PENSIONS IN THE WORKPLACE: AUTO-ENROLMENT A Guide for Employers
INDEX 1. Introduction to automatic enrolment 03 2. When does it come into effect? 04 3. Who does it apply to? 05 4. Earnings 06 5. What if I already provide a pension scheme? 07 6. What happens if I don t have a qualifying scheme? 09 7. How does automatic enrolment work? 10 8. The automatic enrolment process 11 9. Postponement of the automatic enrolment date 12 10. Transitional provisions 13 11. What if an employee wants to opt-in? 14 12. What if an employee wants to opt-out? 16 13. Re-enrolment 17 14. What happens if I don t comply? 18 15. Employment issues 19 16. How we can help 20 17. Contact your local lawyer 21 02 Pensions in the Workplace: Auto-Enrolment
1. INTRODUCTION TO AUTOMATIC ENROLMENT On 1 October 2012, laws contained in the Pensions Act 2008 came into force, which introduced new duties relating to employee pension provision. For the first time, employers are obliged to enrol most of their workforce into a pension scheme and make employer pension contributions. These new duties will apply to all employers with employees in Great Britain, regardless of the number of individuals they employ. There is also corresponding legislation applying to employers with employees in Northern Ireland. It is important that employers take time to understand their new legal duties, to ensure they comply with them fully and to avoid intervention by the UK Pensions Regulator. Ten million individuals are expected to be eligible for automatic enrolment. Source: Department of Work and Pensions www.dlapiper.com 03
2. WHEN DOES IT COME INTO EFFECT? The new duties will be introduced over a staging period, which began on 1 October 2012. Each employer will be given a staging date on which the new duties will first apply. Staging dates are by size of employer working from largest to smallest with size measured by the size of the PAYE scheme as at 1 April 2012. Staging dates are from October 2012 to April 2017 with later dates up to 1 February 2018 for employers who first pay PAYE income after 1 April 2012. Further information about staging dates can be found on the Pension Regulator s website (http://www.thepensionsregulator.gov.uk/employers/staging-datetimeline.aspx). The Pensions Regulator will write to an employer around twelve months before its staging date, but employers should take time to consider how they intend to comply with their new pensions obligations well in advance of that time. A brief timeline of some of the key staging dates is set out below. Date October 2012 Nov 2012 to Jan 2013 Feb 2013 to Apr 2013 May 2013 to Jul 2013 Aug 2013 to Nov 2013 Jan 2014 to Feb 2014 Apr 2014 to Apr 2015 Aug 2015 to Oct 2015 Jun 2015 to Apr 2017 PAYE Scheme by size or other description 120,000 or more employees between 119,999 and 30,000 employees between 29,999 and 6,000 employees between 5,999 and 3,000 employees between 2,999 and 500 employees between 499 and 250 employees between 249 and 50 employees between 49 and 30 employees fewer than 30 employees May 2017 to Feb 2018 new PAYE scheme after Apr 2012 04 Pensions in the Workplace: Auto-Enrolment
3. WHO DOES IT APPLY TO? An employer s workforce can be divided into three categories, with different duties applying to each category, as follows: Employees aged between 22 and state pension age, who earn more than 9,440 a year, must be enrolled into an automatic enrolment scheme. Employer pension contributions must be paid into the automatic enrolment scheme in respect of these employees. This group is often referred to as eligible jobholders. Employees aged between 16 and 22 or aged between state pension age and 75, who earn more than 5,668 a year; and, employees aged between 22 and state pension age who earn more than 5,668 a year, but not more than 9,440 a year, must be enrolled into an automatic enrolment scheme if they elect to opt-in. Employer pension contributions must be paid into the automatic enrolment scheme in respect of these employees. This group is often referred to as non-eligible jobholders. Employees aged between 16 and 75 who earn 5,668 or less a year must be enrolled into a pension scheme if they elect to opt-in. The employer is under no statutory duty to make employer pension contributions to the pension scheme in respect of these employees. This group is often referred to as entitled workers. In 2005 there were four people working for every pensioner. By 2050 it is expected that this will change to just two workers for every pensioner. Source: Department of Work and Pensions www.dlapiper.com 05
4. EARNINGS The Pensions Act 2008 contains its own definition of earnings which includes not only an employee s basic salary or wages, but also other amounts such as commission, bonuses and overtime. Earnings are measured by reference to what is paid over a pay reference period which may not correspond to what is earned in that period. The legal test for determining an employee s earnings can be complex, especially where employees are paid on an irregular basis and/or their earnings fluctuate. If an employer is in any doubt in relation to an employee s earnings it should seek legal advice. Employer pensions contributions, where payable, will be based on the employee s qualifying band earnings between 5,668 and 41,450. All of the earnings figures referred to in this booklet are subject to annual review. If an employer is in any doubt in relation to an employee s annual earnings it should seek legal advice. 06 Pensions in the Workplace: Auto-Enrolment
5. WHAT IF I ALREADY PROVIDE A PENSION SCHEME? Employees who are already members of a qualifying scheme do not need to be automatically enrolled. A qualifying scheme is a registered pension scheme which meets certain minimum requirements known as quality requirements. Money Purchase Schemes In the case of a money purchase (defined contribution) pension scheme the quality requirements are met if the total contributions to the scheme satisfy the minimum levels prescribed. These minimum requirements will be phased-in as set out in the table below. October 2012 to September 2017 October 2017 to September 2018 October 2018 onwards Minimum Employer Contribution based on Qualifying Band Earnings Minimum Employee Contribution based on Qualifying Band Earnings 1% 1% 2% 2% 3% 5% 3% 5% 8% Total Contribution based on Qualifying Band Earnings The employer contributions set out in the table above are based on the employee s qualifying band earnings between 5,668 and 41,450. Certification For Money Purchase Schemes A scheme s definition of pensionable pay may not match that of qualifying earnings because qualifying earnings are defined very broadly to include things like bonuses, overtime and commission which are often not pensionable in schemes and also because many schemes require contributions to be paid from the first pound of earnings rather than on a band of earnings. Employers using money purchase schemes for which the definition of pensionable pay is not aligned with the qualifying earnings definition will be able to follow a process of self-certifying that the scheme meets the quality requirement if, on the face of the rules the minimum requirements are not met but, having examined data, the employer is satisfied that in practice the contributions are not less than the minimum requirements. www.dlapiper.com 07
An employer should take care and ideally obtain advice prior to self-certifying as differences in the definitions of earnings for the scheme and qualifying earnings under the Pensions Act 2008 may mean that it is not obvious whether a scheme meets the minimum requirements. An employer may also use the self-certification process if instead of the minimum requirements set out above, the scheme meets alternative requirements set out in the legislation. There are three alternative sets of minimum contribution requirements which are set out below, although these will be phased in with lower rates applying until October 2018. Alternative requirement 1 Alternative requirement 2 * Alternative requirement 3 Minimum Employer Contribution Minimum Total Contribution 08 Pensions in the Workplace: Auto-Enrolment Measure of earnings 4% 9% Pensionable earnings (which must be at least equal to basic pay) 3% 8% Pensionable earnings (which must be at least equal to basic pay) 3% 7% Total earnings * Alternative requirement 2 will only be met if at least 85% of aggregate pay for all the workers certified on this basis is pensionable. Defined Benefit And Hybrid Schemes Where the employer s pension scheme offers benefits other than money purchase benefits (ie defined benefits or hybrid benefits) different quality requirements apply and it is recommended that specific legal advice be sought by the employer as to whether the scheme meets the minimum requirements of a qualifying scheme in these circumstances. Information Requirements Though an employer does not need to automatically enrol employees who are already members of a qualifying scheme, the employer must still provide certain information to these employees about the qualifying scheme within two months of their automatic enrolment date.
6. WHAT HAPPENS IF I DON T HAVE A QUALIFYING SCHEME? If an employer does not have a qualifying scheme or has employees who are not members of a qualifying scheme, then it will have to make arrangements for employees to be enrolled into an automatic enrolment scheme. An automatic enrolment scheme is a qualifying scheme as described in section 5, but with two additional requirements. First, there must be nothing which prevents the employer from automatically enrolling the employee. Second, there must be nothing which requires the member to make any active decision (eg an investment decision during the currency of his membership). The Government has set up the National Employment Savings Trust ( NEST ) as an automatic enrolment scheme which employers could use in order to comply with their automatic enrolment obligations. www.dlapiper.com 09
7. HOW DOES AUTOMATIC ENROLMENT WORK? Once an employer reaches its staging date (as described on page 4), it must begin enrolling all employees aged between 22 and state pension age who earn more than 9,440 a year into an automatic enrolment scheme. Whilst this earnings threshold is expressed in annual terms, the statutory test for whether it is met is more complex, but broadly it looks at whether a person actually earns more than the relevant proportion of the annual amount in a pay reference period. These proportions have been rounded in the legislation for commonly used pay reference periods. So, for example, if the employee is paid weekly, the test is does the employee earn more than 182 per week? and if the employee is paid monthly, the test is does the employee earn more than 787 per month?. The employer will have one month, beginning on the date on which the employee first satisfies these criteria (known as the employee s enrolment date) to comply with this obligation. An employer will not need to automatically enrol any employees who are already members of a qualifying scheme. Example Rita is aged 27 and earns 30,000 per year. She is not a member of a pension scheme at work. Rita s employer will be required to enrol her into an automatic enrolment scheme within one month of its staging date, because Rita is aged between 22 and state pension age and earns more than 9,440 per year. Example Cathryn is 21 and earns 32,000 per year. She is not a member of a pension scheme at work. Cathryn s employer has reached its staging date, but will not need to enrol her into an automatic enrolment scheme, because Cathryn is not yet 22 and so does not qualify for automatic enrolment. However when Cathryn is 22 her employer will be required to enrol her into an automatic enrolment scheme within one month. 10 Pensions in the Workplace: Auto-Enrolment
8. THE AUTOMATIC ENROLMENT PROCESS The process which an employer must follow to enrol an employee in an automatic enrolment scheme will vary slightly depending on whether the scheme is written under trust or contract. For an automatic enrolment scheme written under trust, the employer must make arrangements with the trustees of the scheme for employees to become members within one month of the employees respective automatic enrolment dates. For an automatic enrolment scheme written under contract (ie a personal pension scheme or group personal pension scheme), the employer must ensure that the scheme provider notifies the employee about the scheme within one month of the employee s respective automatic enrolment dates. In all cases an employer will have to provide certain information to the employee and the automatic enrolment scheme. This information comprises enrolment information and jobholder information and must be provided within one month of the employee s automatic enrolment date. With the number of people living to over 90 expected to nearly treble in the next 20 years, many people will have their assets depleted by their parents long term care costs or indeed their own. Source: NEST pensions advice www.dlapiper.com 11
9. POSTPONEMENT OF THE AUTOMATIC ENROLMENT DATE It will be possible for an employer to defer an employee s automatic enrolment date for up to three months. In order to do this, an employer will need to follow a process set out in the Pensions Act 2008. This process will require the employer to provide certain information to the employee within prescribed time frames. Status Age Range an 16 22 22 SP Auto Enroled More than Option to opt-in More than 5,668 5,668 Option to opt-in 5,668 or *The earnings figures as set out in the table above will be su 12 Pensions in the Workplace: Auto-Enrolment
10. TRANSITIONAL PROVISIONS If an employer has a defined benefit or hybrid pension scheme which is open to new members, it may not need to automatically enrol certain employees until after 30 September 2017. The tests which must be met in order for an employer to take advantage of these transitional provisions are complex, therefore it is recommended that specific legal advice be sought in relation to this particular issue. d Salary A SPA 75 Employer Contribution Required 9,440 Yes 9,440 More than 5,668 Yes less No bject to change over time. www.dlapiper.com 13
11. WHAT IF AN EMPLOYEE WANTS TO OPT-IN? Employees who do not satisfy the requirements for automatic enrolment, nevertheless have a right to opt-in and can thereby require the employer to enrol them into a pension scheme. Employees aged between 16 and 22 or aged between state pension age and 75, who earn more than 5,668 a year; and, employees aged between 22 and state pension age who earn more than 5,668 a year, but not more than 9,440 a year, have a right to opt-in and if they choose to do so must be enrolled in an automatic enrolment scheme into which the employer must make contributions. Employees aged between 16 and 75 who earn 5,668 or less a year have a right to opt-in and if they choose to do so must be enrolled in a pension scheme. However, the employer is under no statutory duty to make any contributions into that pension scheme. In order that employees are aware that they have the right to opt-in, an employer will have to provide information notifying them of this right, within one month of the employee satisfying the criteria set out above. Example Stephen is aged 20 and earns 17,000 per year. He is not a member of a pension scheme at work. Stephen s employer is not required to enrol him into an automatic enrolment scheme, because Stephen does not satisfy the requirements for automatic enrolment, but Stephen s employer will have to provide information to him about his right to opt-in. If Stephen elects to opt-in, he can thereby require his employer to enrol him in an automatic enrolment scheme. Stephen s employer will have to make contributions to the automatic enrolment scheme at a rate at least equal to those set out on page 7. 14 Pensions in the Workplace: Auto-Enrolment
Example Craig is aged 41 and earns 20 per week. He is not a member of a pension scheme at work. Craig s employer is not required to enrol him in an automatic enrolment scheme, because Craig does not satisfy the requirements for automatic enrolment, but Craig s employer will have to provide information to him about his right to opt-in. If Craig elects to opt-in, he can thereby require his employer to enrol him in a pension scheme. Craig s employer need not make employer contributions in respect of such a scheme because Craig earns less than 5,668 a year. www.dlapiper.com 15
12. WHAT IF AN EMPLOYEE WANTS TO OPT-OUT? The changes introduced by the Pensions Act 2008 are not intended to introduce compulsory pension saving. Consequently employees have the right to opt-out of an automatic enrolment scheme if they wish to do so. Employees have a month, from the later of: the day on which they become a member of an automatic enrolment scheme; and, the day on which they receive information about the automatic enrolment scheme, to opt-out. Provided that an employee follows the opt-out process set out in the Pensions Act 2008, the employee will be treated as though they had never been a member of the automatic enrolment scheme, and will be entitled to a refund of any pension contributions which have been deducted from their earnings. If employees opt-out after this period or do not follow the process set out in the Pensions Act 2008, pension contributions may not be refunded. Even where employees have opted-out, automatic re-enrolment (see page 17) means that the opt-out is not permanent. The country faces a staggering 9 trillion shortfall in savings to support the next generation after they stop work, according to a report from the Chartered Insurance Institute (CII). Source: The Telegraph, 09.05.11 16 Pensions in the Workplace: Auto-Enrolment
13. RE-ENROLMENT The employer will have to carry out an automatic re-enrolment process on every third anniversary of the employer s staging date. An employer may choose a date up to three months either side of the anniversary date which may allow the employer to streamline some of its administrative processes. The automatic re-enrolment process will require the employer to automatically re-enrol any employees who are eligible for automatic enrolment and who have previously opted-out or ceased to become members of a qualifying scheme (unless they have done so in the 12 months prior to the automatic re-enrolment date). Example Helen is aged 30 and earns 28,000 per year. She is not a member of a pension scheme at work. Helen began employment with her employer on 2 May 2013. Helen has a number of financial commitments so has decided to optout of the automatic enrolment scheme which her employer arranged for her to join. Helen opted-out within one month of joining the scheme so was entitled to a refund of her contributions. On every third anniversary of its staging date, Helen s employer will have to re-enrol her into an automatic enrolment scheme, for so long as Helen satisfies the criteria for automatic enrolment. Helen will have the right to subsequently opt-out of automatic re-enrolment if this takes place. Britons need to save 16,700 more per year to live comfortably, cover long-term care costs, and pay back debts in their retirement. Source: The Telegraph, May 2011 www.dlapiper.com 17
14. WHAT HAPPENS IF I DON T COMPLY? The Pensions Regulator will be responsible for ensuring compliance with the new rules, and has several powers at its disposal, including: a compliance notice, which the Pensions Regulator can issue directing an employer to comply with its obligations under the Pensions Act 2008; a third party compliance notice, which the Pensions Regulator can issue directing a third party to take action so that an employer can comply with its obligations under the Pensions Act 2008; an unpaid contributions notice, which the Pensions Regulator can issue if an employer has failed to make the correct employer contributions required under the Pensions Act 2008; a fixed penalty notice, being a fine for a fixed amount, which the Pensions Regulator can issue in respect of an employer s failure to comply with its obligations under the Pensions Act 2008; an escalating penalty notice, being a fine of a daily amount accruing until such time as compliance is achieved, which the Pensions Regulator can issue in respect of an employer s failure to comply with its obligations under the Pensions Act 2008. 18 Pensions in the Workplace: Auto-Enrolment
15. EMPLOYMENT ISSUES The Pensions Act 2008 also prevents an employer from engaging in certain practices intended to discourage an employee from becoming a member of a pension scheme. In particular: an employer must not do anything during the recruitment process to indicate that it will choose a candidate based upon the fact that the candidate would opt-out of a scheme if automatically enrolled; an employer must not do anything which would induce an employee to opt-out of a pension scheme; an employer must not subject an employee to detrimental treatment on the basis that the employee has sought to enforce rights under the Pensions Act 2008. www.dlapiper.com 19
16. How we can help Identify The staging date will vary depending on the PAYE scheme; employers should assess their PAYE scheme and find out their staging date Review Speak to your pensions provider and trustees to find out if your existing arrangements need to be reviewed Plan Identify the employees you need to automatically enrol Collaborate Work with other central functions to ensure they are aware; payroll, HR Implement Put in place the necessary measures to implement the changes; timeframes, roles and responsibilities, legal compliance Communicate Employees will need to be made aware of the changes; how they will impact and when 20 Pensions in the Workplace: Auto-Enrolment
17. contact your local lawyer DLA Piper has a large national pensions team, who are able to advise in relation to all aspects of UK pensions law including auto-enrolment. If you wish to speak to one of our pensions experts in your location contact details are as follows: LIVERPOOL David Wright Partner T +44 (0)151 237 4731 david.wright@dlapiper.com Leeds Kate Payne Partner T +44 (0)113 369 2635 kate.payne@dlapiper.com LONDON Tamara Calvert Partner T +44 (0)20 7796 6702 tamara.calvert@dlapiper.com www.dlapiper.com 21
MANCHESTER Jeremy Harris Partner T +44 (0)161 235 4222 jeremy.harris@dlapiper.com edinburgh Andrew McIlhinney Legal Director T +44 (0)151 237 4854 andrew.mcilhinney@dlapiper.com Sheffield Vikki Massarano Partner T +44 (0)113 369 2525 vikki.massarano@dlapiper.com 22 Pensions in the Workplace: Auto-Enrolment
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