Auto Pension Enrolment
In its 2006 White Paper, the Department of Work and Pensions estimated that around 7 million people were not saving enough for their retirement needs.
In order to increase private pension provision for low/medium earners the Pensions Act 2008 introduced workplace pension reforms, due to take effect from October 2012. These reforms mean that eventually all employers will have to offer a qualifying workplace pension scheme to their workers and that all eligible workers must be automatically enrolled into the chosen scheme. The National Employment Savings Trust (NEST) is being created to provide a low-cost independent qualifying workplace pension scheme that any employer can use. NEST was originally referred to as the Personal Accounts scheme, but the scheme name was changed to NEST by the DWP following extensive market research.
The Government estimates that around 9 to 10 million people (including 3 to 4 million women) will be eligible for automatic enrolment into a workplace pension scheme as a result of the above changes. After allowing for people who opt out the Government expects this will result in between 5 and 8 million people newly saving, or saving more into all forms of workplace pensions each year. It estimates that of these between 2 and 5 million will participate in NEST, while an additional 3 million will be saving, or saving more, in other employer workplace pension arrangements. The Government estimates that NEST will have around £100 billion to £300 billion of funds under management by 2050 in 2007/08 earnings terms.
The Pensions Act 2008 defines a ‘jobholder’ as an employee or worker who ordinarily works in Great Britain and who is aged between 16 and 75 and who has ‘qualifying earnings’ in the ‘relevant pay period’. The Pensions Act (Northern Ireland) 2008 provides a comparable definition of ‘jobholder’ for those employees or workers who ordinarily work in Northern Ireland.
Where a ‘jobholder’ has more than one employer, the ‘employer duty’ provisions apply separately in relation to each employment. It should be noted that agency workers are considered as workers for the purposes of the ‘employer duties’. The relevant employer for agency workers for the purposes of the ‘employer duties’ will be either the agent or the principal responsible for paying the worker, or if neither is specifically responsible, whichever one actually pays the worker.
A director is not regarded as a ‘worker’ in the definition of ‘jobholder’ unless he/she is employed by a company under a contract of employment and there is at least one other employee in the company.
Someone who is self-employed for tax purposes may be classed as a ‘worker’, and so potentially a ‘jobholder’, if they are working under a personal services contract.
These new provisions apply equally to persons in Crown employment and to staff in the House of Commons and House of Lords. They do not, however, apply to members of the armed forces, reservists or any person employed or engaged in any capacity on board a ship as is to be set out in regulations. An Order in Council can provide that, to the extent and for the purposes specified in the Order, the provisions of the Act apply with or without modification in relation to a person in offshore employment.
The Pensions Regulator has published detailed guidance on how to identify jobholders and other workers.
‘Qualifying Earnings’ are earnings in a ‘pay reference period’ of 12 months (but see the further comments in this section) between designated lower and upper thresholds. The 2010 review team recommended that the lower threshold should be aligned with the National Insurance lower threshold (£5,715 in 2010/11, but subsequently increased to £7,225 for 2011/12) but that the upper limit should be independent of the National Insurance bands, and should be £38,185 in 2010/11 terms. However, the 2011 Pensions Act specifies that the Secretary of State for Work and Pensions must review the upper and lower earnings levels annually and may take into account a range of factors including Income Tax personal allowances, National Insurance thresholds, the level of the basic state pension and price and earnings inflation. There is also provision for limited rounding of the result by the Secretary of State.
In its response to its consultation on the earnings limits to apply for automatic enrolment in 2012/13 it has confirmed that the qualifying earnings band will be between £5,564 and £42,475.
There are two ‘pay reference periods’ used to calculate whether an individual has or is likely to have ‘qualifying earnings’ or exceed the automatic enrolment earnings trigger during the period over which he/she is normally paid:
- For assessment of eligibility for automatic enrolment and calculation of contributions In this case a ‘pay reference period’ will be the period over which the jobholder receives his regular wage or a period of one week. The Pensions Acts 2008 and 2011 set out automatic enrolment thresholds in annual terms for the purpose of assessing jobholder status. To make this work in practice, employers will need to apply the relevant pro-rata version of the figure appropriate to their payroll cycle. In its December consultation the government had set out the pay reference periods that it felt should be used for this purpose. Following the consultation it has confirmed that it proposes to prescribe the following proportionate pay reference periods:
· one week
· two weeks;
· four weeks;
· one month;
· three months;
· four months;
· six months
A pay reference period of 12 months will apply for those workers (described as ‘accidental jobholders’) who may, exceptionally, earn enough to gain jobholder status for isolated pay periods but will not earn over the threshold of the qualifying earnings band for the whole year. These people will not have to be automatically enrolled. Such ‘accidental jobholders’ could include part-timers who occasionally work full time to meet their employer’s peak demand times. This 12 month pay reference period will commence on the date the employer becomes subject to the automatic enrolment duties (and each anniversary of that date) or the date the worker started with that employer.
Employers may not, however, wait until a jobholder has accumulated earnings in excess of the qualifying earnings band threshold before they automatically enrol him/her. For practical purposes, automatic enrolment is triggered when a jobholder earns over the weekly, four-weekly or monthly threshold in their normal pay cycle straight after the commencement date of the employer’s duties.
This applies equally to jobholders with fluctuating earnings. Earnings over the threshold in a normal pay period will trigger automatic enrolment and the employer will make arrangements to achieve active membership in the usual way. If earnings subsequently dip below the threshold the person does not necessarily lose their active membership status (this will depend on scheme rules). Rather, contributions will resume next time earnings exceed the relevant threshold.
Where a worker without qualifying earnings has an unexpected earnings spike over and above their regular wage the actual value of the spike is added to contracted annual earnings. If this still produces total earnings of less than the qualifying earnings threshold they will not be automatically enrolled. If the value of the earnings spike in a pay reference period, when added to their contracted annual salary (even if not all of it has been earned yet) takes them over the annual threshold then the 12 month pay reference period will cease to operate. Instead, the person will be subject to a weekly or monthly pay reference period and the spike in earnings will be accommodated in the first weekly/monthly period.
Employers will be required to make a factual decision, based on actual additional earnings plus an assumption of continuing contracted earnings, to identify the point when a worker without annual qualifying earnings acquires jobholder status. When this happens the earnings spike ends the annual pay reference period. The person, now a jobholder, should be automatically enrolled at that point and contributions deducted in the appropriate pay reference periods thereafter. The employer will not be required to backdate contributions.
· For assessment of whether the scheme meets the ‘appropriate standard’ A ‘pay reference period’ of 12 months will be set to allow employers to identify if their scheme is a qualifying defined contribution scheme and allow them, at the end of the year, to assess whether pension contributions paid meet the minimum level requirements. Through this process of annual reconciliation, schemes will be able to continue to use their own definition of pensionable pay, which should ease the burden on schemes.
It is proposed to standardise annual pay reference periods for annual reconciliation purposes to cater for jobholders automatically enrolled at the staging date; jobholders who leave and jobholders who join the employer during the first 12 months after the staging date; jobholders whose automatic enrolment is postponed and jobholders joining and leaving during steady state. Eventually all jobholders will have a period for annual reconciliation which ends on the anniversary of the employer’s original staging date.
As a further easement, it is expected that employers will be able to adopt alternative earnings definitions, depending on their contributions rate, which means that many schemes may not have to reconcile contributions based on qualifying earnings
Earnings/pay for both definitions includes:
- statutory sick pay
- statutory maternity pay
- ordinary statutory paternity pay or additional statutory paternity pay
- statutory adoption pay
Regulations may also indicate other sums that may be considered as part of earnings.
The Pensions Regulator has published guidance to help employers assess which workers have qualifying earnings.
An employer must automatically enrol ‘jobholders’ aged between 22 and State Pension Age who have earnings of more than £8,105 in 2012/13, into a ‘qualifying pension scheme’, which may be the NEST scheme, from the first day they first meet the relevant criteria in respect of that employment. This is referred to as the ‘automatic enrolment date’. However, subject to meeting certain conditions, the ‘automatic enrolment date’ can be postponed to a later date (see section 5).
The Pensions Regulator has published guidance for employers on the automatic enrolment process.
The Pensions Act 2008 requires that a jobholder’s automatic enrolment date must also become the effective date for active membership of a qualifying scheme once the employer and its scheme have completed whatever steps are needed to complete the process of getting the jobholder into active membership.
The automatic enrolment provisions, set out in the Occupational and Personal Pension Schemes (Automatic Enrolment) Regulations 2010 – SI 2010/772, provide that the employer must enter into arrangements with an occupational or personal pension scheme so that before the end of a one month period beginning with the automatic enrolment date an individual becomes an active member of the scheme from the automatic enrolment date.
Where the employer enters into arrangements with a personal pension scheme, the jobholder is deemed to have entered into an agreement to be an active member of that scheme with effect from the automatic enrolment date on the later of:
· the date on which the jobholder is given information about the terms and conditions of the agreement. As a minimum these must:
o explain the purpose of the personal pension scheme
o specify the services to be provided by the personal pension scheme provider
o specify the value of any contributions payable by the jobholder, where this information is available to the personal pension scheme provider;
o specify the charges which may be payable to the personal pension scheme provider; and
o in the absence of a choice made by the jobholder, explain the investment strategy adopted by the personal pension scheme provider in relation to any contributions payable to the scheme by or in respect of the jobholder.
· the date on which the employer provides the jobholder with the enrolment information in writing.
The employer must also provide the scheme trustees of the chosen occupational scheme/provider of the chosen personal pension scheme with the following written information regarding the jobholder within one month after the automatic enrolment date:
(b) date of birth;
(c) postal residential address;
(e) automatic enrolment date, automatic re-enrolment date or enrolment date, as the case may
(f) national insurance number (where this is not available to the employer on the automatic enrolment, the employer must provide this within one month of being notified of the NI number) ;
(g) the gross earnings due to the jobholder in any applicable pay reference period;
(h) the value of any contributions payable to the scheme by the employer and the jobholder in any applicable pay reference period, where this information is available to the employer. This can be expressed as a fixed amount or as a percentage of any qualifying earnings or pensionable pay of the jobholder in any applicable pay reference period;
(i) postal work address;
(j) individual work e-mail address, where an individual work e-mail address is allocated to
that jobholder; and
(k) personal e-mail address, where the employer holds this information.
The information in any of points (g) to (k) above can be omitted where the scheme provider indicates they do not need this.
The above auto enrolment requirement will not apply where the ‘jobholder’ had been an active member of a ‘qualifying pension scheme’ and had decided to opt out of that scheme within a prescribed period before the auto enrolment date.
The DWP is responsible for the automatic enrolment policy; the Pensions Regulator will manage employer compliance.
Deduction of contributions
Contributions need to be calculated with effect from the automatic enrolment date and deducted on the first occasion the individual is paid (even if the payday arises before active membership is achieved) and every pay day thereafter. This means the initial calculation is likely to be for a partial pay period, dependent on when automatic enrolment falls within a jobholder’s pay cycle. The DWP’s expectation is scheme rules / contract terms would require contributions to be calculated and deducted once active membership has been created.
There is a duty on employers to automatically re-enrol into an ‘automatic enrolment scheme’ (ie. NEST or any other ‘qualifying pension scheme’) ‘jobholders’ who are aged at least 22 but not more than State Pension Age, where they are not otherwise already members of a ‘qualifying pension scheme’ This requirement will not apply where the ‘jobholder’ had been a member of a ‘qualifying pension scheme’ but chose to end his/her membership of that scheme in the previous 12 months before the re-enrolment date.Automatic re-enrolment will need to be undertaken every 3 years, on a date chosen within a one month window commencing on each three yearly anniversary of the employer’s staging date, for jobholders who have previously opted out or left pension saving and remain eligible for automatic enrolment.
- Where a third party (such as the scheme administrator) takes action which stops membership or lowers the contribution level in a high quality defined contribution scheme used under postponement (ie where the employer contributes 6 per cent);
- Where a third party (such as the scheme administrator) stops the scheme being a qualifying scheme, or stops a jobholder being a scheme member.
Postponement of Automatic Enrolment
The Government recognises that many employers have ‘waiting periods’ for their pension schemes so that staff who are only employed for a very short time do not leave with very small pension entitlements. The Occupational and Personal Pension (Automatic Enrolment) Regulations 2010 – SI 2010/772 enabled postponement of automatic enrolment for up to three months, but with the condition that in an occupational defined contribution scheme or a personal pension scheme, the employer contribution in any applicable pay reference period must be equivalent to at least 6% of qualifying earnings, with a minimum total contribution of 11% of qualifying earnings. However, the 2011 Pension Bill removes this requirement.
The 2011 Pensions Bill allows, but does not oblige, employers to defer the automatic enrolment period for a worker for up to three months by providing them with a notice. The notice must state that the employer intends to use a waiting period, together with details of the worker’s new automatic enrolment date. However, the worker can opt to join the pension arrangement during the waiting period, and the employer is then obliged to allow immediate membership. It is likely that regulations will require the employer to highlight this option in the deferral notice.
The waiting period can apply from the latest of:
· the staging date from which the employer is required to introduce automatic enrolment
· the worker’s first day of employment; and
· the first day when the worker become eligible for automatic enrolment, for example by reaching age 22 or having earnings above the automatic enrolment trigger.
The employer will be required to confirm the worker’s eligibility at the end of the waiting period before automatically enrolling them.
’Jobholder’ Opt Out Process
A ‘jobholder’ can opt out of a scheme (ie. NEST or a ‘qualifying pension scheme’) to which he/she has been automatically enrolled by providing a signed notice. The Pensions Regulator has issued guidance for employers on the opt out process.
The opt out period cannot start until the jobholder is an active member of the pension scheme and in possession of the information about the effect of the employer duty. For occupational pension schemes the jobholder will always have a period of one month during which to opt-out. This opt out period will start from the point that information is provided to the jobholder by the employer or when active membership is established, whichever is the later, e.g. if employer arrangements were such that the scheme joining process (including the provision of enrolment information) was completed in two days, then the combined joining and opt-out period would last for 32 days. It is for the employer and scheme to make the necessary arrangements to achieve active membership.
For workplace pension schemes (WPPs) the opt-out period will be one month from when the contract is deemed to commence.
The opt out process
The procedure, as set out in the Occupational and Personal Pensions (Automatic Enrolment) Regulations 2010 – SI 2010/772, is:
- To opt out a jobholder must obtain an opt out form from the scheme to which he/she was automatically enrolled. The form should not be obtained from the employer except where the scheme concerned is an occupational scheme, in which case the administrative functions have been specifically delegated to the employer. It should be noted that opt out is not permitted by letter or telephone. An opt out form is only valid if it is set out as in the regulations (see Appendix A).
The form must be sent to the employer. It would be possible for an opt out notice to be completed by a jobholder on a scheme website provided an instant e-copy is sent by the scheme to the employer.
Where the notice is in writing, it must be completed and signed by the jobholder. Where the notice is on electronic format, it must be authorised by a statement confirming that the jobholder personally completed and submitted the notice.
Employers receiving an opt out notice must inform the scheme concerned.
- Where a jobholder has submitted an invalid notice to an employer (e.g. where the notice was sent by letter without using the scheme’s opt out form or where a form was not signed) the employer must notify the jobholder of this. The initial consultation had suggested this notification must be within 5 calendar days but no timescale for this has been included in the regulations. In such a case the opt out period will be extended from 1 month to 6 weeks.
It should be noted that once notice of opt out has been given the employer no longer has any legal basis to deduct contributions from the jobholder’s pay without express consent.
Refunds of contributions
Once a ‘jobholder’ has opted out during the opt out period he/she will be treated as never having been a scheme member and any contributions collected from the ‘jobholder’ (and employer) must be refunded in accordance with the following procedures.
- The trustees/provider of the jobholder’s scheme must refund to the employer before the ‘refund date’ (ie the date one month from the date on which the employer is given a valid opt out notice, or where the opt out notice was given to the employer after the employer’s payroll arrangements have closed, the last day of the second applicable pay reference period following the date on which a valid opt out notice is given) any contributions made by the jobholder and any employer contributions paid on behalf of the jobholder.
- The employer must refund the jobholder’s contributions (adjusted for tax where appropriate) by the ‘refund date’..
Under current arrangements some employers have an agreement with their scheme that any employer contributions may be retained by the scheme to offset scheme administrative expenses. Although, following an opt out the regulations require a refund of contributions to the employer, the DWP do not envisage that this would preclude an agreement between the employer and the scheme which, in legal terms, re-directed refunds back to the scheme to be used for such purposes – in practice the money may never leave the scheme.
In order to make it easier to refund contributions in such circumstances an amendment will be made to the normal ’19 day’ rule (ie where member and employer contributions must be remitted to the pension provider by the 19th of the month following that in which they were deducted/due) so that member contributions deducted during the joining window by the employer will not have to be passed to the pension provider until the 19th of the second month following the month in which the jobholder’s automatic enrolment applies.