Employers should be aware that, in October 2012, there will be a number of changes to obligations relating to employees’ pensions. Currently, if a business has five or more employees, then it must provide access to a stakeholder pension scheme, but the business is under no obligation to make any pension contributions.
However, when the new pension laws come into force in October 2012 employers will be required to automatically enrol eligible “jobholders” into the employer’s occupational or personal pension scheme, or alternatively the central scheme set up by the Secretary of State (“NEST”).
Once enrolled, the employer will be obliged to pay mandatory minimum contributions to a defined contribution scheme.
In order to be eligible for auto-enrolment an employee must meet two criteria – he/she must be a “jobholder” and he/she must meet the eligibility criteria for auto-enrolment – there will be some jobholders who are not eligible for auto-enrolment.
A “jobholder” is defined as an employee or worker who meets three conditions: (1) someone who works (or ordinarily works) in Great Britain under a contract; (2) is aged between 16 and 74; and (3) is paid annually between £5,035 and £33,540 (although these figures will not remain static and will be reviewed annually).
For a jobholder to be eligible for auto-enrolment in a pension scheme they must meet the following further criteria: (1) aged between 22 and have not yet reached state pension age; and (2) must exceed the earnings trigger of £7,475.
Opting in and Opting out
However, a jobholder who is not eligible, either because of his/her age or low earnings, can give their employer notice that they want to opt in to the employer’s automatic enrolment scheme. Equally, jobholders who have been automatically enrolled will also have a statutory right to opt out.
Employers will be required to automatically re-enrol eligible jobholders every three years after they first become subjected to the statutory employer duties.
This provision is designed to ensure that jobholders who have opted out on a previous occasion will need to reconsider their pension provision periodically.
This new duty will apply to all employers in Great Britain and the changes will be formally implemented over a period of four years. Larger employers will be starting on 1 October 2012, and then smaller employers and new businesses at a later stage. Every employer will be given a “staging date” from which it will be required to automatically enrol its eligible jobholders as active members of an automatic enrolment scheme.
As a general principle, employers cannot contract out of, limit or exclude any of the new duties imposed on them except under a compromise in relation to proceedings in an Employment Tribunal.
Employers will also be prohibited from either asking job applicants in interview whether they plan to opt out of auto-enrolment or offering financial inducements (for example, offering higher salaries) to their jobholders to opt out of membership.
Preparing for 2012 – issues for employers
In summary, there are a number of issues that employers should be considering in order to prepare for their new duties with regard to pensions. Some issues to consider include:
- If you do intend to use your existing scheme, will any rule changes be required (for example relating to eligibility or waiting periods)?
- If you currently sponsor an occupational scheme with a waiting period, should you consider using two schemes in future? NEST could be used as a “nursery” scheme for new joiners.
- Opting out processes for existing jobholders and new joiners will need to be finalised, along with a strategy for communicating this to staff.
- Re-enrolment processes and communications will also need to be considered.
- What arrangements will you make for low earners who are entitled to join a registered pension scheme, but which will not have to be an automatic enrolment scheme?
It would be prudent at this stage for employers to contact their pension providers to find out if they have any recommendations on how they suggest the new pension rules can be dealt with.