Workplace pensions reforms
Wide ranging work-based pension reforms will be phased in from October 2012, aimed at encouraging more people to save for their retirement.
All employers need to prepare for their new responsibilities under the legislation which was finalised in Autumn 2011, and should be planning and budgeting at an early stage to prepare for the additional costs - both of any additional employer contributions, and of the additional administrative costs of communicating with staff and dealing with their queries, upgrading payroll systems, collecting and paying over contributions and retaining the required records. Practitioners need to be aware of the reforms as they need to prepare (as employers), and also research shows that their clients will look to them for advice.
The work-based pensions reforms require auto-enrolment into pension schemes. Where there is no existing staff pension, employers will either need to set up a suitable ‘qualifying scheme' or find one in the marketplace, including NEST, the National Employment Savings Trust, a new trust-based occupational scheme set up by the Personal Accounts Delivery Authority (PADA). The responsibility for enrolling employees into the chosen scheme(s) and collecting and paying over contributions will fall on employers. Employers already providing pension schemes will need to ensure they are 'qualifying schemes', which may require changes to their schemes and contributions arrangements.
Detail on the reforms
Phasing in from October 2012, starting with the largest employers (based on size of PAYE group), all employers will be required to:
- provide one or more ‘qualifying schemes’, which can include the National Employment Savings Trust known as ‘NEST’
- provide information to all staff, for example telling 'eligible jobholders' that they are being automatically enrolled and have the right to opt out (NB employers cannot encourage staff to opt out or discriminate against potential employees on the grounds that they are likely not to opt out.) Other categories of staff must be told about the chosen scheme and about their right to opt in.
- automatically enroll all 'eligible jobholders'
- pay a minimum employer contribution on each eligible jobholder’s band of ‘qualifying earnings’ and collect and pay over the employee’s contribution which will also be phased in gradually until it reaches 4% from 2017 (with an additional 1% tax relief making total minimum contributions of 8% as from October 2018)
- register with the Pensions Regulator
- maintain adequate records, and
- repeat this auto-enrolment process every three years, for jobholders who have opted out.
A 'worker’ is a wider category than just employees and can include some contractors or agency workers. As a general rule, if you have to pay the national minimum wage to someone they are a worker.
An 'Eligible jobholder' is a worker:
- earning above a certain amount or 'trigger' (currently proposed to be £7,475);
- aged between 22 and state pension age; and
- working, or ordinarily working, in the UK.
A non-eligible jobholder is between 16 and 75 and earning at least £5,715, but less than the £7,475 trigger.
An entitled worker is between 16 and 75 and earning less than the lower contributions limit of £5,715.
Minimum employer contributions will be 1% until all employers are staged in (originally scheduled to be October 2016 but now postponed until October 2017, when it will increase to 2% and then 3% from October 2018). Minimum contributions will be based on a band of gross annual ‘qualifying earnings’, currently £5,715 to £38,185 per annum, which includes salary, commission, bonuses and overtime.
'Qualifying schemes’ can include Defined Contribution (DC), Defined Benefit (DB), personal pensions and contract-based, work-based personal pensions such as GPPs, provided they satisfy the quality criteria prescribed in the Pensions Act 2008, which set a minimum standard for the level of contributions made or the level of benefit provided.
It will be an offence for employers to encourage staff to opt out or to discriminate against potential employees on the grounds that they are likely not to opt out.
What should employers be doing to prepare?
Find out your ‘staging date’ - In November 2011, the Government extended the timetable for automatic enrolment to give small businesses longer to prepare and recover from the current difficult trading conditions. In January 2012, the Government released more information on the new staging dates, as follows:
- Businesses with 250 or more staff should continue with their preparations unaffected, as their staging date (on or before 1 April 2015) remains unchanged (for more details on these tranches see tPR's staging table)
- Businesses with 50-249 staff will have a staging date between April 2014 and April 2015. The Government will consult on the exact timetable early in 2012.
Businesses with fewer than 49 staff will now begin to be staged in between June 2015 and April 2017, instead of the previous timing (which would have started during 2014). These small employers will be split between:
- those with 30 or more staff (who will be staged between August 2015 and October 2015), and
- those with fewer than 30 (who, apart from a test tranche in June 2015, will not be staged until January 2016)
The details of how these staging dates will be allocated to the above in two categories of small employers is to be consulted on by DWP early in 2012
- If your PAYE scheme has fewer than 50 employees then this means that the earliest you will be hit by these reforms is June 2015, and you could be staged in as late as April 2017, but you still need to plan and budget for how you will comply with your new duties. Employers that are part of a group should beware, as the whole group will be staged in together, meaning they will be staged in early (at the same time as the largest PAYE group). Any seasonal businesses who are allocated a date during the peak of their activity can bring forward their staging date to avoid dealing with the additional administration and employee communications/queries at their busiest time of year.
- Assess your workforce. Not all employees are covered by the new duties and there are different requirements for different categories of employees, so you should make sure you know which duties you owe to each category of workers (see definitions box above for description of categories). ‘Entitled workers’ will only be entitled to receive information and opt in (with employee contributions only). ‘Non-eligible jobholders’ will be entitled to opt in and get employer contributions. ‘Eligible jobholders’ must be automatically enrolled with employer contributions, and must be told they can opt in during any waiting period, and that they can opt out once they’ve been enrolled. Staff will be categorised as at your staging date, but you should do an initial assessment in advance so that you can prepare – you can carry out a basic assessment of your workforce using TPR’s interactive tool (see link below)’.
- Choose a 'qualifying scheme(s)' and/or amend existing arrangements. If you do not already offer a staff pension, you can find one in the market place or use NEST, which has a public interest function and is obliged to accept all employers. If you have existing pension arrangements for some or all staff, you can continue with that provided it is a 'qualifying scheme'. The scheme must cater for automatic enrolment – which means that employees must be put straight into the scheme and cannot be required to make any choices, fill out any forms or even sign anything in order to join – this is likely to require changes to existing staff pension arrangements. Adjustments to contributions levels (or to pensionable earnings if these are restricted to basic pay rather than ‘qualifying earnings’) may also be needed to ensure the minimum amounts are met, and any existing waiting periods may need to be shortened if they exceed three months, unless additional feeder or foundation schemes are to be used.
- If you need to amend your existing pension arrangements this is likely to require consent from staff and/or trustees (or insurer/provider for contract-based schemes) so these changes will take time and should be begun sooner rather than later.
- Plan communication with your employees. As mentioned above, entitled workers and non-eligible jobholders will be entitled to receive information about opting in, and your eligible jobholders must be told they can opt in during any waiting period, and that they can opt out once they’ve been enrolled. Staff may also need to be informed or consulted about changes to your existing scheme. Some employers may reduce costs by offering more than one scheme, for example, continuing a more generous one for higher earners and setting up a different one for lower earners or part time/temporary employees. However, care will be needed when communicating this to staff as this ‘two tier’ approach could be perceived badly – so communicating choice of scheme itself may need careful consideration and planning.
- Review your business software and payroll system. You will need to pay employer contributions, and deduct employee contributions and also refund contributions to staff who opt out (see below). You are therefore likely to need to invest in new or upgraded payroll systems and software (which will need to cope with refunding contributions to employees who opt out), and this needs to be included in your budget forecasts. You will also need to keep records of staff who opt out, and monitor the ages and/or earnings of jobholders so that you are aware of when they change their category and thus have different entitlements.
As from your ‘staging date’…
… you will need to start providing information to staff, auto-enrolling your staff and providing information to each of your chosen pension schemes about those being enrolled into that scheme. You will therefore need to have a procedure in place for auto-enrolling staff and dealing with opt-ins and opt-outs.
Employers are allowed to impose a waiting period of up to three months (both on initial ‘staging in’, and for each employee taken on going forward). This will be useful as it will remove the duty to enrol very short term employees, and will help reduce the administrative burden for employers with a high turnover of staff. It will also enable employers to align enrolment periods with pay periods, so they don't have to deal with partial contribution periods.
Employees are then auto-enrolled at the end of any such waiting period, and they have about 4-6 weeks within which to opt out. If they do so within this time, they are treated as if they were never a member of the scheme. However, their contributions will likely have already been taken before such opt-out, and therefore refunds will become due and your payroll system will need to cope with this.
Registration with tPR
Employers must register online with the Pensions Regulator within four months of their staging date to confirm they have fulfilled their obligations, giving information about the pension scheme(s) they are using and how many people they have enrolled into it. Employers will be able to use agents for the registration process.
New employees, triennial re-enrolment and record keeping…
Each new employee that you take on must either be auto-enrolled (or told they can opt in, if they are a non-eligible jobholder or entitled worker), and every three years employers must also re-enrol any staff who have opted out. There is a six month window for such re-enrolment. Seasonal businesses that have peaks of activity should consider this when deciding on a re-enrolment date in order to avoid the burden of additional administration during busy periods.
Employers will be required to keep records in respect of those who opt out (records must be kept for at least six years). In addition, employers will also need to monitor employee ages (if under 22) and earnings, because these employees will need to be auto-enrolled and/or provided with relevant information when they turn 22 or if their earnings increase above the earnings thresholds.
The Pensions Regulator website has information for employers and advisers, including detailed guidance explaining the new auto-enrolment duties. Look out for further information and guidance from the regulator, which can be done by signing up to the regulator’s free news-by-email service.
Updated guidance for workplace pensions reform published by tPR on 10.2.12
The Pensions Regulator has published an updated version of its detailed guidance on automatic enrolment and the new employer duties under pensions reform, for large employers and their advisers.
The detailed guidance, which forms part of the regulator’s suite of educational materials for all UK employers, has been updated to reflect recent legislative changes including the Pensions Act 2011 receiving official approval via Royal Assent.
The guidance now includes new content relating to:
- Postponement – the circumstances in which employers can use the provision to postpone assessment and automatic enrolment of workers
- The assessment of whether a person is 'ordinarily working' in the UK – including further examples for employers
- Contractual enrolment – including clarification around the use of salary sacrifice and flexible benefits arrangements, as a result of feedback
- Updated staging information
- Full appendices referencing the changes that have been made to each guide.
In addition to changes resulting from the Pensions Act 2011 and the publication of regulations by Government, the updated detailed guidance includes additional information identified as a result of interactions with large employers and their advisers. In particular there have been changes to the ‘Assessing the workforce’ guidance which now forms a subset of 4 documents detailing the assessment process, including the application of the postponement provision.
To view the updated guidance, please visit tPR’s website.
Interactive tools for employers
The pensions regulator has also launched some interactive tools for employers, which are designed to provide small businesses in particular with a simple and practical way to learn about the new duties, including how to:
- find out their staging date
- understand which staff need to be automatically enrolled into a pension scheme
- understand how to automatically enrol staff
- find out how much they will need to contribute for each eligible worker
Look out for further information and guidance from the regulator, which can be done by signing up to the regulator’s free news-by-email service.
ICAEW will be planning events on these new employer responsibilities during 2012. To register your interest email firstname.lastname@example.org.