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Auto-enrolment is coming - implications
for company pension schemes
A Unite Pensions Briefing – updated
March 2012
In 2012 a new requirement for employers to
auto-enrol employees into a qualifying pension scheme will start to
come into operation. Awareness of this requirement is already
influencing employer attitudes towards existing company
provision.
In short, most employees will be given a right
to be a member of a pension scheme to which their employer
contributes. If not in a scheme they will have to be automatically
enrolled. This is a huge change nationally, as at present under a
half of all employees work for an employer who offers them access
to a scheme and many employees offered a scheme have chosen not to
join.
It is important for Unite representative and
member trustees to consider the implications of auto-enrolment for
the development of pensions in their workplace. This may help you
to respond to employer initiatives but also may suggest proposals
we would like to make as to how and when employers should implement
this.
Who has to be auto-enrolled
?
Auto-enrolment will apply to all employees
earning over £8,105 p.a.who are aged over 22 but under State
Pension Age.
Auto-enrolment must take place no later than
three months after appointment to a job, or the date when the
employee reaches the qualifying age. Employees will have the right
to opt-out but
Where employees choose to opt-out, when
auto-enrolled, the employer is required to arrange for re-enrolment
at intervals of three years.
Qualifying schemes for auto-enrolment must be
established on a basis whereby members are not required to fill in
any forms or take any decisions before being admitted to
membership. This means that if there are different
contribution/benefit options within a scheme one must be selected
as a default for automatic enrolment.
In a DC scheme this also means there must be a
default investment fund into which members funds are placed until
they express a wish for a different investment choice
While employees younger than age 22, or over
State Pension Age but under age 75, will not have to be
auto-enrolled they must be given the right to opt-in to their
employer’s auto-enrolment scheme, and so gain access to an employer
contribution to their pension.
An employer is not allowed to take any action
to encourage employees to opt-out or to penalise employees who do
not.
What is a qualifying scheme
?
Auto-enrolment has to be in a scheme which
meets prescribed standards.
It could be a pre-existing company scheme, or
a new scheme which the employer designates for the purpose. The
employer can choose to designate a new Government established
scheme called NEST (the National Employment Savings Trust)
The prescribed minimum standard for a defined
benefit scheme will be only that it satisfies the reference scheme
standard for contracting-out (roughly equivalent to 1/80 of
qualifying earnings for each year of membership) or, if employees
are not contracted-out, a minimum benefit standard equivalent to
1/120 of qualifying earnings for each year of membership. In the
case of a CARE scheme there must be a minimum revaluation rate of
CPI with a cap of 2.5%
The prescribed minimum standard for a defined
contribution scheme will be that a total annual contribution of 8%
of qualifying earning is made, of which at least 3% will have to be
an employer contribution.
There is some flexibility for
pre-existing employer DC schemes to meet the DC qualifying
standard reflecting recognition that schemes may have
different definitions of pensionable earnings, and this is covered
in Appendix 1
What are qualifying earnings
?
Qualifying earnings in this context will be
gross pay within a band of £5,564-£42,475 p.a., the bands being
subject to annual up-rating.
As noted above there is flexibility for
schemes to have different definitions of pensionable earnings but
the intention is that these should provide a reasonable
approximation to this standard
Employees who have qualifying earnings above
£5,564 but less than the £8,105 level, at which they would be
auto-enrolled, can opt in to their employers’ pension and get a
pension contribution from their employer
When is auto-enrolment required
?
The minimum levels of contribution applicable
in NEST are a total of 8% of qualifying earnings of which 3% is an
employer contribution, 4% an employee contribution (of post-tax
pay) and 1% tax relief .
The requirement for auto-enrolment is being
staged so that larger employers are affected first in 2012, and
smaller employers phased in over the following three years.
The first auto-enrolment must take place
within three month of the employers staging date. An exception to
this is where employees are and will remain eligible to join a
defined benefit which meets the qualifying standard then they do
not have to be auto-enrolled for the first time until 2015.
The minimum levels of contributions, where a
defined contribution scheme is designated as the qualifying scheme,
are being phased in over a five year period (there is no phasing
period for defined benefit schemes).
A summary of these staging and phasing
proposals is in Appendix 2 to this paper.
A big unknown is how employees currently not
in company schemes will react to being auto-enrolled. These will
include those who are eligible, but have chosen not to join, and
those who were not previously eligible.
The take-up of pension scheme membership will
be influenced by the requirement to pay member contributions, the
perception as to whether worthwhile benefits will be obtained, and
the economic climate and by publicity surrounding the advent of
auto-enrolment and NEST
The implications for company
schemes
Assessment initially could take the form of
analysing existing pension arrangements and collecting data. Key
questions to consider will include :-
- Which employees are presently ineligible to
join a company scheme ?
- these might
comprise, for example, employees who are too young or in a waiting
period to join, or who are ineligible because they did not join
when first eligible, or who work in an area where pension has not
been offered
- Scheme Rules and
Scheme Booklets will provide a part of the answer
- What proportion of employees who are eligible
have joined the scheme ?
- take-up levels
can vary a lot
- for occupational
schemes, Annual Reports and Actuarial Valuations will provide
numbers of scheme members
- Why have eligible employees not joined the
Scheme ?
- this could be
explained, for example, by the scheme requiring employees to apply
(rather than opting-them in ) or by high contribution requirements
or poor promotion of the scheme
- Does the company scheme offered meet the
standard for a qualifying scheme?
- this may be easy
to see from comparing the terms of company scheme (see Scheme
Booklets) with the minimum requirements for qualifying schemes
- but consider
carefully the basis of pensionable earnings in the company
scheme as it could for some be less than the qualifying
earnings relevant to auto-enrolment, requiring contributions or
benefit rates to be higher to offset that shortfall
Analysis of this information will shed light
on the implications of auto-enrolment in your company. One clear
implication could be a prospective large increase in cost for the
company. How might they react to that e.g will they remain happy to
contribute at the same percentage levels per member if the
proportion of the workforce in the scheme were to increase
substantially?
A particular concern associated with
auto-enrolment and NEST is that it may encourage a levelling down
of existing provisions .This could add to the pressure on DB
schemes arising out of rising costs and manifest itself in
employers trumpeting the case for more equal, but lower quality
provision across the whole workforce.
Making adjustment to scheme
provision
A decision will need to be taken by the
employer, before their staging date as to which pension scheme, or
schemes, employees are going to be auto-enrolled in. This could
well be a scheme already running in the company, or some new
arrangement may be proposed for the purpose.
The scheme selected for auto-enrolment will
probably require some amendment in order to be accepted as a
qualifying scheme. Apart from providing for auto-enrolment the
rules will need to extend eligibility to pre-excluded groups and to
remove any waiting period to join.
Where schemes offer a choice of
contribution/benefit levels then a default entry level will have to
be identified and where DC schemes do not have a default investment
option one will have to be designated.
One issue to consider is whether amendments to
schemes, to make them suitable vehicles for auto-enrolment, could
be achieved prior to 2012. One particular advantage from this might
be to extend eligibility to schemes to members who are currently
excluded before this is legally required.
The prescribed auto-enrolment obligation
cannot be discharged prior to October 2012, though it can be
discharged earlier after than would be required by the staging
timetable.
A scenario which could develop will be that
employers may have one scheme designated for auto-enrolment but
offer some or all employees the opportunity to join a better
scheme. Alternatively different groups of employees could be
auto-enrolled into separate schemes.
There may be situations where the present
scheme has a high employee contribution rate , which is deterring
members from joining. A possible development could be to establish
a low employee cost auto-enrolment scheme whilst allowing employees
to opt–in to the better scheme
If an employer proposes closing an existing
scheme to new members because, on grounds of suitability or
expense, they do not wish to use it for auto-enrolment we can argue
that it be retained on an open basis with auto-enrolment to a
different scheme.
In order to be a qualifying scheme a DC scheme
must have an 8% total contribution of which a minimum of 3% must be
paid by the employer. In respect of any company pension scheme,
Unite would wish to see the employer paying a higher level of
contributions than the employee. Even in a minimum contribution
(8%) scheme it is possible for the employer contribution to be
anything between 3% and 8%, with the employee contribution
correspondingly lower.
Pre-existing DC schemes, where the employee
contribution is lower than 5% of pay can still be qualifying
schemes provided that the employer contribution is sufficient to
take the total contribution above 8%
Unite’s policy
The Union supports the principle of
auto-enrolment on the basis that it requires all employers to
contribute to their employees’ pensions
The framework being implemented falls short of
what we would like to have seen most notably in respect of the
level of the employer contributions required. Our target is to seek
improvement such that we reach a position where employers are
obliged to pay at least double what employees pay, as only on that
basis do we believe that lower paid workers have any chance of
achieving a decent standard of pension.
Appendix 1
Qualifying DC Schemes
The core standard for qualifying DC schemes is
that minimum contributions amount to 8% of gross pay between £5,564
and £42,475. Clearly many existing schemes do not have a deduction
and many are not based on gross pay
An employer scheme with a different definition
of pensionable pay may qualify if one of the following standards is
met:
- Contributions of at least 9% are paid on the
scheme definition of pensionable pay (which cannot be less than
total basic pay) with a minimum of 4% from the employer
- Contributions of at least 8% are paid on the
scheme definition of pensionable pay (which cannot be less than
total basic pay), provided that this is no less than 85% of gross
pay, with a minimum of 3% from the employer
- Contributions of at least 7% of all gross pay
with a minimum of 3% from the employer
Appendix 2
Auto-enrolment – staging and
phasing
The obligation to auto-enrol is being staged
in by size of employer, as defined by their number of employees, on
the following basis
Staging Date
Employer size
Staging
Date
Employer size
1 October 2012
120,000 or
more 1
September 2013 1,250 –
1,999
1 November
2012 50,000 -
119,999 1
October
2013
800 – 1,249
1 January 2013
30,000 –
49,999
1 November 2013
500 - 799
1 February
2013
20,000 –
29,999 1
January
2014
350 – 499
1 March
2013
10,000 –
19,999 1
February
2014
250 - 349
1 April 2013
6,000 –
9,999
April 2014 to
April
2015
50 – 249
1 May
2013
4,100 – 5,999
1 June
2013 4,000
–
4,099
August 2015 to
October
2015
30 - 49
1 July
2013
3,000 – 3,999
1 August
2013
2,000 –
2,999
January 2016 to
April
2017
under 30
1 September
2013 1,250 -
1999
Phasing in of contributions for
defined contribution schemes
During the staging period ending in September
2017 minimum employer contributions will be limited to 1% and the
total minimum contribution is 2%. This steps up in the two
following years, as follows:
Phasing Date
Minimum % of qualifying
earnings
Total
Employer minimum
October 2012 to
September
2017
2%
1%
October 2016 to
September
2018
5%
2%
October 2018
Onwards
8%
3%
If the employer only pays the minimum then the
balance of the total minimum contribution would have to be paid by
the members and via tax relief e.g at the outset the member would
be required to pay either 1% of pre-tax pay or 0.8% of post-tax pay
(in which case the balance of 0.2% would be rebated tax)
The band of earnings to be covered has been
provisionally specified as £5,564-£42,475
Further information
www.thepensionsregulator.gov.uk/docs/intro-to-work-based-pension-changes-2011.pdf
www.thepensionsregulator.gov.uk/pensions-reform/duty-dates-timeline.aspx
http://www.nestpensions.org.uk/
http://www.dwp.gov.uk/policy/pensions-reform/workplace-pension-reforms/
