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For smaller businesses pensions have rarely been attractive. Remuneration for employees is usually in the form of salaries and bonuses with, on occasion, some provision such as share options for those businesses hoping to grow significantly. Pension provision is generally the preserve of long established businesses and the issues with pension regulation has meant that it has been an unattractive option for new businesses over the last 10 or even 20 years.
However, the advent of new pension's legislation is set to change this, not because pensions have become easier to manage or less heavily regulated, but because the legislation will now require that all employers provide some pension provision. These new changes are coming in between October 2012 and 2018 and this paper summarises the issues involved.
In its simplest form, the obligation will be for all employers to automatically enroll eligible employees and workers into a ‘qualifying' pension scheme. The requirements will be phased in over time, applying to the largest employers first in October 2012 with the smallest, including those employing just one individual, by April 2017. The onus will be on employers to put the right provisions in place and the Pensions Regulator will have the power of enforcement in relation to failure to comply.
This ‘auto enrolment' effectively requires that the employer will put employees into a pension scheme and make contributions for them. The employee can choose to opt out of the pension scheme once they have gone into it, but the default position will be that the employee will be a member of the pension scheme and that both the employer and the employee will be making contributions. The philosophy behind this is that, whereas it is considered inappropriate to force people to make contributions to pensions, most individuals are apathetic on the issue and an opting out procedure will ensure that those who do not think about it will obtain a pension (considered a good thing by the legislators) rather than having no coverage because they had not thought about the issue.
One of the most complex parts of this legislation is the timetable. Because the provisions are being phased in over time, there is a complex system by which different employers will have different dates from which the obligations apply (known as their ‘staging date'). Once the staging date has passed, the employer must have auto-enrolled all its present ‘eligible job holders' but it will then also have to immediately enroll new job holders who are eligible as soon as they join their employer and, for a job holder who is not immediately eligible, they will be enrolled as soon as they become eligible. Eligibility is discussed further in the ‘who must be auto-enrolled' section below.
An employer does have the ability to delay auto enrolment for up to 3 months by giving notice to a job holder that it will be delayed, but during that 3 month period the job holder can choose to ‘opt in' and join the pension scheme. As such, the 3 month delay cannot be relied on for employers who wish to delay the issue.
The staging date depends on the number of employees who were employed and subject to PAYE on 1 April 2012. The first date of 1 October 2012 applies to those employing 120,000 or more, which will of course be very few companies indeed. However, the limit changes monthly and the minimum number shrinks quite quickly, reaching employers of 249 or more employees by 1 February 2014 and 50 employers by 1 April 2015. Those who do not employ anyone on 1 April 2012 will be swept up from May 2017 to February 2018, depending on the date on which PAYE income first became payable.
The obligation for auto enrolment is not a one-off obligation for each employee. An employee who opts out must automatically be re-enrolled every 3 years. This will include employees who have chosen to make contributions to their pension scheme below the level required by the legislation. Opting out is always possible, but again the idea is to encourage people to obtain pensions, with the path of least resistance being to remain in the scheme. Re-enrolment can be carried out for all employees on a 3 year cycle and, in those circumstances, employees that have opted out within the last year do not in fact need to be re-enrolled in that cycle but can wait until the next one, effectively waiting up to 4 years for the re-enrolment the first time.
Under the auto enrolment provisions, all eligible job holders must be made members of an automatic enrolment scheme providing a minimum level of contributions. The enrolment must be automatic so that they cannot be required to take any steps at all, such as signing a form or making decisions about their choice of funds, in order to become a member of the scheme.
An automatic enrolment scheme has a number of requirements to qualify as such. These include:
The quality requirement generally requires a certain level of contributions or benefits. Most defined benefit pension schemes (that is, those that provide a guaranteed level of benefit on retirement, usually based on years of service and salary) will qualify, although some less generous career average pension schemes may not. A defined contribution scheme, either set up under trust for the company or with an insurer, a personal pension scheme, will comply so long as the contribution rates from the employer are guaranteed to be at a specific minimum level.
There are provisions allowing those who already have a pension scheme that does not quite meet the minimum quality requirements to use that scheme instead, so long as it provides at least a certain level of benefits for employees. These require higher employer and employee contributions but are useful if the scheme does not provide contributions relating to the whole of the employees' earnings.
In practical terms, for most employers coming new to pensions the simplest option will be to use a pension arrangement set up for auto enrolment, from one of a group personal pension arrangement, a pension scheme with a master trust or the government's own proposed scheme known as NEST (the National Employment Savings Trust). There are risks for the employer which means it should ensure that it is choosing the appropriate type of arrangement for its employees, particularly as there will be a default choice of investment funds available for employees who do not choose their own. This makes it very valuable for employers coming new to the market to consider obtaining independent financial advice as to their choice of provider.
Auto enrolment requires a contribution of at least a minimum level. Of those contributions at least a minimum level must to come from the employer. The aim is for a total contribution of 8% of qualifying earnings of which at least 3% must be from the employer. However as part of the phasing in, the minimum contribution up to 30 September 2017 will be 2% of which at least 1% must be from the employer.
The concept of qualifying earnings includes salary and commissions, bonuses, overtime and maternity pay and relates to earnings between £5,5564 and £42,475 per annum for 2012/2013. These figures are to be revised each year. It should be noted that these figures at the moment match the Lower Earnings Limit and Upper Earnings Limit in relation to National Insurance Contributions but it appears that the government has chosen not to link the definition of qualifying earnings to those numbers and so allow qualifying earnings to become out of step with the lower and upper earnings limits in the future.
Under the legislation all ‘eligible job holders' must be automatically enrolled. An eligible job holder is an employee or a worker who is not self-employed, is aged at least 22 and under the state pension age, ordinarily working in Great Britain and earning over £8,105 per annum (for 2012 to 2013). It should be noted that agency workers will also be auto enrolled and the obligation will lie with either the agency or the end user, depending on who pays them.
For employees who are not eligible job holders, they will still have some access to the pension arrangement as follows:
Employers must not take any action to discourage membership of a qualifying pension scheme. This would mean that they must not agree with a job holder that they will not automatically enroll them, even if the job holder has made it entirely clear that they will opt out as soon as they are enrolled. In addition, financial incentives may not be offered to a job holder for them to opt out, such as offering a better bonus or pay package to those who are not joining the pension scheme. The usual rules also apply that applicants should not be asked at an interview whether they would intend to join the pension scheme.
The Pensions Regulator has the power to issue penalties to employers that fail to comply and also issue compliance notices requiring immediate compliance. In addition, it will be a criminal offence for an employer to willfully fail to comply with the legislation.
The Regulator's approach to its powers has, in the past, been to encourage and educate and then to give due warning where there is a failure to comply. It is unusual for the Regulator not to be in regular contact with a defaulting party before using its powers but this does not mean that it is wise to ignore those contacts.
Early indications from the Regulator suggest that it takes this particular obligation very seriously and, whereas it appreciates that there will be a significant amount of work for employers, many of whom have never considered pensions before, it will expect all automatic enrolment provisions to be in place on time for the staging date and will move swiftly to ensure that those that have not, do comply as soon as possible.
Automatic enrolment of pension schemes is no doubt a significant issue for employers, particularly those who have not considered pensions in the past. It will certainly involve a financial cost in terms of making contributions to a pension scheme but more importantly there will be a significant administrative issue which can only be assisted by early review of the obligations and preparation in good time for automatic enrolment.
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