28 February 2011
Key points of the new regime
In summary, the personal accounts regime will require all UK employers to make arrangements for the automatic enrolment of all jobholders (which is drafted widely enough to include agency workers):
- aged between 22 and State Pension Age; and
- who have earnings (broadly gross earnings including bonuses) in excess of the income tax personal allowance, which is due to increase to £7,475 for the 2011/12 tax year,
into a "qualifying scheme" or NEST. New jobholders must be enrolled within three months of being hired.
NEST will be a defined contribution scheme with a cap (£3600) on contributions.
For this purpose, a "qualifying scheme" can either be an occupational pension scheme or a workplace pension scheme, such as a group personal or stakeholder pension plan. The qualifying scheme must not require the member to make a choice or provide information to become a member. In addition, it must be of a certain standard. This means:
- Defined benefit schemes – that it is either contracted-out or provides at least 1/120th accrual and other benefits broadly equivalent to, or better than, a test scheme.
- Defined contribution schemes (personal or occupational) – the employer must make minimum contributions of 3% of qualifying earnings over a 12 month period. Total contributions (including tax relief) must be at least 8% of qualifying earnings over the 12 month period. Qualifying earnings are earnings between the National Insurance primary earnings threshold, £5,715 for the current tax year, and £38,185 (adjusted for average earnings each year).
These mandatory contributions will be phased-in over transitional periods so that in the first four years following October 2012 the employer needs to contribute at the rate of 1%.
Jobholders who are younger or older than the target range can opt-in and require an employer contribution. Likewise, jobholders with low qualifying earnings can also opt-in, but without the requirement for compulsory employer contributions.
Jobholders can opt-out, but employers must not offer any inducement to do so. The opt-out notice must be available only from the scheme, not from the employer unless, in the case of an occupational scheme, the administrative functions have been expressly delegated to the employer.
What does this mean for employers?
Employers should start planning now. Some of the key practical issues to address are explored below.
When is the staging date?
The first thing for an employer to do is to assess when the personal accounts regime first applies. Employers are separated into 43 bands according to size. Large employers (based on PAYE data) become subject to auto-enrolment before small employers. Large employers with more than 120,000 employees will be required to auto-enrol jobholders by October 2012. The smallest employers (those with fewer then 50 employees) will generally be required to auto-enrol by dates falling between 1 August 2014 and 1 February 2016. Early adoption of the auto-enrolment requirements is possible, with NEST also having a discretion to allow early adoption.
Assess who is an eligible jobholder?
Employers will need to know how many staff will be potentially eligible for automatic enrolment. The legislative definition of jobholder is wide. It covers full, part-time, fixed and temporary workers. Potential costs may be larger than expected.
Calculate the cost of compliance
Employers with no current contributory pension arrangements will clearly see an increase in costs. Even employers with good quality pension arrangements are likely to experience some cost increase (unless they level down). This could be because of the wide definition of jobholder, the fact that there may be a low take-up of the existing arrangements and general administrative and training start-up costs in complying with the new regime.
Options to mitigate increased cost
If the anticipated costs are too high, there are numerous options available to employers to mitigate them. Potential solutions include:
- Reducing employer contributions or existing non-pension benefits before becoming subject to the personal accounts regime; or
- Adjusting salary levels before automatic enrolment is implemented
In both cases, it will be important to seek advice, as employees may have contractual entitlements to such benefits. In addition, reducing employer contribution rates will require statutory pension consultation with affected workers.
Can you use your existing scheme?
Most (even good quality schemes) existing pension schemes will need to be amended in some way to comply with the personal accounts regime. The three most common amendments will be to:
- Entry conditions: Many schemes require members to provide information or actively opt-in. This will not be allowed under automatic enrolment and will need to be modified. If a scheme does not allow members to rejoin after leaving pensionable service, this will need to be changed to comply with tri-annual re-enrolment.
- Waiting periods: Schemes with a waiting period of more than three months may have to remove it.
- Contribution rates: The position is not always straightforward. For example, defined contribution schemes may not qualify where total contributions are linked to optional member contributions or where contributions are based on basic salary but staff receive a large element of pay as bonus. The Pensions Bill 2011 proposes that employers should be able to self-certify that their scheme meets the quality standard if any of the following conditions is met:
- Contributions of at least 9% of pensionable pay (4% minimum employer contributions);
- Contributions of at least 8% of pensionable pay (3% employer) and pensionable pay as an aggregate is at least 85% of total pay;
- Contributions of at least 7% of pensionable pay (employer 3%) and 100% of pay is pensionable.
The first and third tests should be relatively easy to check by looking at the scheme and pay definitions.
What scheme will you use?
There are three principal options. An employer can either use:
- its own qualifying scheme; or
- a combination of NEST and its own qualifying scheme.
For small employers, using NEST is likely to be the simplest option. For large employers, modifying an existing scheme is probably the simplest solution. Some employers may, however, wish to use an existing scheme for higher paid staff, with NEST as a nursery scheme.
New administration systems
Employers will need to implement systems that identify when jobholders will become subject to automatic enrolment, deal with refunds of contributions for opt-outs and update staff handbooks and administrative procedures. Opting-out processes will need to be settled for new joiners and existing jobholders. Opting-in communications and processes will also need to be considered.
Changes to schemes
Employers will need to agree any changes to their schemes to ensure that they are qualifying schemes.
If changes are to be made to the benefits of existing schemes, staff will need to be consulted about those changes.
From October 2012 or a later staging date (see when is the staging date above) employers will need to implement auto-enrolment.Providing Information
Once the auto-enrolment duty applies, the employer has one month to make the necessary arrangements for active members and provide the jobholder and the trustee/pension provider with the prescribed information. Contributions will also have to be deducted from salary.
Existing members of qualifying schemes will have to be issued with information confirming that they are active members of qualifying schemes and that they are entitled to remain so without interference from their employer.Registration
Employers will have to register with the Pensions Regulator within nine weeks of their staging dates.
For qualifying DC schemes minimum employer contribution increase to 2% of qualifying earnings, with total contributions being 5% of qualifying earnings.
The DC transitional period ends.
- Starting in the four years following October 2012 employers will have to make compulsory pension provisions
- Employers need to consider how they will deal with the personal accounts regime
- Most existing schemes will need to be amended.