pension auto-enrollment

During the four years commencing 1 October 2012, the process of UK employers having to automatically enrol employees into a qualifying pension scheme will commence.

Before the Labour government left power they decided that legislation was needed to compel all of us to save money for our retirement. With an ageing population it is not realistic to expect the state to keep us in our old age and as such the legislation has been passed to compel us all to join a pension scheme. The Labour government introduced a new law which comes in to force in 2012 and makes it compulsory for all employers to enroll their employees in a pension scheme.

This new piece of legislation also has an impact on temporary workers and recruitment businesses. From next year as well as offering equal rights with regards to pay, holiday etc (AWR), temporary workers will also need to be enrolled in a pension scheme after completing a qualifying period. This will be compulsory and any recruiters or businesses who ignore the rules will face big fines or even imprisonment.

Implementing Auto-enrolment is likely to be as complex if not more than the Agency Worker Regulations so now may be the time to start considering the impact this latest piece of employment legislation may have on your business. Our guide will hopefully assist employers in their understanding of the inherent complexities of the proposed changes:

What Is Auto-Enrolment

Auto-enrolment will mean workers being automatically enrolled into their employer’s qualifying pension scheme without any active decision on their part. At present, many workers fail to take up valuable pension benefits because they do not make an application to join their employer’s scheme. Auto-enrolment is meant to overcome this.

From 1 October 2012 (subject to the employer’s own introduction date), all eligible workers will have to be auto-enrolled into a qualifying pension scheme. Employers can choose the qualifying scheme they use, which could include NEST (the National Employment Savings Trust). Each qualifying scheme must meet minimum standards in respect of the benefits it provides or the amount of contributions paid to it. The scheme must also provide auto-enrolment for all eligible workers, and for all new workers when they become eligible.

The Basics

The new employer duties are planned to come into force from 1 October 2012. Under these duties, employers will have to:

  • Enrol eligible workers into a qualifying workplace pension arrangement;
  • Choose the qualifying scheme(s) they adopt to discharge the newly arising duty; and either make a minimum 3% contribution towards a defined contribution scheme (based on qualifying pensionable earnings) or NEST (the National Employment Savings Trust); or
  • Offer membership of a defined benefit scheme or certain hybrid scheme which either has a contracting out statement or meets the test scheme standard.

An eligible worker is an employee aged between 22 and state pension age and earning above the income tax personal allowance (£7,475 in 2011/12). Contributions will be payable on earnings between £5,035 and £33,540.

Employers will also have an ongoing duty to maintain qualifying pension provision for workers who;

  • are already members of qualifying schemes; or
  • become members of such schemes.

Gradual Introduction of Auto-Enrolment

Although new duties come in from 1 October 2012, individual employers’ own duties will be introduced gradually over the following years and will be based on the size of the employer, typically by PAYE size.

The following is a table showing the staging dates for employers with 3,000 or more employees. The Government is revising the staging dates for employers with less than 3,000 employees and further information will be given by the pension regulator in early 2012.

Employer (by PAYE scheme size) Staging Date
120,000 or more 1 October 2012
50,000 to 119,999 1 November 2012
30,000 to 49,999 1 January 2013
20,000 to 29,999 1 February 2013
10,000 to 19,999 1 March 2013
6,000 to 9,999 1 April 2013
4,100 to 5,999 1 May 2013
4,000 to 4,099 1 June 2013
3,000 to 3,999 1 July 2013

There will be a three month waiting period before employers are required to enrol workers into their designated scheme. During this period, workers can choose to opt in to start saving straight away.

The largest employers who are due to auto-enrol between 1 October 2012 and 1 November 2012 will be allowed to start auto-enrolment from as early as July 2012 to
avoid the Christmas period.

Employers will be given the flexibility to re-enrol workers three months either side of their automatic re-enrolment date.

Minimum Contributions for DC Schemes and NEST

Where a worker is automatically enrolled in a defined contribution (DC) scheme or NEST, there will be a minimum contribution of 8% of qualifying earnings, of which the employer must pay a minimum of 3%. If the employer chooses to pay the minimum 3%, the worker will pay 4%, with a further 1% paid as tax relief by the government. (Qualifying earnings is earnings between £5,035 and £33,540).

However, these minimum contribution levels will be phased in between October 2012 and October 2017.

  • October 2012 to September 2016 – total minimum of 2% of qualifying earnings with at least 1% from the employer.
  • October 2016 to September 2017 – total minimum of 5% of qualifying earnings, with at least 2% from the employer.
  • From October 2017, total minimum of 8% of qualifying earnings, with at least 3% from the employer.

Opting Out

Workers will be able to opt-out of their employer’s scheme if they choose not to participate. Workers who give notice during the formal opt-out period will be put back in the position they would have been in if they had not become members in the first place, which may include a refund of any contributions taken following automatic enrolment.

Summary of changes:

  • The principal new duty will be to “auto-enrol” employees who meet certain age and pay conditions into a pension scheme or arrangement.
  • Employers will have the option of using an occupational pension scheme or contract-based pension arrangement (for example a Group Personal Pension) to meet the auto-enrolment requirement. Existing schemes may be used but will need to be reviewed against the legislation and may need amendment.
  • When the new rules are fully in force, pension contributions for autoenrolled employees to a defined contribution pension arrangement must be at a minimum rate of 8% (of which at least 3% must be paid by the employer) on pay between £5,715 and £38,185. If a defined benefit scheme is in place it must provide minimum benefits defined under: “reference scheme test”, if it is contracted-out of the State Scheme, or a Test Scheme Standard, if it is not contracted-out.
  • The new rules may result in increased pension costs for employers, perhaps substantial, as more employees may be brought into pension provision and contributions may need to be increased. The effects will be greatest for those employers who currently have poor or limited pension coverage within their workforce.
  • The National Employment Savings Trust, or “NEST”, is a new country and industry-wide occupational pension scheme that can be used to fulfill auto-enrolment

For more information on the pension changes taking place please go to the Pension Regulator website…