Pensions World

The framework for auto-enrolment is now largely in place explains Helen-Mary Finney, Aon Hewitt

In 2012 major changes to the pensions landscape will start to be introduced that will eventually impact on every employer, regardless of size. Not only will employers be legally required to automatically enrol eligible jobholders into a qualifying pension scheme, they will also need to make contributions on their behalf. The commencement is only a year away now, yet many companies are not aware of their obligations.

Most of the reforms are set out in the Pensions Act 2008 (as amended by the Pensions Bill 2011) and accompanying regulations. The Department for Work and Pensions (DWP) has been consulting on further draft regulations, which broadly reflect the recommendations of the independent review in 2010. To supplement the legislation, the Pensions Regulator (TPR) has issued extensive guidance that will be updated once the Pensions Bill is enacted. While a number of uncertainties remain, the framework is largely in place. The position is clear enough for employers to start considering what will be required of them and what preparations they need to make.

Identifying staging dates

Auto-enrolment will be introduced in monthly stages at allocated dates between 2012 and 2016. The employer’s staging date will depend on its size (as measured by the number in its PAYE scheme on 1 April 2012), with the largest companies starting first. Where the company operates multiple PAYE schemes, the staging date will be determined by the largest one.

Although employers need to be ready to auto-enrol employees from their staging date, they may find it helpful to choose an earlier date, for example to align with other PAYE or HR processes. To enable this, there is flexibility for an employer to bring forward its staging date to any of the permitted monthly dates on or after 1 October 2012 (a full list of dates is available on TPR’s website). In addition, for the largest employers, who are due to be brought into the reforms from 1 October and 1 November 2012, the date can be brought as far forward as July 2012.)

Assessing the workforce

Employers need to assess what types of workers they employ to see who needs to be auto-enrolled into a pension scheme. The definition of a worker is wider than an employee so, for example, it can include some contractors, secondees or agency workers. The workforce to whom the employer duties apply will essentially fall into three broad categories: eligible jobholders, non-eligible jobholders and entitled workers (see Box). It is important to distinguish between the different types of worker and to monitor them separately as different entitlements apply to each category. In addition, there are different notification requirements that reflect the varying entitlements.

Providing a qualifying scheme

Central to the regime is the duty on employers to auto-enrol eligible jobholders into a qualifying scheme that meets certain quality criteria. The employer may use an existing scheme, set up a new scheme, use Nest, or implement a combination of arrangements for different parts of the workforce.

For DC schemes, as contributions are based on qualifying earnings, rather than whatever definition of pensionable pay the scheme currently uses, it can be hard to assess whether an existing scheme qualifies. Therefore employers may use a certification process that will allow a scheme (or section of a scheme) to be used to satisfy the employer’s auto-enrolment obligations using its existing pay definition. This is known as the alternative quality requirement. The DWP has issued draft guidance on satisfying the alternative quality requirement, including the operation of a phased timetable for contributions mirroring the statutory requirement.

Since auto-enrolment schemes cannot require any decision to be made by the member, DC schemes must provide a default investment option.

A defined benefit (DB) scheme that is used for auto-enrolment will qualify if it is contracted out or provides a minimum level of benefits, for at least 90% of its members. Where a DB scheme is provided, transitional arrangements may permit employers to defer their obligations for some existing employees for up to four years until 2016. However, jobholders must be notified of the intention to delay and given the option to opt in from the staging date. New recruits must be auto-enrolled.

In order that a hybrid scheme can be used as an auto-enrolment scheme, it must satisfy either of the quality tests for DB and DC schemes. Similar transitional arrangements apply as for DB schemes. Further guidance relating to the use of hybrid schemes is awaited.

Employers can operate an optional waiting period of up to three months. During this postponement jobholders have the right to opt in and receive employer contributions.

Ongoing duties

Employers will need to register online with TPR to confirm that they have fulfilled their initial duties. But this does not end the process.

Every three years each employer will have a six month window during which it needs to re-enrol all those who have previously opted out (unless the decision to opt out was made in the previous 12 months). Thus eligible jobholders are required to keep actively opting out if they do not wish to participate.

Employers will need to have processes in place that allow them to continuously monitor their workforce, assessing earnings against the trigger level and identifying those who become eligible for auto-enrolment. In addition there are extensive record keeping obligations and communication requirements.

Employers must also be aware of the anti-avoidance measures that exist to prevent them from inducing their workforce not to join, or implementing practices that might discriminate against employees or potential employees on the grounds of pension scheme membership.

Compliance requirements

There is ongoing discussion about whether the new regime will be successful and if it will achieve its aim of promoting pension saving in the workplace.

However, as there is no longer any doubt that the auto-enrolment regime is going to be implemented, employers and pension scheme trustees should be considering their strategy for complying with the requirements.

There are many issues that require careful navigation, such as the opt out process, salary sacrifice and flexible benefits.

Employers who have not already done so would do well to start addressing these issues without delay.