Workplace pension reform
Implementing workplace pension reform
The new employer duties under workplace pension reform will be introduced gradually over four years. They will apply to the UK's largest employers (i.e. those employing more than 120,000 people) from 1 October 2012.
On a monthly timetable from this point, new batches of employers will become subject to the employer duties. By 1 February 2018 it is expected that all UK employers will be subject to the employer duties. An employer will become subject to employer duties when it reaches its staging date. Staging dates are determined by reference to the size of an employer's PAYE scheme as at 1 April 2012.
The Government announced in November 2011 that the staging dates for employers with fewer than 3,000 workers would be delayed. Employers with fewer than 50 workers would have their staging dates delayed until the next parliamentary session (i.e. May 2015 at the earliest). A ministerial statement was issued in January 2012 confirming this, and the final staging timetable is now expected to be issued in Spring 2012.
Employers will have to provide certain prescribed information about their pension arrangements to all of their workers. The duty will apply from the point at which they are subject to employer duties (see 'when do I have to do anything?').
The exact content of the information will depend on the type of worker (see 'assessing and categorising your workforce') and whether the employer is using a waiting period (see 'waiting periods and notification' below).
Information to be provided to eligible jobholders
Eligible jobholders must be told that they have been, or will be, automatically enrolled or, if applicable, that they are already a member of a qualifying pension scheme. If the eligible jobholder is to be automatically enrolled, they must be provided with the following further information:
- What automatic enrolment means for them
- That they can opt out of membership (and, if they choose, opt back in, in certain circumstances). Employers must be careful not to phrase this in such a way as to induce workers to opt out
- A generic statement telling them where they can find more information about pensions and retirement saving. If the employer chooses to use a personal pension scheme as its automatic enrolment scheme, it must provide the terms and conditions of this scheme.
Information to be provided to non-eligible jobholders
Non-eligible jobholders must be told that they have the right to opt in to an automatic enrolment scheme and what it means if they exercise their right to opt-in. If the non-eligible jobholder does opt in, they need to be provided with the automatic enrolment information set out for eligible jobholders above.
Information to be provided to entitled workers
Entitled workers must be told that they have the right to join a pension scheme and what it means if they exercise this right.
Information to be provided to all workers
If an employer makes use of the three month waiting period, it must tell all workers that it has done so.
The information must be provided within one month of either the date the employer duties apply or, for automatic enrolment information, the jobholder's enrolment date. If the employer uses a waiting period it must issue notification to the workforce within one month and then the prescribed information must be provided one month after the waiting period has expired.
The only exception to the one month rule is for telling workers that they are already a member of a qualifying pension scheme. Employers have two months to provide this information, starting from the date their employer duties apply.
The information must be provided in writing. This includes sending it to workers by email, but, according to the Pensions Regulator, providing an internet or intranet site or a poster will not be sufficient.
Employers will be able to introduce a waiting period of up to three months. If an employer uses a waiting period then its workers' automatic enrolment date will be delayed until the end of the waiting period.
If an employer uses a waiting period, it will have to provide prescribed information in the form of a notification to all workers. Employers will have to provide this notification within one month of the start of the waiting period. The detail of how waiting periods will work is set out in regulations that have not yet been finalised.
It is, however, expected that employers will be able to issue a generic notice to all workers at the beginning of the waiting period. The employer will have one month after the end of the waiting period to provide further prescribed information to all its workers, automatically enrol all eligible jobholders and complete registration with the Pensions Regulator.
Employers will therefore have to assess their workforces during the waiting period to ensure they comply with the relevant employer duties for each group of worker.
The employer duty in respect of pension scheme membership depends on whether the eligible jobholder is an active member of an existing pension scheme:
- If the eligible jobholder is an active member of an existing pension scheme, the employer will have to either ensure that this scheme is a qualifying scheme or automatically enrol them into an automatic enrolment scheme.
- If the eligible jobholder is not an active member of an existing pension scheme, the employer must automatically enrol them into an automatic enrolment scheme.
A pension scheme will be a qualifying scheme if it meets both the:
- qualifying criteria; and
- minimum requirements.
The qualifying criteria are quite simple for UK schemes. They require the scheme to be either an occupational or personal pension scheme and be tax registered. The scheme must also meet the minimum requirements, which are based on an entitlement to a minimum level of contributions (both total and employer) or benefits. The minimum requirements will depend on the type of pension arrangements.
For defined contribution pension schemes, the minimum requirements will be for:
- the employer to make contributions in respect of the jobholder;
- employer contributions to be at least 3% of qualifying earnings; and
- total contributions to be at least 8% of qualifying earnings.
The level of minimum contributions is subject to phasing, and it is expected that the final contribution levels outlined above will be reached from September 2018.
The minimum requirements for defined benefit (including career average revalued earnings (CARE)) and hybrid schemes are different. We will be covering defined benefit schemes and workplace pension reform in a separate update.
An employer can only automatically enrol eligible jobholders into an automatic enrolment scheme. A scheme is an automatic enrolment scheme if:
- it is a qualifying scheme (see 'qualifying schemes'); and
- it meets the automatic enrolment criteria.
To be an automatic enrolment scheme and meet the automatic enrolment criteria, a pension scheme must not have any barriers that prevent an employer from using it to fulfil its employer duties (e.g. a fixed waiting period) or require any choice or information from the member for them to become or continue to be an active member (e.g. an investment choice).
The Department for Work and Pensions has introduced certification to try and make it easier for employers to comply with their employer duties. Many employers and pension schemes do not operate on the basis of qualifying earnings. Instead, they have narrower definitions of pensionable pay that may only cover basic pay or salary.
To tackle this, an additional certification regime is being devised which will enable employers to choose an alternative method of complying with their employer duties and meeting minimum levels of contributions.
Under the certification regime, employers will be able confirm to the Pensions Regulator that the contribution levels in whatever pension scheme they are using to discharge their employer duties comply with an alternative set of minimum standards. This is an alternative to paying contributions based on qualifying earnings as set out under 'qualifying schemes'.
The mechanism for how certification will work has been set out in regulations that have not yet been finalised. The latest draft of the regulations suggested it will be based on three tiers:
- Tier one - based on a contribution of at least 9% of the jobholder's pensionable earnings (inclusive of a 4% employer contribution). Pensionable earnings must be at least equal to basic earnings (a detailed definition of 'basic earnings' is set out in the regulations);
- Tier two - based on a contribution of at least 8% of the jobholder's pensionable earnings (inclusive of a 3% employer contribution). This tier will only apply if the total pensionable earnings of all relevant jobholders to whom the tier applies, in aggregate, are at least 85% of their total earnings (i.e. on the wide, qualifying earnings basis); and/or
- Tier three - based on a contribution of at least 7% of the jobholder's total earnings (inclusive of a 3% employer contribution). Under tier three, contributions must be based on all earnings.
Contributions under certification are based on earnings from £1 upwards and the latest draft of the regulations includes the ability to set a cap on pensionable earnings as long as imposing the cap does not result in contributions that are less than the relevant 'quality requirement'. This allows comparison with the definition of qualifying earnings, which are currently based on a band of earnings between £5,564 and £42,475.
This page may contain information of general interest about current legal issues, but does not give legal advice.