Auto-enrolment a practical guide November 2012 We won t let it creep up on you
Auto-enrolment means that millions of workers will be saving in a workplace pension for the first time The requirement to enrol most employees into a qualifying pension scheme began in October 2012. It is designed to bring about a substantial increase in the number of people saving for retirement. This guide has been updated to reflect current guidance and share top tips from some of the organisations who have reached their staging date. The qualifying auto-enrolment scheme may be an existing or new occupational or personal pension plan. Employers are not restricted to using a single scheme; they can use different ones for different parts of their workforce. The responsibilities of auto-enrolment on employers both before launch and ongoing are many and complex. Employers need to consider the requirements carefully in advance; implementation will need excellent project management and plenty of time. Although conceived of as a solution to inadequate pensions, the ramifications of auto-enrolment are extensive. They reach well beyond pensions to finance, HR, payroll, benefits, data, systems, processes and communications. They also have implications for external suppliers such as pension and payroll administrators. Project managers need access to specialist payroll and pensions expertise; just as important is their ability to operate across all the affected areas. Auto-enrolment is a fast-moving subject. Rules are regularly updated. This Guide represents our understanding of the position in November 2012, watch out for our updates on aonhewitt.co.uk/ auto-enrolment. If you would like to discuss any of the issues raised in this Guide, please telephone us on 0800 279 5588 or email us at enquiries@aonhewitt.com. Top tips so far 3 >> Be aware things you need to know 4 >> Planning the project 6 >> Countdown to staging date 8 >> Questions for specialists 10 >> Compliance considerations 12 >> Glossary 14 >> To see an explanation of the terms used in this booklet, visit our Glossary on pages 14 and 15. 2 Aon Hewitt November 2012
Top tips so far Before you look at the details of planning the project, here are some top tips from those employers who have early staging dates: 1 2 3 4 5 Don t underestimate the time required to set up auto-enrolment in your organisation. Expect your plan, from start to finish, to take at least 12 months. Best practice, as outlined in the Countdown to Staging date section, is 18 months. Involve key stakeholders from the outset. Auto enrolment will impact HR, payroll, pensions, finance and communications within your organisation. Liaise with external suppliers too payroll provider, pension provider, flex provider. Processes will change. Which processes, and by how much, will vary depending on your chosen approach to auto enrolment. You need to spend the time to work through the detail. Watch out too for the additional record keeping required by the Regulator. Know your population. Having complete and clean data about your workforce (their employment contracts, their pension status, their earnings and so on) is fundamental. Start discussions with your provider at an early stage. Understand the commitments they will make regarding the type of plans available, especially if you have a low contributing population. 6 Communication is key. Build in activities to raise awareness (for example, posters, articles in newsletters) and take time to draft letters to make them easily understandable. Consider additional communication for special groups, eg those with Enhanced or Fixed Protection. Make sure you complement this with training for internal stakeholders (HR, payroll etc). Auto-enrolment a practical guide 3
Be aware things you need to know While not comprehensive, here are some of the most important facts about autoenrolment as currently understood, together with some related points to watch. These include some of the administrative aspects of auto-enrolment, both at the staging date and afterwards. Note the complexity of project management and the importance of continuing compliance. If you are interested in more detailed guidance, please contact Aon Hewitt. 1 2 3 4 5 6 Key facts Auto-enrolment applies to all employers who employ one or more UK workers. It takes effect for the biggest employers from October 2012; for smaller employers it takes effect on staging dates over the following four and a half years. The dates are listed on thepensionsregulator.gov.uk Employers must operate one or more qualifying auto-enrolment pension schemes. These can be occupational pension schemes including DC, DB and hybrid schemes, workplace personal pension schemes and/or NEST, or other Supertrust. Employers must automatically enrol into a qualifying auto-enrolment scheme all eligible jobholders who work or ordinarily work in the UK and who are not already active members of a qualifying scheme. Non-eligible jobholders can opt into a qualifying auto-enrolment pension scheme, if they are not already members of such a scheme and work or ordinarily work in the UK. They are entitled to contributions from the employer. Entitled workers (earning below 5,564) can opt in if they are not already members of a scheme and work or ordinarily work in the UK but do not have rights to employer contributions. See Glossary on page 14 for details. Auto-enrolled jobholders can opt out. If they do so within one month of the start of the opt out window they receive a refund of their own contributions. Points to watch Workers include employees and contractors and may include agency workers. Employers can choose to bring forward and in some cases defer their staging date. Employer sizes are defined by size of PAYE schemes in April 2012. To qualify, existing pension schemes may have to change their arrangements. Employers need to track eligibility of existing workers and enrol joiners who are eligible jobholders. The law does not provide a definition of ordinarily working in the UK, although tpr has provided more clarification around what this means. The scheme for entitled workers does not have to be a qualifying scheme. Jobholders must be enrolled before they can opt out, so the process must be clearly defined and tested beforehand. The Department for Work and Pensions (DWP) suggests one in four may opt out. Timescales are tight. Care is needed in respect of high earners. Stuck on a term? Visit our Glossary on pages 14 and 15. 4 Aon Hewitt November 2012
7 8 9 10 11 12 13 14 15 16 Key facts Every three years (within a six-month window) employers must re-enrol all eligible jobholders who have opted out (unless they have opted out within the previous 12 months). Statutory minimum contributions for DC and personal pension schemes are generally set at 8% (including 3% from employers) of a band of pay from 5,564 to 42,475. These requirements will be phased in from 2012 to 2018. Contributions are generally based on qualifying earnings (including bonuses, commission, overtime, sick pay and maternity pay). Where a scheme does not meet the requirements of the statutory minimum test, employers can certify that it meets alternative quality requirements. Earnings are defined by amounts paid in pay reference periods (week, month, etc.). DB schemes must be contracted out (that is, meet the reference scheme test) or meet the qualifying scheme standard. Qualifying DB schemes can defer the start of auto-enrolment until 2017 for any existing jobholders at staging date who have previously chosen not to join that scheme. There is an optional three-month window (known as postponement ) for employers to auto-enrol joiners who are eligible jobholders. Qualifying auto-enrolment schemes cannot require members to make choices prior to the auto-enrolment process. Qualifying auto-enrolment schemes cannot require jobholders to provide information or consent in order to join. Points to watch This is one of a number of ongoing administrative requirements. A band of pay is less than total pay. There are alternative quality tests (see below). Qualifying earnings may not be the same as pensionable pay ; where this is the case there are certification requirements (see below). In respect of DC schemes there are three alternative quality tests (according to the definition of pensionable pay); minimum total contributions could be 9%. There are particular challenges relating to spikes in pay. For example, some workers may need to be auto-enrolled if their pay in any one week is greater than the weekly equivalent of the earnings threshold. Career average and other hybrid schemes are subject to additional requirements. Jobholders must be able to opt in between the staging date and 2016. If the DB scheme closes before 2016, contributions will need to be backdated to staging date. This replaces traditional waiting periods. The window may be important to employers of short service workers. DC schemes must offer a default investment option and are subject to new governance requirements. There may be implications for salary sacrifice and flexible benefits arrangements. Workers cannot be required to complete application forms. As a general rule, employers (not workers) must provide information to the pension scheme. Watch out for updates on aonhewitt.co.uk/auto-enrolment. Auto-enrolment a practical guide 5
Planning the project This section describes the main phases of the project and should be read in conjunction with the Countdown on page 8. The lists are not exhaustive contact Aon Hewitt today if you would like to discuss further. Preliminary steps Before you can agree a plan for auto-enrolment you will need to take several preliminary steps: 1 2 3 4 5 Find out your staging date Go to thepensionsregulator.gov.uk. Form a steering group/project team Consider representation from HR, payroll, pensions department and external providers, including payroll, flex and pensions Gather information Eg on your workforce, pension schemes, suppliers. But watch out, this can be very time consuming. Consider training needs up front Perform initial assessments Consider your workforce: which of your current employees are eligible for auto-enrolment, which are non-eligible and which are entitled? Consider your schemes: which of your existing schemes are, or could become, qualifying schemes? What about new alternatives eg NEST? Consider your providers: can your providers meet your auto-enrolment timetable or budget? Can they provide you with the whole solution? 6 Consider related projects Eg consolidation of providers and benefit reviews auto-enrolment has a potential impact on a number of benefits including salary sacrifice, flex schemes and life assurance. Consider costs 1 2 Review pension costs How much will your pension contributions increase? Some may not see a significant increase in pension costs because they already pay at least the minimum contributions for most employees. Other employers may see a considerable increase, even after allowing for employees who opt out. You may need advice on how to offset the increase. Consider other costs Eg administrative costs for project management, system changes and other aspects of implementation. The Department for Work and Pensions (DWP) has estimated that the one-off costs would be 10 per employee for employers of 250 or more employees, with estimated ongoing costs of approximately 2 per head. (Figures expressed in 2007/8 terms.) 6 Aon Hewitt November 2012
Developing a strategy 1 2 3 Review HR strategy Is your qualifying scheme merely a tool for achieving compliance or will you use it to attract and retain staff? Have you allowed time to assess your competitors packages? Do you need to consult or negotiate with unions? Communication is key You will need to build a communication plan incorporating any specific legislative requirements. Auto-enrolment is potentially confusing for employees: potential unhappiness around reduced take-home pay; frustration around the process of having to opt out mean that how you position auto enrolment in your workplace is key. Making decisions Armed with initial assessments, decision-makers, eg the employer s Executive Committee, will make key decisions on qualifying schemes, providers, finance and HR aspects. Decisions should be made a year before staging date to allow for systems implementation. And you will need to confirm the members of the project team for the implementation phase. Implementation phase 1 2 3 Be prepared for significant data, process and system changes The systems and process work involved will be considerable and will require specifying changes, implementing them and testing them. This could take up to 12 months and project planning is crucial. See our illustrative Countdown on page 8. Deadlines galore Project managers need to bear in mind that there are also deadlines to meet after staging, eg registration, opt out window and paying pension contributions. Many tasks, including enrolment, will have to be repeated at intervals. Project evaluation Two months after the staging date to allow for initial opting out project managers should review the outcome against the original strategy. Auto-enrolment a practical guide 7
Countdown to staging date This chart is an illustrative guide to the timing of some of the key tasks that need to be completed before your staging date. It is not comprehensive; nor is it a project plan. Some organisations will be able to complete the actions quicker than others; we expect most will take between 12 18 months to get ready. Time to staging date (approx.) 18 months 15 months 12 months Strategy Fact find: workforce, pension schemes, providers Initial assessments: workforce, pension schemes, providers, related projects Decisions: qualifying scheme(s), providers, HR and financial impact Identify initial project team Confirm project team for implementation Finance Review costs: pensions, suppliers Budgets HR Review HR strategy Review HR processes eg new hires Review benefits incl. Salary sacrifice, Flex etc Review special cases eg overseas workers Data Initial data on workforce Review PAYE schemes Process, systems, payroll System changes: specify changes incl. eligibility, qualifying earnings, opt ins, opt outs, refunds, joiners, leavers Providers Engage Review capacity Review contracts Workers Liaise with unions Education, training Decision makers Project team Trustees and pension professionals Communications Communications strategy Identify legislative requirements Pension schemes Engage trustees and others Identify changes Legal Review providers contracts Official communication 12 months receive commu 8 Aon Hewitt November 2012
The Countdown should be read in conjunction with Planning the project on page 6. Actions that will have to be repeated after the staging date appear in red. 9 months 6 months 3 months 2 months 1 month Staging date Review actual project vs strategy Data cleanse Address record-keeping requirements Formal assessment of workforce Implement system changes Test system changes internally Test with providers Enrol eligible jobholders Specify changes Test links Payroll, pensions admin Specify communications process changes Implement changes Initial communications to workforce Specific communications Specific communications Specific communications Implement changes Review terms and conditions Review agency workers etc nication from tpr 6 months Auto-enrolment a practical guide 9
Questions for specialists This section lists some of the specialists you should involve in your planning process, together with questions you might like to ask them, both to check that they understand the new requirements and to identify the interaction of changes in their area of expertise with those elsewhere. The specialists are listed alphabetically by function. This is not a comprehensive list. For more detailed information on each area, please contact Aon Hewitt. Benefits manager Have you reviewed the implications for flex schemes, insured benefits and salary sacrifice? Communications Have you identified legislative requirements for each type of worker? Data manager Is the current employee data adequate? Finance Have you identified the impact on pension and administration costs? HR How does auto-enrolment link in with your current HR strategy? Legal adviser Have you reviewed terms and conditions of employment for workers? Payroll manager How will you deal with earnings if different from pensionable pay? Pensions manager DB Does the existing scheme meet the requirements of a qualifying auto-enrolment scheme? 10 Aon Hewitt November 2012
Pensions manager DC What impact does auto-enrolment have on your current arrangements eg do you have a default investment option? Project manager Does your project team include representatives of all the affected areas eg HR, payroll, finance, providers...etc? Providers Do they have capacity to deal with your staging date and requirements? Systems/IT manager How will you deal with opt outs, opt ins, re-enrolment, joiners and leavers? Training Have you planned training for all the internal teams involved? Trustee DB Are rule changes required to make the scheme a qualifying auto-enrolment scheme? Trustee DC Have you considered the suitability of the default investment option, if any? Auto-enrolment a practical guide 11
Compliance considerations Hiring Employers are not allowed to discriminate against candidates who would have to be automatically enrolled into a pension scheme. This is known as prohibited recruitment conduct. The penalties increase (by reference to the number of employees in PAYE schemes) to a maximum of 5,000 for organisations with 250 or more employees. Inducement to opt out Employers cannot induce employees to opt out of a pension scheme. Individuals have up to six months to register a complaint. Employees who do not opt out also have protection against being treated less favourably than employees who do opt out. Failure to enrol or pay contributions on time This could give rise to a compliance notice or an unpaid contributions notice. The Pensions Regulator (tpr) has powers to insist on overdue payments being made; for DC schemes late payments would be increased by interest equal to the Retail Price Index plus 4.2%. Failure to address reforms Failing to engage with reforms, to keep records or to supply tpr with information can give rise to a fixed rate penalty of 400. There are also escalating penalties for entrenched behaviour that vary with numbers of employees (in PAYE schemes) and can amount to 10,000 per organisation per day. Both fixed penalties of 400 and escalating penalties of 200 a day can be imposed on trustees, administrators and managers, so the liability is not limited to employers. Penalties for breaching the rules can be severe. They have been set in order to gain the attention of senior executives. They are meant to signal the authorities determination that employers comply promptly with the new requirements. 12 Aon Hewitt November 2012
Explaining terms employees, workers and jobholders This diagram sets out to explain the hierarchy of terms relating to workers used in the context of auto-enrolment. For definitions see Glossary on page 14. Employees and contractors are workers. Workers are subdivided into jobholders, entitled workers and others (who have no entitlement at all). Jobholders are subdivided into eligible and non-eligible jobholders. Employees Contractors Workers Jobholders Entitled workers Eligible jobholders Non-eligible jobholders Others (who have no entitlement at all) Auto-enrolment a practical guide 13
Glossary Agency worker Auto-enrolment Career average scheme Certification DB scheme DC scheme Default investment option DWP Eligible jobholder Entitled worker Flex scheme Hybrid scheme Jobholder NED NEST Non-eligible jobholder Occupational pension scheme Opt in A worker, who usually has an employment contract with an agency and is supplied to work temporarily for and under the supervision of a hiring organisation. Automatic enrolment is the requirement to enrol every eligible jobholder into a qualifying auto-enrolment pension scheme if they are not already an active member of a qualifying scheme. A DB scheme which provides pensions linked to average pensionable salary over the member s service rather than salary at retirement. The process for allowing employers to certify that their schemes meet the criteria for qualifying schemes. Defined benefit pension scheme. The amount of income an employee receives on retirement is defined in advance, usually by reference to years of service and level of salary at retirement. Defined contribution pension scheme. The contribution level is set, often as a percentage of salary, however the amount of income received in retirement is not predefined. DC schemes need to have a suitable investment fund into which contributions will be paid unless members choose otherwise. The Department for Work and Pensions. Jobholders are eligible for auto-enrolment if they are at least 22 years old and below their state pension age, have qualifying earnings of more than 8,105 a year and work or ordinarily work in the UK. Workers who are at least 16 and under 75 years old, with qualifying earnings below 5,564 and who work or ordinarily work in the UK can opt in to a pension scheme but the employer does not have to make pension contributions. A flexible benefits scheme that allows employees to choose between benefits, eg child care or insurance. An occupational pension scheme that combines elements of DB and DC schemes. Jobholders are workers who are at least 16 and under 75, with qualifying earnings of at least 5,564 and who work or ordinarily work in the UK. New Employer Duties arise under auto-enrolment. National Employment Savings Trust is a new defined contribution multi-employer pension scheme, introduced by the government as part of its workplace pension reforms. Non-eligible jobholders can opt in to a qualifying pension scheme, if not already members of a scheme, and are entitled to contributions from their employer. They are either (a) jobholders who are at least 16 and under 75 years old with qualifying earnings of between 5,564 and 8,105 or (b) jobholders who are at least 16 and under 22 or between the state pension age and 75 with qualifying earnings of more than 8,105. An occupational pension scheme is a pension scheme set up in trust by an employer for their staff. Non-eligible jobholders can choose to be enrolled into a qualifying scheme. Entitled workers can also choose to join a pension scheme. 14 Aon Hewitt November 2012
Opt out PAYE Pay reference period Pension trustees Pensionable pay Pensions Regulator Personal pension scheme Postponement Qualifying earnings Qualifying pension scheme Reference scheme test Registration Salary sacrifice Staging date Waiting periods Worker Eligible and non-eligible jobholders may choose to leave their qualifying pension scheme after being automatically enrolled or opting in. Pay As You Earn is the system used by HM Revenue and Customs to collect Income Tax and National Insurance contributions. The period over which the worker is paid, usually a week or month. Pension trustees hold the assets of a pension scheme on behalf of members. A definition of pay used in pension calculations that varies according to scheme rules. Often defined as basic salary, ie excludes overtime, etc. The Pensions Regulator (tpr) is the UK regulator of work-based pension schemes, responsible for employers compliance with their NED. A registered scheme provided by an insurance company (or another financial institution) to enable individuals to save for a private retirement income. The deferral of auto-enrolment by up to three months. For the purposes of auto-enrolment, qualifying earnings include bonuses, commission, overtime, sick pay, maternity pay and other items. A pension scheme that meets certain requirements set out in legislation. To be used as an auto-enrolment scheme, the scheme must be a qualifying scheme and must not require the individual to take any action to become a member nor prevent the employer from automatically enrolling an individual. A test used to check that the benefits provided by a contracted-out scheme are equivalent to those under the reference scheme, defined in legislation. After completing the auto-enrolment process an employer must provide information to tpr on how it has met its auto-enrolment duties. A mechanism allowing an employee to give up the right to part of his or her remuneration in return for a benefit, eg extra pension contributions. The date from which each employer must enroll every eligible jobholder; staging dates are spread across four years starting in 2012, according to size of organisation. These postpone auto-enrolment for new joiners and for workers who become eligible jobholders. An individual who has entered into work under a contract of employment or any other contract by which the individual undertakes to do work or perform services personally for another party to the contract. Generally includes employees and contractors. Auto-enrolment a practical guide 15
For more information on auto-enrolment, please visit aonhewitt.co.uk/auto-enrolment, call either your normal Aon Hewitt contact or our central resource on 0800 279 5588 or email enquiries@aonhewitt.com. aonhewitt.com About Aon Hewitt Aon Hewitt is the global leader in human resource consulting and outsourcing solutions. The company partners with organisations to solve their most complex benefits, talent and related financial challenges, and improve business performance. Aon Hewitt designs, implements, communicates and administers a wide range of human capital, retirement, investment management, health care, compensation and talent management strategies. With more than 29,000 professionals in 90 countries, Aon Hewitt makes the world a better place to work for clients and their employees. Nothing in this document should be treated as an authoritative statement of the law on any particular aspect or in any specific case. It should not be taken as financial advice and action should not be taken as a result of this document alone. Individuals are recommended to seek independent financial advice in respect of their own personal circumstances. 2012 Aon Hewitt Limited Aon Hewitt Limited is authorised and regulated by the Financial Services Authority. Registered in England & Wales. Registered No: 4396810. Registered Office: 8 Devonshire Square, London EC2M 4PL. aonhewitt.co.uk @aonhewittuk SB3582 This document has been produced using a minimum of 50% recycled material from a sustainable forest.