All Employers must provide a funded pension scheme

As a result of the pensions Act 2008 auto-enrolment into a suitable pension scheme and employer contributions become mandatory just under a year from now in October 2012. This date is for firms of 10,000 staff and greater. For smaller firms the dates are staggered

Under the changes Employers will need to:

Automatically enrol certain workers into a pension scheme

Make contributions on their workers’ behalf

Register with The Pensions Regulator

Provide workers with certain information about the changes and how they will affect them.


1 The background – A longer living population

Longevity is accelerating so rapidly that siblings born a year apart can now expect a six-week difference in life-span. Further, figures for the UK published by the Department for Work and Pensions predict that 25% of people aged less than 16 will now live to at least 100. Just 30 years ago, more than 25% of new-born boys were expected to die before their 65th birthday.

This rapid rise in life expectancy while welcome has enormous implications for public policy in a range of areas from health to transport, with taxpayers having to pick up the bill to look after a growing older population.

Already, millions of workers relying on the state pension have seen their retirement pushed back to age 66 by 2020 and 68 in 2046. Today’s figures, based on data produced by the Office for National Statistics, give greater impetus to a government consultation to link the state pension age to longevity. This could result in a pension age of 70 by the middle of the century.

2 ‘Mandatory’ Pensions

Against increasing concern that significant numbers are not saving enough to provide a pension while life expectancy increases month by month, the Government plans to introduce a national pension savings scheme. Unless employers offer a scheme as good as, or better, then workers must automatically be enrolled in the new scheme which will be known as ‘The National Employment Savings Trust’ (NEST). To say the scheme is mandatory is inaccurate given that workers may opt out. However the employer’s responsibilities are mandatory

Employers will also be conscious of the fact they already contribute towards workers’ state pension (as do workers) through National Insurance contributions. However these payments are not ring fenced to provide pensions but seem to drop into the general tax take providing less secure pension provision.

3 Timing

The timing procedure introduces the term ‘Staging Dates’ to indicate the last date an employer can auto enrol workers. The staging date is based on the number of people in an employer’s PAYE scheme at 1st April 2012. Employers with the largest numbers of workers in their PAYE schemes will have the earliest staging date of 1st October 2012 and this applies to employers with 10,000 or more workers. With 50 but more than 30 workers the staging date is between 1st April 2014 and 1st April 2015. For 30 or less on the payroll the staging date is between 1st Jan 2016 and 1st April 2017; the exact date depends on your PAYE reference as given on the P35 Employer Annual Return

A qualifying workplace scheme could be an existing company scheme if it meets certain criteria. If there is no suitable existing scheme employers will need to choose an eligible scheme. Such a scheme must meet the criteria. For example it cannot impose barriers, such as probationary periods or age limits for members, or require staff to make an active choice to join. If there is no other suitable alternative workers must be enrolled into NEST. Choice of provider is a decision for employers to make but note the legislation does not permit NEST to receive transfers in.

To allow some flexibility, employers can choose to bring forward their staging date, provided the regulator is informed. However, employers cannot choose a later date than the one they are allocated.

4 Who to enrol?

‘Eligible workers’ must be enrolled and these are; those aged between 22 and the State pension Age, not enrolled in another qualifying scheme and earning more than the rate of personal allowance before tax. Note the term is ‘worker’ not employee and therefore the requirement applies to agency, temporary and contract staff unless genuinely self-employed as sub-contractors.

Where earnings fluctuate a 12 month reference period may be used to assess the overall level of earnings. Those earning less than the rate of personal allowance may become a member of a registered scheme if they ask to join but that scheme does not have to be a qualifying scheme and the employer has no obligation to make contributions.

Workers aged over 65 and between the ages of 16 to 21 should be informed of their right to join a qualifying scheme if they wish. The employer would then pay contributions for them in the normal way.

Eligible workers must be enrolled once they have completed three months service. A worker may choose to be enrolled earlier in order to benefit from the employer’s contribution earlier. Existing workers currently not eligible must be enrolled no later than three months after their circumstances changed so as to make them eligible: For example a 22nd birthday or an increase in pay.

5 Notification procedures

Employers will be required to provide certain prescribed information to all workers within one month of their automatic enrolment date. This must include a statement that the jobholder has the right to opt out of the scheme during the opt-out period and from where the jobholder can obtain an opt-out form. This form must be provided by the pension scheme not by the employer. The opt-out form is completed by the worker who returns it to the employer.

6 Contribution rates

The Employer’s contribution will be phased in three stages. The tax relief will be 1%. The joint contribution will be capped at 8% of qualifying earnings. Qualifying earnings are based on income between the NIC’s primary earnings threshold and an upper threshold equivalent which is £38,185 at 2010-2011 levels. Therefore some workers’ earnings may be within qualifying earnings but below the rate of personal allowance. In this case they may opt in voluntarily and the employer’s contribution will be payable. Note that qualifying earnings includes a total of basic pay, overtime, commission, and bonus.

The three stages are:

1st September 2010 to 30th September 2016 – Contribution 1% for both employer and worker (including tax relief)

1st October 2016 to 30th September 2017 – Employer contribution 2% worker contribution 3% (including tax relief)

1st October 2017 – Employer contribution 3% worker contribution 5% (including tax relief)

There are additional management charges which will be levied on contributions. We gather these will be 2.3% for the first ten to twenty years.

7. Opt out.

Workers can opt out of the scheme but only after they have been auto-enrolled. Thereafter employers will need to re-auto-enrol the worker each third year three months before or after the anniversary date. Employers are prohibited from offering inducements to opt out or even to ask at interview if the applicant intends to opt out or not.

8. Existing schemes:

For an existing scheme to qualify;

  •  Defined contribution schemes must have a minimum 3% employer contributions and a total of at least 8% contribution overall.
  • This can be achieved by a 5% worker contribution (including the 1% tax relief).Defined benefit schemes will need to accrue at least 1/120ths on qualifying earnings.
  • The scheme will need to allow the automatic enrolment of workers and must not require eligible workers to make any choices such as where to invest the fund. It will also have to allow workers to opt back in at least once every year, and will need to allow for another round of auto-enrolment every three years.
  • Enrolment must be done within three months of an eligible worker joining you, so any waiting periods may need to be amended.
  • Any scheme which has higher entry thresholds than the minimum (being over 22 and earning over the lower earnings threshold) will need amending.

9. Role of the Regulator

Overall compliance will be enforced by the Pensions Regulator. The Regulator will be providing further guidance during the year.