Pensions Auto-enrolment Briefing Paper

Transcription

1 Pensions Auto-enrolment Briefing Paper Contact: Alan Fox UNISON s Pensions Unit Date of Release: 3 August 2012 From October 2012 employers will be required to start automatically enrolling eligible staff into qualifying pension schemes Find our more here! What are these changes? The Government wants to universally increase pension take-up as the Workplace Retirement Income Commission identified that 14 million workers in the UK are not currently contributing to a workplace pension and that at least 7 million are not saving enough to meet their retirement aspirations. It is for these reasons that an automatic enrolment programme will commence in October 2012 where employers will be legally compelled to enrol eligible staff into a qualifying pension scheme. This pension scheme must meet certain minimum standards and employers can simply enrol staff into their current pension scheme as long as these standards are satisfied. There will be a rolling timetable for employers to adhere to and the very largest employers will undergo this exercise first with effect from October 2012 with the very smallest employers not having to fully adopt these provisions until early These requirements also apply to public service employers. What will employers have to contribute for eligible staff? Ultimately, employers, as an absolute minimum, will have to contribute at least 3% of a worker s qualifying earnings into a qualifying pension scheme on the condition that the employee pays at least 4% with 1% being added in the form of tax relief so in effect a total minimum 8% contribution is made. Qualifying earnings is defined as all annual earnings in excess of the National Insurance Lower Earnings Limit (currently 5,564) up to 42,475 and includes salary, wages, bonus, commission, overtime, statutory maternity/paternity pay and statutory adoption pay. The vast majority of employers sponsoring final salary and career average revalued earnings schemes will already be providing qualifying workplace pension schemes that satisfy the minimum eligibility conditions so such employers will not need to provide new schemes for eligible staff. This includes local government and health employers that qualify to offer employees access to the Local Government and National Health Service Pension Schemes.

2 Employers will however still need to offer a pension scheme to staff that do not qualify for their current pension scheme but fall within the auto-enrolment parameters. For example, many casual workers and those on zero hour contracts. Will employers have to contribute at least 3% straight away? No, employers will only be required to contribute at least 1% of an employees qualifying earnings until October This should increase to at least 2% between October 2017 and September 2018 and 3% with effect from October Who exactly will employers need to auto-enrol into a qualifying pension scheme? Any worker aged between 22 and State Pension Age employed under a contract of employment in Great Britain who earns enough to pay income tax currently 8,175 per annum. All eligible workers will need to be auto-enrolled within 3 months of being hired. The definition of a worker will include those who are employed under a contract of employment or any other contract by which an individual undertakes work, or performs services personally for another party to the contract. The way job holder is defined will basically include all but those who are truly self-employed. This means that it will include casual workers, those on zero hours contracts, office holders, volunteers, secondees, carers, nannies and agency workers. What is a qualifying pension scheme? Employers currently contributing to the following pension schemes should have qualifying schemes: A defined benefit pension scheme (including final salary or career average schemes) that satisfy the contracting-out requirements for example, the Local Government and NHS Pension Schemes A defined benefit pension scheme that is contracted-in to the State Second Pension but has at least a 1/120 th pension build up rate Group Stakeholder and Personal Pension Schemes where minimum contributions at least match those required under the automatic enrolment requirements i.e. 3% employer contributions by late 2017 However an employer will still need to provide a qualifying pension arrangement for any staff that satisfy the auto-enrolment eligibility criteria but cannot join their employer s standard pension scheme. Perhaps for example because they have already opted-out and are not allowed to re-join under the scheme rules.

3 What happens if an employer does not have a qualifying pension scheme? If an employer does not currently contribute to a qualifying workplace pension scheme then quite simply they will need to provide one by their allocated staging date. Alternatively an employer could choose to make a contribution to the National Employment Savings Trust (NEST) for qualifying staff. NEST is a low-cost and simple pension scheme designed in part to help employers to meet their auto-enrolment duties and to encourage people to save for their retirement. It s run by a Trustee Body called the Nest Corporation and has a clearly defined investment strategy. NEST is effectively a defined contribution pension scheme where a member (and any employer contributions) are invested in a fund which hopefully grows in value in line with the underlying investments and then this fund at retirement is used to purchase a pension at retirement (known as an annuity). There is currently an annual limit to contributions to NEST of 4,400 and pension transfers cannot be made in or out of the scheme. What is an employer staging date? Employers depending on their relative size will have different dates as to when they are compelled to start auto-enrolling eligible employees into their qualifying workplace pension scheme if they don t already. In simple terms the biggest employers will go first and the smallest employers will have more time to prepare for their obligations. Broadly the staging timetable can be broken down into 2 distinct phases, as follows: Phase 1 will be for employers with 250 or more persons in their Pay as You Earn (PAYE) scheme. This will run from 1 October 2012 to 1 February Employers with 120,000 or more PAYE employees will auto-enrol first from the 1 October 2012 Employers with between 250 and 349 PAYE employees will have a staging date of 1 February 2014 You can see the full Phase 1 staging date timetable by going to Phase 2 will be for employers with less than 250 persons in their PAYE scheme. Staging dates will run from the 1 April 2014 to 1 February Employers with between 160 and 249 PAYE employees will have a staging date of the 1 April You can see the full Phase 2 staging date timetable by going to In addition, small businesses that are part of a larger PAYE scheme will run to a different staging timetable with the earliest staging date being the 1 August 2015 and the latest the 1 April 2017, see

4 Can employees opt-out of a qualifying pension scheme if they wan t to? Yes! Workers who have been automatically enrolled have the right to opt-out of the pension scheme. Each pension scheme has a specific opt-out period (which will have to be at least a month) where any deductions made from salary will be refunded. It should be noted that although a worker can choose to opt-out at any time, they may not be entitled to a cash refund of contributions after the opt-out period expires. Instead they will have built up a pension benefit which will increase in accordance with Scheme Rules up to retirement age. An employee would only be refunded their contributions with any employer contribution being refunded to the employer. If a qualifying employee opts-out of the pension scheme their employer will be required to automatically re-enrol them every 3 years. What will be the specific obligations on employers? Employers will effectively have to automatically enrol eligible jobholders into a qualifying workplace pension scheme and make an employer contribution towards it. Employers will also have to tell all eligible jobholders that they have been automatically enrolled and that they have the right to opt-out if they want to. Employers will also have to register their qualifying scheme with The Pensions Regulator and give details of the people they have automatically enrolled. Employers must not: Encourage or induce workers to opt-out of qualifying pension schemes Employ recruitment practices that will benefit job applicants who indicate they are prepared to opt-out Treat a worker unfairly or put them at a disadvantage because of automatic enrolment Provide false or misleading information to The Pensions Regulator What will be the penalties for non-compliance? The Pensions Regulator (TPR) will monitor non-compliance and has a range of powers for breach of these requirements, including the following: A compliance notice which may require a change of practice, specific steps to be taken, provision of information to the Regulator, or if appropriate retrospective admission to a qualifying pension scheme An unpaid contribution notice - which may require payment of both employer and employee contributions to an auto-enrolment scheme A fixed penalty notice for an amount up to 50,000 An escalating penalty notice if any of above are not not complied with In the event of a criminal offence occurring, TPR can also levy fines or press for imprisonment

5 What are the specific implications for members of public service pension schemes? Employees eligible to join a public service pension scheme are generally automatically included in the pension scheme and have to actively opt-out if they don t want to be in it. Also the take-up rates of public service pension schemes, unlike many in the private sector, are very good. To this extent therefore the ramifications are perhaps not as significant as they are for private sector employers and employees. Private sector employers with relatively low pension take-up rates will clearly be concerned with these requirements as these could lead to increased scheme membership and hence greater employer costs. Public service workers should note the following: Members who opt-out of public service pension schemes will need to be aware that they will automatically be re-enrolled into their relevant pension scheme every 3 years, although again they can choose to opt-out If the proposed 50/50 option (i.e. where a member pays half the standard contribution rate for half the benefits) comes into force as part of the Local Government Pension Scheme (LGPS) 2014 package, members of this scheme will be re-enrolled back into the main scheme every 3 years Approximately 25% of eligible members opt-out of the LGPS and auto-enrolment may present a good opportunity for these members to start or resume saving for their retirement Public service pension schemes, even after reform, will still provide one of the very best means for employees to save for their retirement; helping to avoid reliance on an inadequate state pension. Aside from building up a pension they also offer protection should a member suffer ill-health and protection for dependants in the event of member death If they are not eligible to join their current public service pension scheme (for example many casual employees cannot join the LGPS) their employer may well still be required to provide them with access to an alternative qualifying pension scheme.

6 Actions for Branches, Regions, Pension Champions and Contacts: Make members aware of the auto-enrolment agenda and what this requires To look out for any employer failings and examples of private sector employers dumbing down existing provision simply because they offer more than the minimum required To engage with private sector employers and to campaign for a significant improvement on these minimum standards To monitor opt-outs from workplace pension schemes so we can look to see if automatic enrolment is boosting take-up as the Government claims will be the case Make the Pensions Unit aware of any cases where employers are encouraging opt-outs Remind members that being in an employer sponsored pension scheme is likely to be in their best financial interests To make members aware that public service pension schemes will continue to provide good quality pension benefits including ill-health and dependants protection To make members not currently eligible to join their employer s pension scheme aware that their employer may well soon be required to provide them with an alternative pension scheme that at least satisfies the minimum auto-enrolment provisions