This briefing updates and replaces our briefing of the same title published in August 2011. The background to the Government’s intention to reform workplace pension provision is straightforward: the current size of the retired population is larger than ever before and is increasing as people live longer. State pension costs are rising and, in response, the Government seeks to encourage more people to save for retirement. It believes that one way of achieving this goal is by way of auto-enrolment, that is, to compel employers to enrol staff into a qualifying pension scheme, or into the National Employment Savings Trust (NEST), so that many more individuals make a financial contribution to their retirement savings.
NEST is a trust-based occupational defined contribution pension scheme run by the NEST Corporation, its trustee body. From 1 October 2012, UK employers will start becoming subject to new duties requiring them to auto-enrol all eligible jobholders in a qualifying workplace pension scheme. Designed specifically for low earners and others who are new to pension saving, NEST will be one of the pension schemes that employers will be able to use to meet these duties. Alternatively, employers will be able to use their existing pension arrangements (or put in place new arrangements), provided they meet qualifying criteria.
In this briefing, we look at the detailed and lengthy guidance on auto-enrolment and workplace pension reform from the Pensions Regulator (TPR), which was published in May 2011, and updated in February 2012. We also look at some of the practical issues for employers and highlight the actions employers should be taking in advance of their staging date. In addition, we examine briefly the checklist that TPR has published for trustees.
TPR, which has been charged with enforcing compliance with the new employer duties, has published online guidance resources about the reforms. These include nine detailed guidance notes principally aimed at advisers and larger employers, and it is this guidance upon which this briefing focuses. Guidance from TPR for smaller employers was first published on 28 July 2011, and interactive online tools from TPR for employers are available here. Further guidance from DWP and NEST for smaller employers is also available.
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An overview of TPR’s detailed guidance
TPR’s guidance for larger employers on workplace pensions reform is divided into nine sections, as set out below. There have been minor amendments since the Pensions Act 2011 received Royal Assent on 3 November 2011 and affected passages in the guidance are identified by footnotes.
The detailed guidance is divided into the following sections:
1. Employer duties and defining the workforce - an introduction to the new employer duties.
2. Getting ready - first steps to prepare for the new employer duties.
3. Assessing the workforce - how to identify the different categories of workers.
3.a Postponement - how to apply it (added in February 2012).
3.b Transitional Period for DB and hybrid schemes (added in February 2012).
3.c Having completed the assessment - next steps (added in February 2012).
4. Pension schemes - pension schemes under the new employer duties.
5. Automatic enrolment - an explanation of the auto-enrolment process.
6. Opting in and joining - how to process pension scheme membership outside of the auto-enrolment process.
7. Opting out - how to process “opt-outs” from workers who want to leave a scheme.
8. Safeguarding individuals - the new safeguards for workers.
9. Keeping records - records that must be kept by law under the new employer duties.
As all the guidance above runs to about 200 pages, the following summaries are also useful:
The different types of worker - diagram of the different categories of worker and the criteria for each category.
Employer duties and safeguards - at-a-glance summary of the duties and safeguards.
Information to workers - summary of information requirements in a quick-reference table format.
Although this guidance is aimed at professional advisers and large employers with in-house pensions professionals, there are further publications on TPR’s website providing a basic introduction to workplace pension changes and a summary of the new employer duties.
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Types of worker
The legislation distinguishes between the following different types of worker:
- Worker - works under a contract of employment (an employee) or has a contract to perform work or services personally and are not undertaking the work as part of their own business.
- Entitled workers - aged 16 - 74; working in the UK; earning below the annual lower earnings level, currently £5,564. These individuals have a right to join.
- Eligible jobholders - aged between 22 and State Pension Age (SPA); working in the UK and earning above the annual earnings trigger for auto-enrolment, currently £8,105. These individuals must be auto-enrolled.
- Non-eligible jobholders - aged 16-21 or SPA-74; working in the UK; earning above £8,105 or aged 16-74; working in the UK; earning above £5,564 but below £8,105. These individuals have a right to opt in.
The upper earnings limit for the qualifying earnings band is £42,475.
The figures above are those set out for 2012/13 in the DWP’s response to the consultation on earnings thresholds for auto-enrolment published on 26 March 2012. The Pensions Act 2011 requires the Government to review the auto-enrolment earnings trigger and the lower and upper limits of the qualifying earnings band each year.
Certain categories of person may not be workers and may need further evaluation; for example, where the individual does not work normal hours in a regular place of work, casual workers and individuals on zero-hours contracts. Those who are not workers include office holders, such as non-executive directors and unremunerated company secretaries and trustees.
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Auto-enrolment and employer duties
Under the new regime, all UK employers must have a private sector workplace pension scheme in place by the designated date - their “staging date”. Staging dates for employers are dependent on the number of employees they have, with the largest employers being required to auto-enrol their employees first. Pay as You Earn (PAYE) schemes with 120,000 or more employees have the earliest staging dates, and these may be brought forward should employers wish to do so.
On 23 March 2012, the DWP published a consultation on proposed new staging dates. Under the consultation proposals, employers with 250 or more employees will have staging dates between 1 October 2012 and 1 February 2014. Employers with fewer than 250 employees will have staging dates between 1 April 2014 and 1 February 2018. Tables setting out indicative staging dates are available from both the DWP and TPR online, but staging dates should be checked after the closing date of the consultation on 4 May 2012.
Employers must auto-enrol and pay contributions for all eligible jobholders. For existing employers, the staging date is determined by the employer’s largest PAYE scheme as at 1 April 2012. TPR’s website also provides staging date information for new employers who set up after 1 April 2012.
Contributions will be phased in between 2012 and 2018, ending with a minimum contribution of 8 per cent of qualifying earnings, of which at least 3 per cent must be paid by the employer. The revised baseline level of "qualifying earnings" is fixed in the legislation at annual earnings between £5,564 and £42,475, including bonuses, overtime and statutory maternity, paternity and adoption pay. The qualifying earnings band will be reviewed annually and revalued to allow for inflation.
The key employer duties (Guidance 1 - Employer duties and defining the workforce) are to:
- Auto-enrol eligible jobholders. If using postponement1, the employer must send the eligible jobholder notification that it is using postponement within a prescribed period - (Guidance no. 5 - Automatic enrolment).
- Make arrangements to establish active membership of an auto-enrolment scheme if a non-eligible jobholder chooses to opt in (Guidance no. 6 - Opting in and joining).
- Make arrangements to establish active membership of a pension scheme if an entitled worker chooses to join (Guidance no.6 - Opting in and joining).
- Provide information to workers about how the auto-enrolment duties affect them (Guidance no. 3 - Assessing the workforce).
- Register with TPR shortly after its staging date to state what it has done to comply with the new duties. TPR is in the process of designing a registration process which will be available through its website and also by phone for employers without online access.
- Process any opt-outs, including refunds of contributions (Guidance no. 7 - Opting out).
- Ensure no act or omission means any eligible jobholders cease being active members without putting them into an alternative scheme (Guidance no.8 - Safeguarding individuals).
- Ensure no act or omission results in the scheme ceasing to be a qualifying scheme without providing an alternative scheme (Guidance no. 8 - Safeguarding individuals).
- Re-enrol after 3 years any eligible jobholders who have opted out. (Guidance no.9 - Keeping records).
These duties are all set out in tabular form in TPR’s helpful at-a-glance summary of employers’ duties and safeguards, along with reference to the related detailed guidance.
1 An employer may postpone the auto-enrolment of a given jobholder into a pension scheme for up to 3 months provided it subsequently auto-enrols that jobholder into a workplace scheme and contributes at least 6 per cent of qualifying earnings for a minimum period of 3 months following the postponement period, and provided it has not already postponed auto enrolment for that individual in the previous 12 months.
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What can employers do to prepare?
The first action for an employer is to find out when its staging date is likely to be, using the available table from either the DWP or TPR website. It is the employer’s responsibility to identify its own staging date. TPR will write to all employers around 12 months before their staging date, so that they know when to start auto-enrolling their eligible jobholders. Three months before each employer’s staging date, TPR will write again to remind it of the new duties and the need to register. Employers with more than one PAYE system will start their duties for all their PAYEs at the same time, on the staging date of the largest PAYE system.
Having identified the applicable staging date, the employer should then make an initial assessment of the likely make-up of its workforce at that date, in order to work out which duties it is likely to have. TPR’s at-a-glance guidance sets out the employer duties in relation to each category of worker.
The employer can then work back from the staging date and prepare for those duties. This could include deciding on a pension scheme, preparing the data to send to that scheme, preparing the information packs to send to workers and setting up the necessary payroll processes.
Employers must be ready to comply with the new duties at the staging date. It should be noted that the new obligations may be quite onerous, particularly for large employers. Therefore, it is essential to start planning for auto-enrolment well in advance of the designated staging date. Employers should also note that some elements of the legislation, such as the safeguards for individuals (Guidance no. 8) will be effective for all employers from October 2012. These safeguards apply to jobholders, entitled workers and job applicants and they operate to protect the rights of individuals. The safeguards mean employers must ensure that:
- they do not take any action to induce a jobholder to opt out of a scheme;
- they do not make any recruitment dependent upon whether the applicant intends to join a scheme or not; and
- they note the new employment rights for individuals not to be unfairly dismissed or suffer detriment on grounds related to the new employer duties.
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Assessing a scheme against the “qualifying scheme” requirements
In order to assess whether an existing scheme meets the minimum requirements, the employer can check TPR’s Guidance no.4 - Pension schemes. There is extensive information on how to determine whether different types of scheme satisfy the qualifying scheme requirements. Flow charts in appendices to this section show the considerations for an employer in ascertaining whether its scheme meets the criteria.
Employers will be able to certify in advance that their existing schemes meet the minimum quality criteria and whether they can be used to satisfy the auto-enrolment requirements. Broadly, the primary legislation provides that an employer can certify each year that its existing scheme satisfies the quality tests under section 28 of the Pensions Act 2008, which will be implemented under the Pensions Act 2011, and the details of the certification process are to be set out in regulations.
In July 2011, following an informal consultation, the DWP published for formal consultation, draft legislation that provides employers with the flexibility to satisfy one tier from a three-tier test, depending on which suits best with their existing pay structures. An employer will be able to certify compliance with the certification requirements if it provides contributions on one of the following bases:
- Tier 1 - contributions of at least 9 per cent of pensionable pay (that is, all pay that is treated as pensionable by the scheme), including 4 per cent employer contributions.
- Tier 2 - contributions of at least 8 per cent of pensionable pay (that is, all pay that is treated as pensionable by the scheme), including 3 per cent employer contributions, provided at least 85 per cent of the total pay is pensionable.
- Tier 3 - contributions of at least 7 per cent of pensionable pay (that is, all pay that is treated as pensionable by the scheme), including 3 per cent employer contributions, provided all pay is pensionable.
Following concerns that unscrupulous employers might manipulate this test and define only a small proportion of pay as pensionable, a Government amendment to what is now the Pensions Act 2011 was introduced at its third reading as a Bill in the House of Lords. New subsection 28(2A) is inserted into the Pensions Act 2008 and provides that quality requirements will be satisfied only where total contributions to an employer’s qualifying scheme will not be less than under the relevant quality requirements for at least 90 per cent of jobholders.
Different tiers can be used for different sections of the employer’s workforce. Self-certification will not be necessary for employers operating defined contribution (or hybrid) schemes that clearly satisfy or exceed the relevant quality requirements.
For the scheme also to be used for auto-enrolment, it should be checked that the scheme rules:
- do not require the member to give consent to join;
- do not require the member to provide any information or make any choices; and
- allow a new starter to join it from the first day of employment (subject to postponement, as explained above).
Where an employer has varied pension provisions for different segments of the workforce, (perhaps, for instance, including employer contributions as low as 2 per cent, or no employer contributions at all) the qualifying scheme test may not be met in relation to many of its employees. The employer may decide to amend the rules of one of its existing schemes where necessary so that they comply, approach one of its existing providers for a new bespoke scheme, or use NEST for auto-enrolment purposes.
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What about transfers to and from NEST?
It is important for employers to note that there will be a ban on transfers into and out of NEST, except for certain limited, prescribed cases, at least initially. The Transfer Values (Disapplication) Regulations 2010, implementing the ban on transfers into and out of NEST, came into force on 5 July 2010.
This means that if employers wish to use one of their own schemes for auto-enrolment, those schemes will need to be set up and ready to accept contributions from the outset at the applicable staging date. The DWP's external reviewers recommended in October 2010 that the annual contribution limit (£4,400 for 2012/13, and to be adjusted annually in line with average earnings) be lifted and that the ban on transfers should be reconsidered in 2017.
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Communications to employers from DWP and TPR
Once an employer has taken the decisions necessary on ongoing pension provision, it needs to decide on how to approach the communications process with its employees.
Who will be talking to employers over the preparation and implementation periods of auto-enrolment? Three main bodies are involved - the DWP, in charge of policy and regulation; TPR, which has responsibility for guidance and application; and NEST, which will provide a scheme to be used where employers do not have a qualifying scheme of their own.
As noted above, employers’ staging dates are determined by HMRC’s records of PAYE payrolls. Where separate entities within a corporate group are assessed and different dates apply, the group will be permitted to nominate one staging date for all, on the date that applies to the largest group entity.
The timeline for communications from DWP for the largest employers is as follows:
October 2011 - start of issue of 12 month “call to action” letters;
January 2012 - DWP information service for individuals went live;
July 2012 - start of 3 month “call to action” letters;
October 2012 - auto-enrolment goes live; and
February 2018 - end of staging period, when auto-enrolment will apply to all employers.
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What are the first considerations for employers?
In order to assess the information which must be provided to employees, employers will need to look first at the contractual relationships they have with those people working for them to ensure they have correctly identified those who are considered workers (Guidance no. 1 - Employer duties and defining the workforce).
Having identified its staging date, the employer should undertake an initial assessment of its workforce in order to determine the likely make-up of the workforce at the staging date, to work out the employer duties which are likely to apply. It is possible for employers to bring forward their staging date, if they wish to align it with other key dates in their financial or operational calendar. Employers may not choose a later staging date. TPR’s Guidance no. 2- Getting ready provides a table of possible early staging dates available.
The employer can then work back from the staging date and prepare for its new duties. Steps could include:
- deciding upon a pension scheme to use to fulfil its duties;
- preparing the data to send to the scheme provider;
- preparing the information to send to the various categories of workers;
- setting up the relevant payroll processes;
- getting ready to manage opt-outs and opt-ins; and
- setting up the required record-keeping processes.
Employers must be ready to comply with the new duties on the staging date. Different employee communications will be required in respect of employees that have to be auto-enrolled, workers with a right to opt in, and workers with a right to join a scheme.
Once the administrative processes above have been completed, the employer should make a formal assessment of its workforce so that it is aware how many of each of the following categories of workers it is likely to have at the staging date:
- eligible jobholders who have to be auto-enrolled;
- non-eligible jobholders with a right to opt in, to whom the employer must provide information; and
- entitled workers with a right to join, to whom the employer also has to give information.
Where employers have existing pension arrangements, they have a number of options:
- to use an existing scheme for auto-enrolment - does the scheme require any amendments to comply? If so, is member consultation required?
- to use an existing scheme as a qualifying scheme for existing members and set up a separate scheme, or a separate section of an existing scheme, to fulfil the auto-enrolment requirements (or use NEST); and
- to set up an alternative pension scheme (or use NEST) to fulfil their auto-enrolment duties for all current and future eligible jobholders.
Once the decision has been made on which scheme option to use, the necessary administrative procedures should be put in place and data will need to be provided to the scheme administrators about the eligible jobholders who are being auto-enrolled (section 4 of Guidance no. 2 - Getting ready).
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Employee communications - what information will employees need?
Employers need to start considering as early as possible what they will be required to provide to their employees by way of communications, and when, and how, those communications will be made available. DWP, TPR and NEST will be making available some template employee communications, but these will need to be tailored by employers to fit their needs and the structure of their own work forces.
The preparation of the required employee communications should be done well in advance of the staging date, as auto-enrolment and the provision of information, where necessary, needs to take place on the staging date. The relevant guidance is section 2 of TPR’s Guidance no.3 - Assessing the workforce. This sets out the mandatory information that the employer must give to each eligible jobholder, non-eligible jobholder and entitled worker.
Generally, employees will need information on:
- relevant dates;
- processes to follow;
- contribution levels;
- default investment option; and
- opt-out options.
There are certain compliance and legal requirements for employers:
- prescribed information must be provided;
- the employer must not discourage people from joining;
- opt-out forms must not be provided by the employer - they can only be obtained by the member from the scheme provider;
- recruitment procedure must not incentivise opt-outs; and
- no financial advice may be given by employers.
The penalties for non-compliance are harsh: TPR can impose a £400 fixed penalty plus escalating penalties of up to £10,000 per day. Senior office holders could be jailed for up to two years for wilful failure to comply.
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Segmentation of the workforce
In order to decide how to communicate with their various groups of workers, employers will need to identify which workers are eligible and then decide how best to make the required information available to them.
Generally, there will be four groups of employees as follows:
- Existing members in a scheme that meets the qualifying scheme criteria (see “Assessing a scheme” above) - they require information only and need do nothing.
- Existing members in a scheme which does not meet the qualifying criteria. The employer will need to decide how to change the scheme so that it does comply (perhaps by providing a contribution increase or by changing the definition of pensionable pay, having complied with the consultation requirements) and then will need to inform the relevant employees.
- Staff members who are not in the employer’s scheme and who are not eligible jobholders, in respect of whom there is no requirement to auto-enrol. The employer may still decide to contact these people to inform them that the current changes do not affect them, but that when they reach the required age or level of earnings, this may change.
- The prime targets, and those whom the employer must identify, are staff members who are not currently in the employer’s scheme, although they are eligible jobholders. These people need to be provided with the relevant information, as they must be auto-enrolled from the staging date.
TPR’s Information to workers summary table is useful in determining which information needs to be sent to whom.
Some consultants consider that a factual, personalised letter is the best initial communication, although email communications are permitted under the regulations. Whichever route is preferred, the communication should provide the mandatory information and also signpost the employee to further information, as required. It is likely that all employers will need at least two parts to their communications - core information to all workers and targeted communications to each segmented group.
The DWP research has identified two distinct reactions to the idea of auto-enrolment: one is relief that pension provision is being achieved with no effort from the employee (except paying); another is anger at having this “done to” or “forced on” them, so the form of communication and its content needs to be considered carefully.
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Communications - general points
While the pension scheme provider can assist with employee communications, and employers should enquire what level of service they are able to provide, research by the DWP has shown that employees sometimes regard with suspicion communications from providers as they are not perceived as being independent. It may be that an initial message from the employer may be better received. NEST will have its own communications, as will the DWP, although the public broadcast schedules are yet to be announced. It may be that employers will wish to dovetail their communications with those of the DWP and NEST once these are available.
Communication channels to be considered include written communications and briefings, and face-to-face meetings with individuals or groups of staff in the same segment. Large employers may wish to consider setting up a helpline. Targeted communications will be the most effective and forms to be considered could include employee seminars, one-to-one meetings, interactive forums, PDFs, websites, podcasts, posters, newsletters, flyers, notices on payslips - whichever the employer thinks will be most effective.
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When do employers need to communicate?
Before the staging date, there is a great deal of preparatory work required. Information packs will have to be assembled for eligible jobholders. At the launch of auto-enrolment (that is, at the employer’s staging date), record keeping will be key. The employer should talk to its payroll provider, since information will need to be pooled each time someone joins the employer’s workforce, so that the correct information can be provided. After the staging date, ongoing records need to be kept updated regarding opt-outs, opt-ins and new eligible jobholders for auto-enrolment.
Large employers would benefit from the instigation of a project plan, since initial communications, for instance, with union representatives, should be taking place 12 - 18 months in advance of the staging date. The DWP’s “12 month call to action letter” will be received a year before the staging date, leaving 12 months for the employer to provide, for example, initial communications in the form of a general information letter, further communication in the form of face-to-face staff information forums, with final, targeted communications continuing up to and beyond the staging date.
Where there is a large and varied workforce, there will usually be tailored messages to deliver to different groups of staff. Basic scheme provider communication material could be used, which are then enhanced and personalised by either an adviser or the employer itself. With union engagement to be factored in, communications should start at least a year in advance of the staging date.
For small employers with less complex pension arrangements, it may be sufficient for communications to begin a few months before the employer’s staging date. Again, these should be tailored with the specific work force in mind. If a high percentage of staff is already meeting the eligible jobholder criteria and the employer’s scheme meets the qualification requirements, communication with the remaining staff is a simpler issue. In such a scenario, senior management could perhaps be briefed on the changes to the workplace pensions regime, and these could be communicated to staff via seminars.
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A communications project can be a significant drain on resources for an employer and a budget should be prepared so that the cost can be factored into the company’s cash-flow projections. Pension providers and other advisers may need to be approached for their input.
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What should trustees do?
Whilst the new duties relate predominantly to employers, trustees will have a role to play. It is important that trustees talk to their sponsoring employer to determine if the existing pension scheme will be used for auto-enrolment and whether there will be any potential impact on existing member benefits.
On 10 June 2011, TPR published its 5-step action checklist for trustees in relation to workplace pensions reform. In brief, the five steps trustees should take are:
- Know when they need to act. The staging date of each employer will depend on the number of people in its PAYE scheme. Trustees should obtain the necessary staging date payroll information from the scheme’s employer.
- Start the planning process. Any existing pension scheme should be assessed to establish whether it meets the qualifying criteria for existing active members. The existing scheme should also be assessed to confirm whether it can be used for auto-enrolment of new members.
- Consider the impact on their existing scheme. It is possible that changes will be required to a scheme’s rules to ensure it qualifies and this should be checked. The administrator’s processes should also be checked to ensure they can cope with an increase in scheme membership. Investment choices and retirement processes may also need to be reviewed as the membership changes.
- Mobilise an implementation team. Trustees should consider establishing a sub-committee to be responsible for auto-enrolment. The sub-committee should assess the impact on existing systems and engage with the scheme’s administrators as soon as possible.
- Communicate the changes to all scheme members to let them know how the changes will affect them and when the changes will occur.
TPR anticipates that many occupational schemes may be adapted for auto-enrolment without substantial alteration. Key considerations will include the definitions of “eligible employees”, “pensionable earnings” and “contribution rates”. Rules on waiting periods to join the scheme, together with those provisions relating to opting in and out of scheme membership will also need to be reviewed.
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Summary - what should employers do?
- Start now (if they have not already).
- Clarify strategy. How is the employer’s organisation planning to approach the new employer duties? What needs to be done in relation to scheme design, preparing communications, compliance with consultation requirements, and the management of contributions?
- If using an existing scheme is the preferred option, check with advisers that its rules are compliant.
- Be clear on the starting point and what the priorities should be.
- Engage with providers as soon as possible.
- Design a plan of action which focuses on both the staging date and on the longer term.
To view briefing as a pdf.
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