Automatic Pension Enrolment – Legal Update
This checklist explains the obligations that the automatic pension enrolment requirements place on your business.
What is auto-enrolment?
- From October 2012, your business will be required to automatically enrol eligible “jobholders” in a pension scheme. A “jobholder” will include permanent, fixed-term and temporary employees, as well as agency workers.
- Your business can use its existing occupational or personal pension scheme if it meets statutory quality requirements. Otherwise you will have to enrol jobholders in the National Employment Savings Trust (NEST), a central defined contribution scheme to be set up by the government.
- A defined contribution scheme (also known as a money purchase scheme) is a pension scheme in which an employer and employee pay fixed contributions. The employee receives a pension or annuity at retirement, the size of which depends on the contributions paid and the investment return on those contributions over the member’s working life.
- Your employees may opt-out of either scheme, but only once they have been automatically enrolled.
- Your businesses must pay a minimum level of pension contributions for each employee.
- The requirement to automatically enrol eligible jobholders will be phased in over a four year staging period from October 2012, with larger businesses required to comply first.
- Businesses will be required to automatically re-enrol eligible jobholders every three years after they first become subject to the statutory employer duties.
No exemption for smaller businesses
Small businesses will not be exempted from the auto-enrolment requirements since this would exclude 1.2 million employees from the reforms and create substantial enforcement problems. However, the government is extending the implementation period for businesses with fewer than 50 employees and a revised timetable will be published in early 2012.
Changes to NEST
- The annual contribution limit (set at £3,600 in 2005 prices) will be removed once the four-year staging period has been completed.
- The ban of transfers into and out of NEST should be reviewed in 2017. NEST should be able to receive and make transfer payments once auto-enrolment is established.
What is the income threshold at which individuals are auto-enrolled?
- Jobholders will only be automatically enrolled once they reach the income tax threshold (£8, 105 in 2012/13).
- Contributions will be based on earnings between the National Insurance lower earnings limit (£5,564 in 2012/13) and £39,853. Employees who have been automatically enrolled will continue to pay contributions until their earnings drop below the income tax threshold (unless they opt out).
- Any employees with earnings between these thresholds will be able to opt in and receive an employer contribution.
What are the age limits for automatic pension enrolment?
The age band for eligibility is between 22 and the state pension age. Retaining the state pension age as the upper age limit gives people access to pension saving during their normal working lives and avoids automatically enrolling people for whom saving is no longer the right option.
Three-month waiting period before an employee is automatically enrolled
A three-month waiting period will be introduced to avoid automatically enrolling employees who leave employment soon after joining (for example, seasonal or temporary workers). This will also allow businesses to align enrolment dates with their own payroll systems.
Simplified certification process for defined contribution schemes
A defined contribution scheme could be certified as meeting the requirements if it satisfies any one of the following criteria:
- A minimum 9% contribution of pensionable pay (including a 4% employer contribution).
- A minimum 8% contribution of pensionable pay (with a 3% employer contribution) provided pensionable pay constitutes at least 85% of the total pay bill.
- A minimum 7% contribution of pensionable pay (with a 3% employer contribution) provided that the total pay bill is pensionable.
Businesses can voluntarily comply as early as July 2012
Businesses that are scheduled to automatically enrol in October and November 2012 will be allowed to automatically enrol ahead of the planned start date of October 2012, and as early as July 2012, if they want to.