New pensions legislation - what is it?
Between 1 October 2012 and 1 September 2016, all employers will become subject to new duties to enrol employees into a pension scheme either automatically or on request. For the first time, there will also be an obligation on employers to pay pension contributions for employees. Employers should start planning now for this new world of automatic enrolment.
When does this come into effect?
The date on which the duties will first apply (known as the 'staging date') depends on the size of the employer, with the largest employers going first. Employers can find out their staging date from the DWP's website. The Pensions Regulator will also send reminders to employers 12 months and three months before their staging date.
What contributions are payable?
Employees earning more than £7,335p.a. and aged between 22 and state pension age will have to be automatically enrolled within three months of joining (or reaching age 22 or the earnings level if later). Employees earning more than £5,035 and aged between 16 and 22 or state pension age to 75 may request enrolment. In both cases, the employer will need to pay contributions in respect of these members. The contribution requirements are being phased in but by October 2017 the total contribution will have to be at least 8% of "qualifying earnings" (£5,035 to £33,540, including all payments including overtime and bonuses) with at least 3% being paid by the employer.
Workers earning less than £5,035 can asked to be enrolled but there is no requirement for the employer to pay contributions.
Employers should start identifying which employees might need to be automatically enrolled, and which could choose to join the scheme. The costs of this should be factored into business plans and payroll processes should be checked to ensure they can cope with calculating employer and employee contributions and paying these over to the scheme within the statutory time limits.
What schemes can be used for automatic enrolment?
Employers can use any tax registered pension scheme, including an occupational pension scheme (defined benefit or defined contribution), a master trust, a group personal pension, stakeholder pension or the National Employment Savings Trust. The chosen scheme has to comply with certain requirements, in particular membership cannot depend on any action being taken or decisions being made by the member (so there can be no application form for members to complete or other decisions that they have to make). And the scheme must, of course, satisfy the minimum contribution requirements. Few existing schemes have a definition of pensionable earnings which matches the statutory definition of "qualifying earnings" so employers may need to look at whether existing contributions meet the statutory minimum.
Employers should start thinking about what scheme(s) they want to use for automatic enrolment. If the plan is to use an existing scheme, does this need to be amended (e.g. to remove the requirement for a membership application form)? Are there reasons to use a new scheme for automatic enrolment instead of or as well as existing pension arrangements?
Opting-out and refunds
All members (including those enrolled on request) will have a right to opt out of the scheme within one month and receive a refund of their contributions. The opt-out form has to be obtained directly from the scheme (this is intended to discourage employers from inducing members to opt-out) but once completed, has to be returned to the employer for checking and submitting to the scheme.
This has a very quick turn around time and employers will need to ensure that resources are available to undertake this checking process. Once a member has opted-out, the employer has to refund the member and the scheme in turn refunds the employer, but the timing might mean that there is a temporary cash flow issue for the employer.
Employees who are not members of a qualifying scheme (including those who have previously opted out) will need to be re-enrolled every three years.
Communication is key
Employers will have to provide certain information to members and the Pensions Regulator, and they will need to keep accurate records to know who needs to be automatically enrolled (or re-enrolled), who has opted-out and what contributions and refunds are payable. Communications may need to be reviewed and processes put in place to ensure compliance with these new requirements.
Regulating the new duties
The Pensions Regulator is responsible for policing the new regime. There are substantial penalties in place for non-compliance with any aspect of the duties. In addition, it will be illegal to induce an employee not to join the pension scheme or to opt-out. Employers will need to look at their recruitment processes and employment terms to ensure that they don't fall foul of these restrictions.