Solicitor Sarah Henderson looks at the implications for employers of the imminent introduction of pension auto-enrolment.
Q What are the plans for workplace pension reform?
Starting in 2012, employers will be required to enrol their “eligible jobholders” into a qualifying pension scheme and make minimum levels of employer contribution in respect of those jobholders. Eligible jobholders are workers employed under a UK contract of employment (or working under certain other contractual arrangements) between the ages of 22 and state pension age (SPA) who earn more than the minimum “earnings threshold” (currently £7,475). Once enrolled, eligible jobholders will have a period of time during which they can opt out of membership, subject to an obligation on their employer to re-enrol them every three years.
Q When does the auto-enrolment duty come into force?
The new auto-enrolment duty will come into force in stages between October 2012 and March 2016, starting with larger employers first.
A press release from the Department for Work and Pensions (DWP) on 28 November 2011 indicated that this “staging” timetable will be altered for employers with fewer than 50 employees. These employers will be “staged in” from May 2015 onwards, rather than from April 2014 as currently planned. It is also envisaged that employers with between 50 and 3,000 employees may see their staging dates revised slightly as a result of the changes to the small-employer timetable.
Minimum contribution levels will also be phased in to help employers and jobholders adjust gradually to the additional costs of the reforms. For defined-contribution (DC) schemes, the current minimum contribution requirements are that:
- during the staging period (October 2012 to September 2016) the total contribution level will be 2%, with a minimum of 1% coming from the employer;
- for one year following the end of staging (from October 2016 to September 2017) the total contribution level will be 5%, with a minimum of 2% coming from the employer; and
- from October 2017 the total contribution level will be 8%, with a minimum of 3% coming from the employer.
The DWP’s 28 November statement says that contribution levels required for DC schemes will remain unchanged until all businesses have been staged in. This suggests that the September 2016 cut-off point for phasing might therefore be put back to tie in with the changes to staging.
Q Do employers have any obligations to non-eligible workers?
Although there is no requirement on an employer to automatically enrol “non-eligible jobholders” into a qualifying scheme (see below), such workers will have a right to opt-in. If they do so, the employer is then obliged to make contributions in respect of the worker.
Workers are classified as non-eligible jobholders if they:
- earn less than the minimum earnings threshold for auto-enrolment but equivalent to or more than the “qualifying earnings” threshold (currently £5,035);
- are aged below 22 or between SPA and 75;
- have opted-out after being automatically enrolled but subsequently wish to rejoin the scheme; or
- are workers whose employer operates a waiting period before eligible jobholders can join its scheme.
Q What is the difference between “non-eligible” workers and “entitled” workers?
“Entitled” workers are individuals who earn less than the qualifying earnings threshold. Although such workers may request to join a pension scheme, that scheme does not have to be a “qualifying scheme” and no employer contributions are required.
Q What kind of pension schemes will qualify under the auto-enrolment rules?
A “qualifying scheme” can either be an occupational pension scheme or a personal pension scheme and must normally be a registered pension scheme under the Finance Act 2004. It must also satisfy certain quality requirements, which vary depending on whether the scheme is a defined-benefit (DB) or a DC arrangement.
A DB scheme will meet the quality test if it is contracted-out on the “reference scheme test” basis or if it is broadly equivalent to, or better than, the “test scheme standard”. The test scheme standard is based on a pension payable from the age of 65, equal to 1/120th of average “qualifying earnings” in the last three tax years before the end of pensionable service for each year of pensionable service (subject to a maximum of 40 years). This standard also assumes that the pension is protected against inflation in line with legislative requirements.
The quality test for a DC arrangement is based on the contributions made to that arrangement (as outlined above).
Q Are the plans for workplace pension reform finalised or might there be further changes?
Although the main plans are in place, the final shape of the new employer duties will not be known until early 2012. For example, the Government has put forward proposals for a simplified certification process for DC schemes whereby contributions are payable from the first pound of earnings rather than by reference to the banded earnings which the legislation currently uses. If accepted, these proposals are likely to pass into law early next year.
Sarah Henderson, solicitor, Sacker & Partners LLP