UK: Pensions Auto-Enrolment – What Does This Mean For Businesses?

Wide-ranging pension reforms were introduced by the Pensions Act 2008 and came into force on 30 June 2012. All UK employers will be required to auto-enrol eligible workers into a pension scheme and make mandatory contributions, in a process staged over several years.

The process is not a simple one, as evidenced by the twelve guidance notes produced by the Pensions Regulator. Furthermore, the guidance notes are aimed at pensions professionals rather than the employing business. So what does the new system mean for you, as an employer? The following is a broad outline of the requirements.

When will your business be required to comply with these pension reforms?

The new duties will apply to your business from a "staging date" assigned by the DWP, and this will depend upon the size of your PAYE scheme on 1 April 2012. If you operate more than one PAYE scheme, your staging date will be determined by your largest PAYE scheme on that date. For example, you are likely to have two PAYE schemes if you are an employment business supplying PAYE temps to clients, and your temp payroll scheme may be larger than the PAYE scheme of your own employees.

The staging timetable started on 1 October 2012 and currently runs until 1 February 2018 with larger employers becoming subject to the enrolment duties before small employers. The Pensions Regulator has published a staging date timeline to confirm the indicative staging dates that will apply for different sizes of employer, although the exact dates will depend on your PAYE data. See the staging date timeline. As a general guide, the position is as follows:

What does your staging date mean and what action do you have to take around that date?

Knowing your staging date is the first step and there are various things that you will need to do both before and after that date. Broadly speaking, you must have:

1. Fully assessed the composition of your workforce before the staging date;
2. Enrolled "eligible jobholders" into an automatic enrolment scheme within one month of the staging date (unless a "postponement period" can be applied); and
3. Register with the Pensions Regulator within 4 months of the staging date.

Assessing the composition of your workforce:who must be auto-enrolled?

The auto-enrolment legislation applies to your "workers"; a wider category than "employee". A "worker" is an individual who is working or ordinarily works in Great Britain under a (a) contract or employment or (b) any other contract under which the individual undertakes to do work or perform services personally for another party to the contract, but that party is not a client or customer of the individual.

You are obliged to make an assessment of your workers to determine which category each worker falls in. This assessment must leave sufficient time for you to auto-enrol "eligible jobholders" within one month of your staging date. You are then obliged to re-assess your workers continuously, in each relevant "pay reference period", which will coincide with your normal pay cycle, i.e. weekly or monthly, to determine if their category has changed and therefore their rights have changed.

The 3 categories of worker established by the auto-enrolment legislation are:

1. eligible jobholder:
   
   A worker who is at least 22 but has not reached state pension age and has earnings that exceed the "earnings trigger in a relevant "pay reference period". The trigger is set at £9,440 a year for the 2013/2014 tax year.
2. non-eligible jobholder:
   
   A worker who is aged between 16 and 21 or between state pension age and 74 and has qualifying earnings above the earnings trigger (£9,440 in 2013/2014) or a worker who is aged between 16 and 74 and has earnings exceeding the qualifying earnings threshold but below the earnings trigger (i.e. between £5,668 and £9,440 in 2013/2014).
3. entitled worker:
   
   A worker who is aged between 16 and 74 and earns less than the qualifying earnings threshold (£5,668 in 2013/2014).

The categories are more easily represented as follows:

What are the rights of eligible jobholders?

Unless they are already active members of an existing "qualifying scheme" that you run at the date on which they become eligible for auto-enrolment, your eligible jobholders must be enrolled into an "automatic enrolment scheme".

A qualifying scheme is an occupational pension scheme, or a personal pension scheme that is a registered pension scheme satisfying a statutory quality requirement under the Pensions Act 2008, the nature of which will depend on the scheme's benefit structure.

The government has set up the National Employment Savings Trust ("NEST"), an automatic enrolment scheme that can be used by any employer.

You must make a mandatory minimum level of contributions (see below).

An eligible job holder can opt out of the scheme, but cannot be encouraged to do so, and cannot do so prospectively, i.e. they have to be enrolled before they can opt out. This means that you will have to enrol them and make contributions which will have to be refunded if they subsequently opt-out. Eligible job-holders who do opt-out must be automatically re-enrolled every 3 years from your staging date so will have the opportunity to consider whether they wish to continue to opt out, every 3 years.

What are the rights of non-eligible jobholders?

Non-eligible jobholders are entitled to opt in to your automatic enrolment scheme and must give appropriate notice of their wish to do so. If they opt in you must give them the benefit of the mandatory employer pension contributions in the same way that as for an eligible jobholder. You are obliged to inform non-eligible jobholders of their rights to opt in.

What are the rights of entitled workers?

Entitled workers are not entitled to auto-enrolment. They are entitled to give you notice that they would like to join a registered pension scheme, not necessarily an auto-enrolment scheme. If they do opt in to a registered pension scheme provided by you, they have no statutory right to opt out. You are obliged to inform your entitled workers of this right to join a registered pension scheme.

What are the mandatory pension contributions?

If your auto-enrolment scheme or existing qualifying scheme is a defined contribution scheme (i.e. not a final salary scheme), you will need to make minimum contributions in respect of (i) eligible jobholders; and (ii) non-eligible job holders who opt in to the scheme.

From 1 October 2018, the minimum contribution will be a total of 8% and your contribution will be a minimum of 3%. This level of contributions will be phased in over time. Currently the total contribution level required is 2%.

Contributions are calculated according to the worker's earnings that fall within the qualifying earnings band, that is, earnings between £5,668 and £41,450 in the 2013/2014 tax year. This means that they will not necessarily apply in respect of the whole of the workers earnings, only those earnings within the qualifying earnings band. This may prove to be a difficult calculation to make, and there are options whereby the employer can choose to meet their obligations to make pension contributions based on the whole of the worker's pensionable earnings. Although these may prove more costly, they will certainly be easier to administrate.

Earnings include the worker's gross salary, commission, bonuses and overtime pay. It also includes statutory maternity, paternity or adoption pay and statutory sick pay.

What does this mean in practical terms?

1. Identify your staging date

• Number of "workers" in your PAYE scheme on 1 April 2012

2. Assess your workforce

• Workers will fall into one of three categories
• Identify the pay reference period
• Identify the earnings payable to the worker
• Compare the earnings with the qualifying earnings band and earnings trigger
• Are they eligible in terms of age?
• If so, they must be auto-enrolled within 1 month of their auto-enrolment date

3. Select auto-enrolment arrangements for your workforce

• Will you use an existing scheme if it qualifies? Check with the scheme actuary.
• Will an existing scheme require any rule changes (e.g. eligibility or waiting periods?)

4. Postponement

• Are you going to use a postponement period (up to 3 months)?

5. Prepare standard form documents for use

• Opt out and opt in notices
• Standard auto-enrolment and joining information notices
• Postponement period notices

6. Review contracts of employment/Staff Handbook

• Are you going to contractually enrol all employees regardless of whether eligible?
• Update pensions provisions
• Consider data protection consent in contracts

7. Payroll

• Set up auto-enrolment pay processes
• Arrangements for paying contributions
• Deduction of contributions from jobholders' earnings
• Refunds need to be made to those who opt out

8. High earners

• Consider the position of your high earners: if they have registered for enhanced or fixed protection from the lifetime allowance charge or have started taking flexible drawdown they must opt out within one month to retain protection.

9. Implement enrolment and opting in/out processes

• Enrol eligible jobholders in an automatic enrolment scheme
• Provide information about auto-enrolment to jobholders and other categories of worker
• Set up the opt out process
• Allow non-eligible jobholders to opt in
• Give entitled workers the right to join a registered pension scheme

10. Check compliance issues

• Communications with employees – template letters and information requirements
• Data protection: consent of employee to send information to pension scheme to enrol
• Register online with Pensions Regulator within 4 months of staging date
• Record-keeping – detailed records must be kept for 6 years
• Timely payment of contributions

11. Staff training for those in management/recruitment roles

• Job applicants must not be asked whether they plan to opt out
• Employers must not offer financial inducements to opt out

12. Prepare for automatic re-enrolment every 3 years

• Note those who have opted out will need to be re-enrolled unless they opted out within the previous 12 months
• There is a 6 month window spanning the 3 year date for re-enrolment

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.