Following are guidelines on Pensions Reform for small businesses.
- Familiarise yourself with the requirements of the legislation
- Employer responsibilities
- Frequently asked questions
The pensions reform legislation, due to be introduced in October 2012, will have wide-ranging effects across company pension schemes. This guide summarises the main changes for small businesses only.
Familiarise yourself with the requirements of the legislation on
Automatic Pension Enrolment for small businesses
While the full proposals include reforming the State Pension to make it simpler and more generous, but potentially extending people’s working lives, the key reforms affecting employers relate to the Government’s ideas for making it easier for more people to save for retirement. The Government estimates that about seven million people are currently not saving enough for their retirement. As a result, it is putting the onus on employers to help encourage more people to save:
When and Who?
From sometime between 2012 and 2017 (dependent on the size of business from largest to smallest), employers will have to automatically enroll all eligible employees in a qualifying pension scheme and make contributions to their plan.
A staged process will be used to bring employers into the new regime over a five year period from October 2012, starting with the largest employers and moving down to the smallest.
The first trench in October 2012 is expected to be mainly the larger employers, while smaller employers will gradually be required to comply from 2014 through to 2017 according to the number of their eligible employees. However, a few randomly selected small employers will be brought in earlier to test the system.
There is also flexibility for some employers to bring forward this automatic enrolment date, subject to approval from the Pensions Regulator.
New businesses that are set up between April 2012 and September 2017 will be brought in at the end of the staging period to allow them time to establish themselves.
The contribution rate for money purchase schemes will be phased in, increasing to the ultimate level of 8% of qualifying earnings.
|Transitional period†||Minimum employer||Minimum employee*||Tax relief*||Minimum total|
|1 October 2012 – 30 September 2017||1%||0.8%||0.2%||2%|
|1 October 2017 – 30 September 2018||2%||2.4%||0.6%||5%|
|October 2018 onwards||3%||4%||1%||8%|
Contributions are as a percentage of ‘qualifying earnings’.
†Full details of revised phasing arrangements have still to be announced
*Assuming the employer pays the minimum contribution
Checking your staging date
Employers will be brought into the regime gradually to facilitate a smooth take-on of employers by the Pensions Regulator.
|Employer size||Auto-enrolment staging date|
|120,000||1 October 2012|
|50,000 – 119,999||1 November 2012|
|30,000 – 49,999||1 January 2013|
|20,000 – 29,999||1 February 2013|
|10,000 – 19,999||1 March 2013|
|6,000 – 9,999||1 April 2013|
|4,100 – 5,999||1 May 2013|
|4,000 – 4,099||1 June 2013|
|3,000 – 3,999||1 July 2013|
|2,000 – 2,999||1 August 2013|
|1,250 – 1,999||1 September 2013|
|800 – 1,249||1 October 2013|
|500 – 799||1 November 2013|
|350 – 499||1 January 2014|
|250 – 349||1 February 2014|
|50 – 249||1 April 2014 to 1 April 2015|
|Test trench <30 employees||1 June 2015 to 30 June 2015|
|30 – 49 employees||1 August 2015 to 1 October 2015|
|Less than 30 employees||1 January 2016 to 1 April 2017|
|New employers||1 May 2017 to 1 February 2018|
|The rules for staging within each size grouping have still to be confirmed|
One method of reducing the costs of automatic enrolment is to set up a scheme up on a salary exchange basis.
By making payments through salary exchange (sometimes referred to as salary sacrifice) rather than directly, employers can reduce the amount of National Insurance Contributions (NICs) that they pay as well as the reducing the NICs their employees pay.
Salary exchange is an arrangement where an employee gives up part of their future earnings or bonus in exchange for a non-cash benefit. As the salary is being ‘exchanged’ rather than paid, the employee does not pay NICs on the exchanged amount. In addition, employers won’t pay NICs on the amount of salary exchanged either. The exchanged
amount can then be paid to the employee’s pension plan as an employer contribution. Any savings the employer makes using salary exchange can then be used to offset any increased contribution and administrative costs of that arise from automatic enrolment.
- Employer responsibilities
There are certain things that employers must do in order to comply with their new duties.
- Select an automatic enrolment scheme
Employers are free to select an occupational or personal pension ‘automatic enrolment scheme’ to offer their staff, or to go for an alternative such as the Peoples Pension or the NEST scheme (which for this purpose is treated as simply being an occupational scheme). The main requirements currently specified for the scheme are that it must allow automatic enrolment and must not force members to make any choices (for example by offering a default investment choice) or provide any information. These details are still subject to change.
- Provide information to the scheme
It’s the employer’s responsibility to ensure that employees are automatically enrolled into the scheme. There’s a one month window for this to happen from when an employee becomes eligible. During this period the employer must provide information to the pension scheme. Some of this information is compulsory. This includes the employee’s name, date of birth, National Insurance number and home addresses. Other information is optional, including details of proposed contribution levels. There is a statutory data protection exemption, so the employer doesn’t need the jobholder’s permission to provide the information. There will also be requirements to provide information to the Pensions Regulator, including details of the qualifying pension scheme chosen and action taken to auto-enrol employees. This must be within two months of the staging date. There is also an ongoing (three yearly) requirement to provide the Pensions Regulator with auto-enrolment information.
- Provide required information to employees when they become eligible
Within the same timescale as providing information to the scheme, the employer also has to provide information
to the employee. This includes details about the automatic enrolment process and opt-out rights, plus information about contributions and tax relief. For personal pensions the information provided will also have to include the key features required under FSA rules.
Information required for both occupational and personal pensions
• A statement including the words “the objective of automatic enrolment is to encourage jobholders to make pension savings”
• The automatic enrolment date
• The scheme name and contact details
• The value of contributions in monetary or percentage terms
• Tax relief arrangements
• Opt-out rights and how to exercise them
• The right to opt in at least once in any 12 month period having previously opted out
• Details of automatic re-enrolment
• Where to find out about pensions and saving for retirement
Normal scheme disclosure rules will also apply. Existing scheme members While no action is needed to enrol existing scheme members, they’ll need to be told that their current pension
arrangements meet the new requirements. There will be two months in which to do this, allowing employers to incorporate it into payslips if they choose to.
- Collect employee contributions as soon as they are eligible
It is likely that some employers will be required to start collecting employee contributions before automatic enrolment happens. The requirement is that contributions must be deducted on the first payday, even if the individual is not yet an active scheme member. Obviously they can’t be passed onto the scheme until automatic enrolment has taken place.
- Automatically enrol employees into the qualifying pension
While the process of automatic enrolment will take up to one month, it will be backdated to the start of the period. Among other things, this prevents a gap in contributions if an individual moves job. Information provision and automatic enrolment can be simultaneous, potentially on day one or at the end of the month. Alternatively, employers using occupational schemes may choose not to provide the information to staff until automatic enrolment has happened, or may choose to provide the information and then leave a few days before processing the automatic enrolment.
Waiting period for automatic enrolment There is an optional waiting period of up to three months before an employee has to be automatically enrolled. Employees can choose to opt in during this time.
- Process opt-outs
Employees can’t choose to opt out of the pension until they’ve received the required information and been automatically enrolled. They then have one month to opt out.
In general, employers will be forbidden from providing opt-out forms to their staff. They must be obtained from the scheme. However, where an occupational scheme has delegated administration to the employer, the dedicated administrator can pass out the form.
There are two potential methods for an individual to opt out:
• If a paper form is completed, it must be returned to the employer. The employer must check it, and if it’s not right return it to the jobholder. A valid form must be received within six weeks of the opt-out period starting. The employer must then inform the scheme.
• If an electronic form is completed, it can be returned to the scheme but must also be instantaneously transmitted to the employer.
- Refund contributions of those who opt out
Given the length of the process – possibly two months or longer – it’s very likely that at least one contribution will be collected during it, unless the employee opts out at the first opportunity. Any contributions deducted will have to be refunded (refunds within the first two years apply to trust based schemes only). Responsibility for the refund sits with the employer, who must pay money back to the jobholder and reclaim it from the scheme if necessary. To minimise the likelihood of refunds from the scheme being required employers may not be required to pass on initial contributions until the end of the second month following the automatic enrolment date. So, for example, if the process starts on 1 October, the first contributions don’t have to be passed to the scheme until the end of the second month. The hope appears to be that employers will make use of this payment window, but the
efficient ones who process payment quickly will have to reclaim. Employers must refund contributions to those who opt out by the later of the next-but-one payday and one month after opt-out.
- Repeat the process every three years for those who opt out
For those who choose to opt out, the employer must repeat the whole process at three-yearly intervals, to see whether attitudes have changed or lethargy eventually prevails. Employees can be re-enrolled three months before or after the third anniversary of the original automatic enrolment or re-enrolment date. There will be a single re-enrolment date for each employer, and employees who have opted out in the previous 12 months do not need to be re-enrolled. It will also be possible for an employee to opt in at any stage, but employers are only obliged to arrange for them to become an active member once in any 12 month period.
- Frequently asked questions
- Is it possible for employers to choose to start the process earlier?
The largest employers (staging dates October 2012) will be allowed to automatically enrol before the planned start date (as early as July 2012 if they want). They will have to be able to convince the Pensions Regulator that they already have a qualifying scheme in place or can establish arrangements by their chosen staging date.
- What is a qualifying pension scheme?
The Government has designed simple qualifying criteria for Company Schemes:
• Does it permit auto-enrolment?
• Are eligible employees auto-enrolled within 90 days of joining the company?
• Does it have a default investment fund?
• Does it deliver a minimum accrual rate or minimum contribution?
Contracted-out final salary schemes Contracted-in final salary schemes Money Purchase, Stakeholder & GPP schemes Minimum accrual rate of 1/80 of pensionable earnings. Minimum accrual rate of 1/120 of pensionable earnings. Minimum total contribution of 8% of all earnings between the minimum proposed threshold of £5,564 and the proposed upper limit of £39,853, with at least 3% paid by the company.
If the company scheme passes these relevant criteria, then it will qualify, if it doesn’t then employees must be automatically enrolled into an alternative such as the Peoples Pension or the NEST scheme.
- Who are ‘eligible employees’?
Employees eligible for automatic enrolment will be:
• those who aren’t already active members of a qualifying scheme; and
• are aged between 22 years and the State Pension age; and earn over £8,105 gross a year (the income tax personal allowance in 2012/2013).
• work or ordinarily work in Great Britain.
- What about employees who are not auto-enrolled?
There are two groups of workers who will have the right to join an employer-arranged pension scheme, even though they are ineligible for auto-enrolment:
• Those aged 16 to 21 or over state pension age but under 75 are not automatically enrolled but can opt in to the employer’s qualifying scheme. If they do, the normal contribution rules apply, including those for the employer. The employer must inform such staff of their rights, and they can opt in through a written instruction to the employer.
• Those with earnings under £8,105 a year can choose to join a pension scheme through the company they work for and if they earn more than the NI threshold, employer contributions are payable. Again, the employer must tell them about their rights, and arrange an appropriate pension scheme if they choose to contribute. It doesn’t have to be the same scheme as is used for automatic enrolment, although in most cases it’s likely to be the same one.
- Is it possible for the employer to pay more and the employee to pay less?
Yes, as long as the total contribution is at least the minimum. For example, from October 2018 an employer can pay the full 8% and your employee does not need to make any contribution.
- Can the employer change the qualifying pension scheme?
Yes, but there mustn’t be a long gap. The draft regulations allow for up to a month to finalise administration. In practice, when an employer decides to change scheme the move is generally immediate with no break in contributions.
- How does an employer ensure that contributions meet the minimum requirements?
There is a certification process that will simplify the auto-enrolment duty for employers who calculate their pension contributions on a different definition of pensionable pay than qualifying earnings:
• If the scheme provides for minimum contributions for each jobholder of at least 9% (4% minimum employer contribution).
• If contributions for each jobholder are at least 8% (3% employer minimum) and pensionable pay is at least 85% of total pay.
• If there is a minimum contribution of at least 7% for each jobholder, and 100% of pay is pensionable.
- What are ‘pay reference periods’?
Collection of contributions will be based round the individual’s pay reference period. This is defined as the frequency with which the individual is paid, or one week if longer. The idea is that employers won’t be able to delay deducting contributions for, say, a month if staff are paid weekly. On the first payday (following the three month waiting period or prior to that if the employee opts in) when the employee has qualifying earnings (i.e. those between £5,564 and £39,853) the company must deduct contributions and add in the employer ones. The one exception is where there is a spike in pay – for example a bonus – and earnings over a 12 month period are lower than the threshold. In that case employees do not have to be automatically enrolled or have contributions deducted. The reference period for checking that contributions have met the minimum requirement is 12 months.
- What regulatory requirements are there?
Employers will be required to inform the Pensions Regulator about how they have met their obligations within two months of their staging date, and every three years after that. Employers, pension schemes and pension providers will have to retain records for six years, including details of opt-outs. There will be a fixed £500 penalty for employers who fail to comply, followed by penalties of between £50 and £10,000 a day for persistent or serious non-compliance, depending on employer size. Various other sanctions for the Pensions
Regulator are also being put in place – these are still in consultation and will form part of our future updates once confirmed
There are some exceptions to automatic enrolment, including the self-employed, Sole Director & Shareholder of Ltd company and members of the Armed Services. There are also special rules for:
- Parliamentary staff
- Police officers
- People working on vessels
- Those in offshore employment