UK Pensions Alert

Automatic enrolment - the date of assessment has arrived

03 April 2012

This Sunday (1 April 2012) marked the date on which the size of an employer's PAYE scheme is assessed in order to determine its staging date for the purposes of the automatic enrolment reforms. This serves as a timely reminder that the onset of the new duties is fast approaching for the largest employers.

Recent months have seen several developments in relation to the automatic enrolment reforms with the DWP issuing responses to existing consultations as well as new consultations and the Pensions Regulator publishing a document setting out its approach to automatic enrolment. This Alert provides a round up of these recent developments.

Implementation

On 23 March the DWP published a consultation on the detail of proposals first announced last November (and reported in our previous Pensions Alert) to change the staging dates of small and medium sized employers.

The changes to staging dates affect employers with fewer than 250 employees and new PAYE schemes from 1 April 2012. Key changes include:

• an extended implementation for those with fewer than 250 employees now ending on 1 April 2017 (instead of 1 February 2016)
• implementation for new employers (those with PAYE income first payable between 1 April 2012 and 30 September 2017) will be in the period 1 May 2017 to 1 February 2018 (instead of 1 March to 1 September 2016), and
• provision for employers with fewer than 50 workers who are part of a multiple employer PAYE scheme to have staging dates between 1 August 2015 and 1 April 2017.

A change which will be of significance to all employers is that the phasing in of minimum contribution rates is now proposed to take place over a longer period so that:

• the first transitional period of a 1% minimum employer contribution will run until 30 September 2017
• the second transitional period of a 2% minimum employer contribution will run until 30 September 2018, and
• the 3% minimum employer contribution will apply from 1 October 2018.

The consultation on these proposals runs until 4 May 2012.

It should be noted that the minimum contributions are payable on a range of 'qualifying earnings' which has a specific meaning in the legislation and includes not only basic pay but also commission, bonuses, overtime and certain statutory payments. Information on changes to the legislation for employers basing contributions on a different definition of earnings is set out in the 'certification' section of this Alert.

Earnings thresholds

On 26 March the DWP published the response to its December 2011 consultation on the earnings thresholds that will apply for 2012/13. The three earnings thresholds and the proposals in relation to each are as follows:

• the level of qualifying earnings that will trigger a requirement for automatic enrolment will be £8,105. This is in line with the PAYE threshold
• the lower limit of the qualifying earnings band on which contributions will be payable will be £5,564. This is in line with the lower earnings limit for National Insurance contributions
• the upper limit of the qualifying earnings band on which contributions will be payable will be £42,475. This is in line with the upper earnings limit for National Insurance contributions.

The first two figures are in line with those proposed in the December 2011 consultation but the figure for the upper limit of the qualifying earnings band has been altered since the original proposal to take into account the responses to consultation. These proposals are subject to the approval of Parliament before they become law.

European Employers

On 20 February the DWP published a consultation on draft legislation that would clarify that employees who are caught by the cross-border legislation on pension schemes are not subject to employers' duties. We would expect employers to welcome these proposals as they would prevent them having a duty to enrol employees who would need a scheme registered in line with the cross-border legislation.

This consultation closed on 2 April 2012 and a response is awaited.

Updated legislation

On 1 February the DWP published the response to its July 2011 consultation on changes to the employers' duties legislation. Two changes which are of particular note are those in relation to waiting periods and certification.

Waiting periods

The response confirmed the detail of the process that employers will be able to follow to use waiting periods in order to defer automatic enrolment for up to three months. Employers could use waiting periods to:

• defer their initial staging date for some or all employees, or
• defer the automatic enrolment date for a new employee, for example, to remove the need for automatic enrolment if the employee is on a short fixed term contract or so that automatic enrolment does not have to take place until a new employee has passed a probationary period.

However, employees will retain the right to opt in during the waiting period and so employers will still need to be ready to comply with such requests.

Employers will also need to ensure that they follow specified processes in relation to the provision of information if they wish to take advantage of waiting periods.

Certification

The response also confirmed that employers using defined contribution schemes for which the definition of pensionable pay is not aligned with the qualifying earnings definition in the legislation will be able to self-certify that the scheme they are using meets the quality requirement. Schemes may not match the qualifying earnings definition in the legislation because:

• qualifying earnings are defined very broadly to include items that are often not pensionable in schemes such as bonuses, commission and overtime
• the legislation requires minimum contributions to be paid on the range of qualifying earnings (the £5,564 to £42,475 referred to above) but many schemes will require contributions to be paid from the first pound of earnings.

In order for an employer to self-certify, the scheme will have to satisfy one of three alternative sets of minimum contribution requirements:

• 9% of basic pay (with a minimum of 4% of this from the employer)
• 8% of basic pay (with a minimum of 3% of this from the employer) provided at least 85% of aggregate pay for all the workers certified on this basis is pensionable, or
• 7% of total pay (with a minimum of 3% of this from the employer).

Guidance has also been issued to assist employers with the process of self-certification.

The Pensions Regulator

On 29 February the Pensions Regulator published 'Delivering successful automatic enrolment' which sets out how it aims to ensure maximum compliance with the reforms and to engage with the industry to ensure that appropriate defined contribution schemes are available.

In relation to compliance, the Regulator notes that it will follow the 'educate, enable and enforce' approach that it already adopts in relation to the regulation of pensions. More detail on the Regulator's compliance and enforcement strategy will be published in the spring.

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