Pensions World

The framework for auto-enrolment

The Department for Work and Pensions (DWP) is consulting on draft regulations designed to complete the auto-enrolment regime that comes into force in 2012. The consultation, which broadly reflects the earlier recommendations of the 2010 Making Automatic Enrolment Work (MAEW) review, closes on 11 October 2011. The changes supplement those in the Pensions Bill currently making its way through Parliament. Some of the key amendments are set out below.

Changes to staging dates

The draft regulations confirm the MAEW proposal that the staging dates for large employers who are due to be brought into the reforms from 1 October 2012 and
1 November 2012 can be brought forward to 1 July 2012. Others are restricted to using the permitted staging dates on or after 1 October 2012.

The draft legislation also adjusts the staging dates for the smallest employers to meet a Budget 2011 commitment for a moratorium on new legislation until April 2014 for employers with fewer than ten employees. For employers with fewer than ten full time equivalent employees immediately before 1 April 2011, staging dates, which originally would have occurred before April 2014, will be put back. This will have a knock-on effect on staging dates for other small employers.

Waiting periods

Employers can operate an optional three month waiting period, provided that they notify their employees of this fact within one week. The employer can choose the level of detail in the notice.

Accidental jobholders

Following the Pensions Bill proposal to raise the earnings trigger level for auto-enrolment to £7,475 a year, adjustments are proposed to the provisions for monitoring lower earning workers and assessing earnings spikes against the trigger level.

Contribution payments

The prescribed time limits for paying contributions to the scheme electronically will be extended to the 22nd day of the following month. The due date remains the 19th day of the following month for contributions paid by cheque.

Certifying money purchase schemes

The new regime requires employers to auto-enrol eligible employees into a qualifying scheme that meets certain quality criteria. The basic requirement for a qualifying money purchase scheme is for minimum total contributions of 8% (including at least 3% from the employer) of earnings between £5,035 and £33,540. (This is in 2006/7 terms, with updated amounts to be confirmed in early 2012.)

However, contributions can be based on a variety of definitions of earnings and the consultation sets out how these will be assessed.

A certification, allowing a scheme (or section of a scheme) to be used to satisfy the employer’s auto-enrolment obligations, can be provided where total contributions are at least:

• 9% of pensionable earnings (including at least 4% from the employer)
• 8% of pensionable earnings (with at least 3% from the employer) provided that total pensionable earnings are at least 85% of total earnings or
• 7% of total earnings (including at least 3% from the employer) where all pay is pensionable.

Pensionable earnings are the actual earnings on which contributions are based, which must be at least equal to basic pay (ie those elements of pay which do not vary, which would typically exclude commission, bonuses and overtime).

These rates will apply from 1 October 2017 but will be phased in over three periods starting from October 2012 (or the relevant staging date for the employer). Schemes need to be re-certified by the employer every 12 months.

The DWP has also released draft guidance on certifying money purchase pension schemes for auto-enrolment purposes.

Completing the framework

The auto-enrolment regime is now taking shape. The intention of the consultation is to try to complete the legislative framework, so that there is as much certainty as possible about the new regime.

Although these proposals are still in draft, in many cases they reflect the MAEW recommendations and are likely to survive into final legislation. As most of the legislation is now in place, employers and pension schemes should consider their strategy for complying with the requirements.