Reforms to the UK pension provisions were introduced by the Pension Act 2008 and will come into effect for employers and employees in stages from October 2012. The basis of the reforms provides that all employers must auto-enrol workers, an eligible “jobholder”, on a “qualifying workplace pension scheme” (QWPS) if they are not already enrolled in a workplace pension scheme. This will affect all employers of one or more eligible employees.
The scheme aims to ensure that an employer makes arrangements for all eligible jobholders to receive an income once they retire from work.
So who is an eligible “jobholder”?
A “jobholder” is an employee or worker who works (or ordinarily works) in the UK under a contract, is aged at least 16 and under 75 and is paid “qualifying earnings” by an employer (currently £5,035 to £33,540).
To be eligible for auto-enrolment, a jobholder must:
- Be at least 22 and not have reached state pension age;
- Be paid earnings of more than £7,475 and up to £33,540. Earnings are defined to include wages, commission, bonuses and overtime, including statutory sick pay and statutory maternity or paternity or adoption pay (including contractual entitlements); and
- Work or ordinarily work in the UK
Employers will be required to auto-enrol all existing employees. However, an employer will have a waiting period of three months for all new employees before they are required to auto-enrol them on a QWPS.
When do these changes come into effect for my business? The changes will be phased in for all employers on a month-by-month basis, between October 2012 and September 2016, and the ‘staging-date’ which will affect each employer will be dependant upon the number of employees that an employer has:
- 1 October 2012 to 30 September 2013: over 800 employees*;
- 1 October 2013 to 1 July 2014: between 50 and 799 employees*;
- 1 August 2014 to 1 September 2016: Less than 50 employees**.
* Check exact ‘staging-date’ throughout the period by number of employees with the Department of Work and Pensions.
** Check exact ‘staging-date’ throughout the period by PAYE Reference number with the
Department of Work and Pensions.
The Pension Regulator should write to you 12 months before the changes affect your business and send you a reminder about 3 months before the changes come into effect. Employers should not rely on these notifications alone.
What are my obligations as an employer?
- Provide access to a QWPS for all eligible ‘jobholders’. If the company does not have or does not wish to set up its own QWPS, it can use the Government’s National Employment Savings Trust (NEST) for employees (the obligation is on the employer to set up access to NEST);
- Auto-enrol all eligible ‘jobholders’ on date of eligibility (see ‘staging-dates’ above);
- Offer access to those who do not qualify as an eligible ‘jobholder’;
- Keep records of workplace scheme;
- File regular returns to the Pension Regulator (first day of eligibility and annually);
- The employer will need to try to reason with any employee who wants to opt-out of the scheme. However, as a matter of caution an employer must not give advice to an employee on the merits of the scheme as it may be liable for any bad outcomes as a result of the advice (this includes ordinary conversations).
Can an employee ‘opt-out’ of the scheme?
An employee can only opt-out of the scheme once they have been enrolled on the scheme. So the onus is on the employer to initially auto-enrol the employee.
An employee can opt-out during what is known as an “opt-out window” and if they do it then, they will be able to get their money back. If they opt-out outside the window, the will not get their money back until a later date.
Any employee who opts-out must be auto-enrolled again within 3 years of the date of opt-out.
Employers must be aware that they cannot pay employees say an extra 3% salary if an employee has opted-out of the scheme. This could be seen as encouraging the employee to opt-out and could result in a hefty avoidance penalty.
What contributions do employers need to make?
The amounts of mandatory contributions are being phased in over a period of five years, between 2012 and 2017. The minimum employer contribution requirements will be:
- November 2012 to September 2016: 1%
- October 2016 to September 2017: 2%
- October 2017 onwards: 3%
These minimum contributions do not apply to the employee’s whole salary, but what they earn between the minimum and maximum earning limits.
Employers do not have to make contributions for employees who have opted-out of the scheme. Where an employee opts-out of the scheme, an employer will be refunded its contributions from the pension scheme.
- Find out your ‘staging date’.
- Start budget planning to account for financial impact of employer contributions.
- Check if your current pension scheme qualifies as a QWPS. If not, decide whether to set up your own or take advantage of NEST.
- Consider your ability and systems to track eligibility, re-enrolling those who opted-out (every three years) and contributions.
- Consider communication to employees of pension scheme including to those who do not automatically qualify.