Racing for the finish line - the comprehensive guide to workplace pension reform. Part one - employer duties

16.11.11

 

Employers in the UK will have to cope with major reforms to workplace pensions that will be implemented from October 2012. The reforms will affect all employers, irrespective of their size or type of business. For the first time, employers must automatically enrol certain workers into a pension scheme that meets certain quality criteria. And, also for the first time, employers will have to pay a minimum level of contributions.

To help demystify this complex new area of law, we have produced a comprehensive guide to workplace pension reform. This is the first of three pieces of analysis on the reforms and focuses on employer duties.

Workplace pension reform has introduced a range of new terms and definitions into pensions and employment law. To make this analysis easier to follow these new terms are highlighted and linked to a glossary.

Employer duties

At the heart of workplace pension reform are the new employer duties. These will affect all employers, regardless of size, and will require them to:

Employers will also have to administer a re-enrolment process every three years, administer and process opt-out notices, and pay refunds. They will also be required to keep records and register with the Pensions Regulator. Finally, employers will be obliged to adhere to certain safeguards to ensure compliance.

Assessing and categorising your workforce

Workplace pension reform will affect groups of employees and workers in different ways. There are four main groups:

  • Eligible jobholders;
  • Non-eligible jobholders;
  • Workers (sometimes referred to as 'entitled workers');
  • Others ('non-entitled workers').

In order to successfully implement workplace pension reform it is necessary to undertake a thorough assessment of the workforce to establish who falls into which category. These definitions then determine what an employer has to do in order to comply with their employer duties.

The definition of the four groups is summarised in the following table, and detailed in the next three sections.

Qualifying earnings
Age of worker <£5,035 £5,035 - £7,475 >£7,475
16-21 Entitled worker Non-eligible jobholder Non-eligible jobholder
22 - State pension age Eligible jobholder
State pension age - 75 Non-eligible jobholder

Eligible jobholders

Who are they?

What are employers' obligations?

Non-eligible jobholders

Who are they?

A worker who works or ordinarily works in the UK, is aged at least 16 and under 75; and who either:

  • has qualifying earnings between £5,035 and £7,475; or
  • earns more than £7,475 of qualifying earnings but is aged at least 16 and under 22 or between state pension age and under 75.

What are employers' obligations?

  • Provide prescribed information about the pension arrangement (including a statement that the non-eligible jobholder has a right to request membership of an automatic enrolment scheme).
  • Permit non-eligible jobholders to opt-in to membership of an automatic enrolment scheme. This membership will be on the same basis as an eligible jobholder (i.e. employers will be obliged to pay contributions on qualifying earnings above £5,035).

'Entitled' workers

Who are they?

  • A worker who works or ordinarily works in the UK;
  • Aged at least 16 and under 75; and
  • Earns below the qualifying earnings threshold (i.e. currently £5,035 per annum).

What are employers' obligations?

  • Providing prescribed information about the pension arrangement
  • Allowing membership of a pension scheme (but this is not on the same basis as jobholders - no employer contributions are required in respect of workers).

Obligations to all workers

Employers have certain obligations that apply to all categories of workers, including:

  • Keeping records
  • Registering with the Pensions Regulator
  • Providing notification if using 'postponement'
  • Providing prescribed information about the pension arrangement
  • Adhering to the safeguards in place to protect workers' rights.

Issues in assessing the workforce

Dividing the workforce into the appropriate categories will be a big task, especially for larger employers or employers with complicated workforces. There are additional complexities in the detail that employers should consider. These include:

  • Who are 'workers'?

    This is a wide definition, and covers many people traditionally considered to be self-employed contractors and consultants. It is not the same as the definition for worker used in tax legislation. It may, therefore, capture individuals who are not covered for other employment purposes.

  • Office holders

    The 'worker' category does not cover 'office-holders' (e.g. non-executive directors or trustees), sole person directors or members of the armed forces.

  • 'Works or ordinarily works in the UK'

    Employees who conduct some of their work in the UK may be caught. Particular care will have to be paid to employees who travel and work in different countries, seconded and expatriate employees.

  • Age and earnings thresholds

    Employees' ages will change and their earnings may fluctuate. Employers need to ensure that their payroll systems can cope with the changes to an employee's age and earnings as this may trigger new duties, for example:

    • when a 21-year old employee who earns £10,000 per annum turns 22; or
    • a 25 year old employee gets a pay rise, taking their earnings from £6,000 per annum to £8,000 per annum.

    In both of these cases the employee will have switched from non-eligible jobholder to eligible jobholder status.

    See our alert on the practical implications for employers and new employee rights.

Qualifying earnings

  • The list of employer duties makes it clear that the definition of qualifying earnings is crucial for both assessing the workforce and administering pensions under the reforms.
  • Qualifying earnings are all earnings (see the next point) between £5,035 and £33,540 (in 2011/12). These amounts will be reviewed annually and may be changed by the Secretary of State for Work and Pensions.
  • The definition of qualifying earnings is wide and includes: salary or wages, commission, bonuses, overtime and a range of statutory payments (e.g. statutory maternity and paternity pay and statutory sick pay).
  • Employers will need to use a 'pay reference period' to determine if a worker is an eligible or non-eligible jobholder. For example:
    1. If a worker is paid on a weekly basis their earnings thresholds will be £143.75 per week (the automatic enrolment earnings threshold, i.e. for eligible jobholder status) or £96.83 per week (qualifying earnings threshold i.e. for non-eligible jobholder status); or
    2. For monthly employees this will be £622.92 and £419.58 respectively.

Contributions

The final major change under workplace pension reform is the new employer duty to pay a minimum level of pension contributions.

The exact amount that will need to be paid will depend on the type of pension scheme that is used to discharge the employer duties (see 'qualifying scheme' and 'automatic enrolment scheme' in part two of this series) and whether the employer decides to base contributions on qualifying earnings or to take advantage of the 'certification' regime.

At its simplest, at the end of phasing (i.e. when the reforms are in 'steady state') the minimum level of contributions based on qualifying earnings into a defined contribution (money purchase) scheme will be:

  • Three percent of qualifying earnings paid by the employer; or
  • Eight percent of qualifying earnings paid in total.

The five percent between the minimum employer contributions of three percent and the total minimum contributions of eight percent may be paid by either the employee or the employer.

The amount of contributions will be phased in and the government has now confirmed the final phasing plan. This will require one percent employer contributions and two percent total contributions from an employer's staging date until 1 October 2017.

From 1 October 2017 until 30 September 2018 minimum contributions of two percent (employer) and five percent (total) were required. The final 'steady state' (as outlined above) would be achieved from 1 October 2018.

This analysis is based on the Pensions Act 2011, which received royal assent on 3 November 2011 and is now law, and on a batch of amending regulations which have not yet been finalised. It also incorporates commentary on the Government's statement in November confirming changes to staging dates and phasing. We will update this analysis once the legislation is finalised in January/February 2012.

The figures set out in this document are as currently set out in legislation. They are subject to alteration by order of the Secretary of State for work and pensions, and we expect them to be uprated in 2012. Again, if and when they change, we will update this analysis to reflect the new position.

Glossary of terms

Terms that are in bold below are also defined in this glossary.

Automatic enrolment criteria

The automatic enrolment criteria are that the scheme cannot contain any provisions that:

  1. prevent an employer from using the scheme to comply with their employer duties (e.g. having a fixed waiting period or a minimum salary requirement)
  2. require a jobholder to make any choices or provide any information to become or remain an active member of the scheme (e.g. a requirement to provide an investment choice). This means that an automatic enrolment scheme has to provide a default investment option.

Automatic enrolment date

The minimum contribution amounts required to meet employer duties and satisfy the minimum requirements will be phased in from 2012. This is subject to a change announced in November 2011 by the Government.

A final timetable for phasing will be issued in January 2012. The following are the contribution rates that will be required to meet the minimum requirements for a defined contribution scheme. All the figures are based on percentages of qualifying earnings.

(1) Staging date - date to be confirmed) 1% employer and 2% total;
(2) Phase 2 (date to be confirmed) 2% employer and 5% total; and
(3) Steady state (or phase 3) (date to be confirmed) 3% employer and 8% total.

Automatic enrolment earnings threshold

The level of qualifying earnings that a worker needs to earn to trigger the employer duty to automatically enrol them into an automatic enrolment scheme. This is £7,475 in 2011/12 but this amount will be reviewed annually and may be changed.

Automatic enrolment scheme

A pension scheme that meets the automatic enrolment criteria, the qualifying criteria and the minimum requirements. (These terms are detailed in the 'Qualifying Scheme' and 'Automatic Enrolment Scheme' sections above.)

Contribution threshold

The level of qualifying earnings that an employer needs to pay pension contributions . This is £5,035 in 2011/12 but this amount will be reviewed annually and may be changed.

Eligible jobholders

Workers who work or ordinarily work in the UK, aged between 22 and state pension age and who earn qualifying earnings above £7,475.

Entitled workers

Workers who work or ordinarily work in the UK, aged between 16 and 75 who are not jobholders.

Jobholders

Workers who work or ordinarily work in the UK, aged between 16 and 75 and who earn qualifying earnings above £5,035. This includes both eligible and non-eligible jobholders.

Minimum requirements

For a pension scheme to meet the minimum requirements it must offer contributions that equal or exceed minimum benchmarks. These will vary depending on the type of scheme (e.g. defined contribution versus defined benefit).

Non-eligible jobholders

Workers who work or ordinarily work in the UK, aged between 16 and 75 and who earn qualifying earnings above £5,035 but who do not qualify for eligible jobholder status.

PAYE scheme

Most employers are required to operate pay as you earn (PAYE) for their employees. To do this, they register with HM Revenue and Customs and set up a PAYE scheme. Many employers have a single PAYE scheme that covers all of their employees. Some employers have multiple PAYE schemes for different groups of employees and some employers participate in a larger PAYE scheme (e.g. companies within a group structure).

An employer's staging date is determined by the size of the PAYE scheme as at 1 April 2012. If the employer operates multiple PAYE schemes, its staging date (for all of its employees) will correspond with that for the largest PAYE scheme.

Phasing

The minimum contribution amounts required to meet employer duties and satisfy the minimum requirements will be phased in from 2012, with the full amount payable from 2017. The following are the contribution rates required, based on percentages of qualifying earnings.

  1. Staging date - September 2016 - one percent employer and two percent total;
  2. September 2016 - September 2017 - two percent employer and five percent total; and
  3. September 2017 onwards - three percent employer and eight percent total.

Prescribed information

Information that employers need to provide to all workers. What the employer needs to provide will depend on the type of worker, whether they are already in a qualifying scheme or being automatically enrolled, the type of pension scheme being used to discharge employer duties and whether a waiting period is being used.

Qualifying criteria

A UK pension scheme will meet the qualifying criteria if it:

  1. is an occupational or personal pension scheme;
  2. is tax registered; and
  3. meets the minimum requirements.

Different, and complex, rules apply to non-UK pension schemes.

Qualifying earnings

The gross earnings payable to a worker over a period of 12 months including various components of pay, such as: salary, wages, commission, bonuses, overtime and statutory payments (e.g. statutory sick pay, statutory maternity pay etc.)

Qualifying scheme

A pension scheme that meets the qualifying criteria and the minimum requirements. (These terms are detailed in the 'Qualifying Scheme' and 'Automatic Enrolment Scheme' sections above).

Staging date

The date when an employer will be subject to employer duties under workplace pension reform. An employer's staging date can be found through the Pension Regulator's online tool.

Please note that this tool will be updated with the new staging timetable in January 2012, with full functionality restored.

Upper contribution limit

The maximum amount of earnings that are considered for the purposes of qualifying earnings. The upper contribution limit is £33,540 in 2008/09 terms, but we expect this figure to be reviewed and amended in 2012.

Waiting period

Employers can use an optional three-month waiting period to delay the onset of employer duties. It is important to remember, however, that if an employer uses this waiting period they will need to notify all their workers. In addition, jobholders will be able to opt-in to an automatic enrolment scheme at any point during the waiting period.

For the latest news on workplace pension reform, visit Wragge & Co's dedicated micro-site.

 

Key Contact

Richard Lee, partner, +44 (0)121 260 9831, richard_lee@wragge.com

Ian Curry, associate, +44 (0)20 7864 9598, ian_curry@wragge.com

This analysis may contain information of general interest about current legal issues, but does not give legal advice.