisations employing more than 120,000 people required from 1 October 2012, time is pressing for employers to ensure the data they hold complies with the record-keeping requirements.
The Pensions Regulator says that after an employer reaches its staging date, it must keep certain records on aspects of its compliance with the new duties, preserve those records and produce them to the regulator if requested.
“It is important that employers understand when their staging date is, and that is determined by their pay-as-you-earn (PAYE) reference,” says PMI’s Middleton. “It becomes a little more challenging when we get to 2016 and the very smallest employers find themselves in a position where they have to provide a qualifying workplace pension scheme. They will certainly have enough information about earnings, but they will need to make sure whether the people who work for them are old enough or young enough to be included in auto-enrolment.”
Auto-enrolment also gives employers an opportunity to check the quality of their data, make sure it is fit for purpose, and then carry out a test. Butler adds: “Inevitably, that means the employer needs to look at it reasonably soon, and if it has advisers or providers that are looking to assist with that, to use their experience.”
The relationship between an employer’s staging date and when it needs to start thinking about the data will depend on the quality of data it has, says Butler. “If it is good, then theoretically, a couple of months before its staging date, it could run tests to make sure it has the right information, and send it to its provider.”
How should employers manage the data concerning employees who opt out of the pension scheme?
Employees have a specific opt-out period during which they must give their employer notice if they want to leave a pension scheme.
The pension scheme provider, not the employer, must provide the opt-out notice. This can present a number of challenges concerning the transfer of information because the employee must be given the information to secure an opt-out form from the pension scheme provider, but the information must then be sent to the employer in order to stop payroll deductions. Employers will effectively have only a one-month window in which to do this.
“The traditional monthly file exchange in most HR functions today is not going to work because that will not be timely enough,” explains SBC’s Markham. “The employer has a major obligation to process the opt-out through payroll, so the whole thing can get processed in a realm of time, and the deductions appropriately adjusted. That is yet more pressure for processing real-time data exchange.”
Employers have a duty to automatically re-enrol employees, if they still meet the eligibility criteria, every three years from the original enrolment date. Jamie Jenkins, head of corporate strategy and propositions at Standard Life, says: “Consideration needs to be given to what they will do going forward, so for those people who will opt out, for example, how do employers manage the three-year re-enrolment that needs to take place? Depending on who opts out and when, they could have lots of triennial reviews going on.
“Making up lost investment growth is a big fear that employers have if they miss somebody. The duties are on the employer, and they are becoming quite conscious of the fact that there is no duty on the employee other than whether to choose to stay in the scheme or not.”
This means that employers will need to keep and maintain the data on those individuals, just as they would with all other employees. Friends Life’s Butler says: “Employers need to make sure the information held on those employees is maintained within their datacentre, or held wherever their pension data is held, so when it becomes time for the individual who has opted out to be re-enrolled, they have to make sure they have the appropriate information to do that.”
Read more about the 2012 pension reforms