UK: Simplifying Auto-Enrolment For Employers – Changes From April 2015

Last Updated: 22 June 2015
Article by Jeremy Bristow

April 2015 saw the introduction of a number of changes to pensions legislation. Here we explore some of these changes in the context of auto-enrolment and the new approach for employers.

From 1 April 2015 new regulations under the Pensions Act 2008 relating to auto-enrolment came into effect and, in response, the Pensions Regulator ("tPR") has published its updated series of detailed guidance notes reflecting the changes.

Employers who had 30 or fewer employees on their PAYE system as at 1 April 2012 are now starting to reach their staging dates.  As many of these small employers will have had no previous experience of providing pensions for their workforce the recent simplifications are likely to be very welcome.

There are three classifications of UK worker for the purposes of auto-enrolment:

  1. Eligible jobholder – a worker aged 22 or over, and below state pension age, who has qualifying earnings over the earnings trigger for automatic enrolment (now Ł10,000 per annum).
  2. Non-eligible jobholder – a worker: (1) who is aged between 16 and 21 (or between state pension age and 74) and has qualifying earnings over the earnings trigger; or (2) who is aged 22 or over, and below state pension age, and has qualifying earnings equal to or below the earnings threshold for automatic enrolment.
  3. Entitled worker – a worker aged between 16 and 74 who does not have qualifying earnings.

Information to workers

Employers are required to provide workers with specified information regarding auto-enrolment within 6 weeks of their auto-enrolment date.  Before 1 April 2015 employers were required to provide each category of worker with separate information notices informing them of their rights to opt-in or join a pension scheme. This has been replaced by one combined communication setting out the prescribed information, which is helpfully described in tPR's detailed guidance note number 10, "Information to workers".

Similarly, postponement notices were previously categorised into four types in accordance with the levels of information which they should cover. For example, general notice B (for workers who are not active members of a qualifying scheme) had to include the figure for the current lower level of qualifying earnings, whereas the tailored notice for a Jobholder did not need to include this information. This system has now been replaced with one postponement notice for all types of worker.

Alternative criteria for DB schemes

In some cases, an employer may wish to automatically enrol its workers through its existing DB scheme. In order to do this, the scheme in question must meet the qualifying criteria applicable to all schemes for the purposes of automatic enrolment. Additionally, for a DB pension scheme which is not contracted-out of State Second Pension, there is a requirement to satisfy the criteria under the continuing 'test scheme standard' test, or under one of the new alternative DB requirements (the 'cost of accruals' test or the 'shared risk' test) introduced in April 2015.

The 'cost of accruals' test is designed to tie-in with the statutory scheme funding regime under the Scheme Funding Regulations 2005 by relying on work already completed by the scheme actuary. In essence, the test provides that the cost of providing benefits for each benefit scale requires a percentage level of contributions by the employer. The 'shared risk' test has been partially enacted in lieu of revisions to the Hybrid Schemes Quality Requirements Rules. If a shared risk scheme can satisfy qualifying criteria for DC schemes then it can be used for the purposes of auto-enrolment.

Exceptions to the employer's duties

In addition to the above, four new exceptions to the employer's duty to automatically enrol its workers have been created.

A Jobholder or an Entitled Worker has a right to opt-in to an auto-enrolment scheme, unless (focusing only on the new exceptions):-

  1. The worker has been paid a winding-up sum in the previous 12 months during their employment with the employer and, since that sum was paid, the worker has ceased to be employed and has later been re-employed by the same employer;
  2. The worker has given notice of termination of employment;
  3. The worker has cancelled their membership of a scheme after being contractually enrolled in the last 12 months; or
  4. The employer has reasonable grounds to believe that the worker benefits from lifetime allowance transitional protection.

If any of the above apply, the employer's duty to automatically enrol the worker is converted into a discretion.

Whilst these simplifications will go some way to helping ease the burden for those employers who are yet to reach their staging date, we anticipate increased levels of non-compliance as small employers struggle to grapple with the complexities of what is required of them.

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.

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