Following our update in November 2010, this article restates the key facts associated with the pension reforms and also considers the latest views on flexible benefits schemes and inducements.
Following the publication of the Automatic Enrolment Work Review in October 2010, we now have a clearer view of the way the pension reforms will work. The key changes the review recommended are:
- The earnings threshold at which an individual is automatically enrolled has been raised and will now be based on the personal allowance for income tax (which is £7,475 for 2011/12).
- There will be an optional waiting period of up to three months allowed before an employee needs to be automatically enrolled, although employees may opt in during the waiting period.
- There will be a simplified process for employers to certify that schemes meet the requirements.
Will the pension reforms happen?
Yes. There had been some speculation that the review would lead to the abandonment of the reforms but this always seemed unlikely given the messages coming out of Government and the survival of the new NEST pension scheme in the cull of the quangos last year. The review was broadly supportive of the proposed reforms and the Government has said it will proceed with the implementation of these reforms taking account of the reviews proposals.
This means that employers of all sizes, with no exceptions for smaller employers, will need to understand their responsibilities under the legislation and make sure they have processes in place to comply.
Employer duties
Starting in 2012, employers will be required to automatically enrol their employees into a pension and make minimum contributions into it. There is a timetable showing the phased start dates between October 2012 and September 2016.
Auto enrolment will apply to most employees but there are some exemptions. They need to be aged between 22 and state pension age with earnings at or above the Income Tax personal allowance (which is £7,475 for 2011/12).
Employers have the option of waiting for up to 3 months before being required to enrol employees. Employees will be able to opt in earlier by request and be able to benefit from the employer contributions.
Employees will have the option of opting out but will need to be enrolled again every 3 years.
Payment levels
The basic requirement is for an employer to pay 8% of qualifying earnings with minimum of 3% coming from the employer. Transitional arrangements will apply as follows:
|
Year |
Minimum Employer contribution |
Total contribution |
|
First transitional until Oct 2016 |
1% |
2% |
|
Second transitional from Oct 2016 to Oct 2017 |
2% |
5% |
|
From Oct 2017 |
3% |
8% |
The earnings threshold at which an individual is automatically enrolled into a workplace pension is increased and aligned with the income tax personal allowance. The band for contribution calculations will be the lower National Insurance threshold (currently £5,715 for 2010/11) and an upper limit (£38,185 for 2010/11). Qualifying earnings include salary, wages, bonus, commission, overtime, maternity pay, paternity pay and adoption pay. Employees earning over the lower NI threshold but below the income tax personal allowance will be allowed to opt-in and benefit from employer contributions.
Timing
Employers will also be able to assume the new requirements ahead of time, otherwise they will be subject to the staging dates released by the DWP earlier this year - see /content/dwp-staging-dates-pension-reform.
Existing pension schemes
Employers are required to operate a pension scheme which meets the minimum qualifying requirements, where the scheme can be any one meeting these requirements including the new NEST scheme (National Employment Savings Trust). This means that existing schemes can continue to be used as long as they meet the minimum contribution requirements.
The new contribution structure uses a percentage of band earnings that is different from most contribution based pension plans - these normally calculate the amounts payable by referencing a salary figure which is made up from basic pay with no deduction of the lower National Insurance threshold. Employers will therefore be able to use alternative criteria to certify that their scheme meets the quality test, as follows:
- A minimum 9% contribution of pensionable pay, with at least 4% from the employer.
- A minimum 8% contribution of pensionable pay, with at least 3% from the employer, provided pensionable pay constitutes at least 85% of the total aggregate pay bill.
- A minimum 7% contribution of pensionable pay, with at least 3% from the employer, provided the total pay bill is pensionable.
Pensionable pay, will in most cases, mean basic pay.
Flexible Benefits
Flexible benefits and the interaction of pension contributions were not addressed in the October 2010 review and this remains an area where clarity is required to ensure that employers can plan properly. The key issues revolves around whether employer subsidies which are made available to be used to provide non-pension benefits in the event of an employee opt-out of pension would breach the inducements rules.
The DWP has now confirmed that, as we know, employers must automatically enrol their eligible employees into a qualifying pension scheme. Employers offering pension saving through a flexible benefits package must therefore ensure that the package requires pension contributions at or above the statutory minimum levels.
Once an individual has been auto-enrolled, they can then choose to opt out of membership of the qualifying scheme provided that the decision to do so is their own and they have not been induced by the employer. Having made the decision to opt out the worker is then free to go into alternative non qualifying pension saving if they wish but they will have lost the right to a compulsory employer contribution. The employer may agree to contribute to this scheme but they are under no obligation to do so.
Individuals who have opted out have the right to opt back into a qualifying scheme if they so wish, and even if they do not choose to do so, the employer must re-enrol them three years after their staging date and every three years after that.
The DWP go on to state that the intention of the legislation is to encourage pensions saving at a minimum level, not to restrict flexible benefit packages that employers wish to offer their workers. However, they also say that the Pension Regulator cannot predetermine the employer's intention in offering a flexible benefit package and would need to consider the individual circumstances of each case to determine whether an employer had breached the inducement provisions. Any employer offering a flexible benefit package should therefore be confident that in doing so, their sole or main purpose was not to induce individuals to opt out of a qualifying scheme.
We are pleased that the DWP has provided more information and we would urge any employer with or considering a flexible benfits package to carry out a full review of the scheme structure and communication to ensure that the inducement rules have been considered.
Summary
Employers should now be starting to assess how they are going to meet their responsibilities in both financial and compliance terms. Redbourne will be contacting our clients over the coming months to review existing arrangements and help to plan for any changes required. In the meantime, if you have any questions or need further information, please do not hesitate to contact us.
Richard Stewart
2nd March 2011
Disclaimer – this information is based on our current understanding of the proposed reforms, which are subject to change, and therefore is for general guidance only. Please contact us for specific advice before taking any action.
