AUTO ENROLMENT: QUALIFYING AND AUTO-ENROLMENT QUALIFYING SCHEMES

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1 PENSIONS PROFILE AUGUST 2012 AUTO ENROLMENT: QUALIFYING AND AUTO-ENROLMENT QUALIFYING SCHEMES Summary Faced with the imminent implementation of the auto-enrolment legislation, employers do have a number of options as to how they can comply. In order to determine whether a scheme is to be judged an automatic enrolment or qualifying scheme there are various tiers of criteria that need to be met, which are dependent upon the type of scheme and what the employers intends to use the scheme for. For a scheme to be an automatic enrolment scheme: it must meet certain qualifying, automatic enrolment and minimum criteria. For a scheme to be a qualifying scheme: it only needs to meet the qualifying criteria, in addition to any minimum requirements. So, where an employer wishes to use a scheme for its existing members, they must ensure that it meets the qualifying criteria in addition to the minimum requirements based on the type of scheme they plan to use. Employers can also use certification to self-certify their existing scheme to ensure that their scheme meets the requirements. ANY QUESTIONS? If you have any questions or comments in relation to this article, please pensions.technical@landg.com

2 2 PENSIONS PROFILE Automatic enrolment criteria Employers who wish to use a scheme for automatic enrolment must ensure that it meets the automatic enrolment criteria. What is the criteria for a scheme to be an automatic enrolment scheme? In order for a scheme to be an automatic enrolment scheme, it must meet the minimum requirements, the qualifying criteria and the automatic enrolment criteria: Automatic enrolment criteria: The scheme: Must not inhibit an employer from carrying out their duties to automatically enrol, opt in or reenrol a jobholder; Must not expect a jobholder to have to make any decision in terms of choice or in providing any information, in order to remain an active member of the pension scheme. Qualifying criteria (UK pension schemes): The scheme must: Be either an occupational or personal pension scheme; Be tax registered; and Satisfy certain minimum requirements according to the type of pension scheme that is used (see page 3). What does the automatic enrolment criteria mean in practice? Pension schemes cannot: Have anything in its rules that would act as a barrier to entry if it were to be used for an automatic enrolment scheme; Require the provision of information by the jobholder to become or remain a member of the scheme. Neither can they require the employer to provide information beyond that specified under the regulations; Require any choice to have to be made by the jobholders in terms of joining or remaining in the pension scheme. This also includes any investment decisions, i.e. there should be a default fund. Qualifying criteria Where an employer wishes to use any existing pension scheme before their staging date this would also mean that the scheme: Must be either an occupational or personal pension scheme; Be tax registered; and Satisfy certain minimum requirements according to the type of pension scheme used.

3 3 PENSIONS PROFILE Minimum requirements type of pension scheme The minimum requirements are dependent upon the type of pension that is used. Defined contribution (DC) occupational pension schemes The requirements are: The employer must make contributions in respect o f the jobholder; A total minimum contribution (of at least 8%) of qualifying earnings for the relevant pay reference period; A minimum employer s contribution (of at least 3%) of qualifying earnings for the relevant pay reference period. Defined contribution (DC) personal pension schemes The requirements are the same as above, however, in addition: It must be regulated by the Financial Services Authority (FSA); It must have its operations carried out by an authorised or exempt person under the Financial Services and Markets Act 2000, (FSMA 2000); It must provide money purchase benefits; and It must have certain types of agreements in place between the employer, jobholder and provider. Certification Employers with existing schemes may be able to self-certify that their existing schemes meet the minimum qualifying criteria. This is covered in the profile Automatic Enrolment: Certification. Defined benefit (DB) pension schemes The minimum requirements are based on the jobholder s benefit entitlement under the pension scheme at retirement. Where the scheme is contracted out? Where a contracting-out certificate has been issued the scheme will meet the minimum requirements. Where the scheme no longer contracts out or has never contracted-out? Where the scheme no longer contracts out or has never contracted-out the test scheme standard is applied, which includes: Entitlement to a pension from age 65, gradually increasing to 68 (to reflect increases in state pension age) and continuing for life; An annual pension of 1/120 th of average qualifying earnings in the three tax years before the end of pensionable service, multiplied by the number of years of pensionable service, up to a maximum of 40 years; Revaluation of accrued benefits by a specified method; and The annual increase in the rate of pensions in payment must at least increase by the consumer prices index (CPI), capped at either 5% or 2.5%, depending on certain factors, for example, the date the pension came into payment and the periods of pensionable service to which the pension relates.

4 4 PENSIONS PROFILE Hybrid pension schemes Hybrid schemes tend to have a blend of both DB and DC elements within their structure. Such schemes will have to meet the following: The same minimum requirements as for a DB scheme or a modified version; or The same requirements as a DC scheme or a modified version, including the self certification process where applicable; or A combination of the two. What the qualifying criteria mean in practice What should the employer be checking for? The employer should check the scheme rules to determine the following: Does the pension scheme have a total minimum contribution rate of 8% of a jobholder s qualifying earnings in the relevant pay reference period; and Does the employer s contribution equate to at least 3% of qualifying earnings; If the answer is yes to the above two points then the scheme should meet the minimum requirements. What are the requirements, if any? An employer has no specific requirements in relation to checking contribution levels in terms of establishing whether the pension scheme meets the minimum requirements. Employers may want to: Ensure that they continue to make the correct payments by making regular checks at set intervals; Carry out an entitlement check to ensure that the 8% of qualifying earnings contribution rate or equivalent is still being applied. The entitlement check should be carried out on each worker, although it may be possible to group workers where appropriate. Can employers use certification as an alternative? An employer can use certification as an alternative where their pension scheme rules: Deduct contributions from the first pound earned; Have a definition of pay that does not use qualifying earnings; and Pensionable pay is at least equivalent to basic pay.

5 5 PENSIONS PROFILE Conclusion While the introduction of auto-enrolment will mean employers will have a duty to automatically enrol eligible jobholders into an automatic enrolment scheme, they will need to determine which type of scheme they intend to use and ensure that it meets the relevant criteria. Once a pension scheme has been put in place that meets the relevant criteria they will then need to understand their automatic enrolment duties and how workers will join the scheme, whether this is through opting-in or contractual enrolment. Detailed guidance no.5 - Automatic enrolment and Detailed guidance no.6 - Opting in, joining and contractual enrolment provide more information on what the next steps will be in the process. This is not a consumer advertisement. It is intended for professional financial advisers and should not be relied upon by private customers or any other persons. This document is based on Legal & General s current understanding of tax law, HMRC practice and legislation which may change. It should not be considered a definitive statement in law. Legal & General Assurance Society Limited Registered in England No Registered office: One Coleman Street, London EC2R 5AA Authorised and regulated by the Financial Services Authority. PP08/12 Non GASD