Workplace pension reforms - one year to go - your frequently asked questions answered
25 October 2011
There is one year to go before the requirement to automatically enrol all eligible workers into a qualifying scheme is due to start applying to the country's largest employers. For smaller and medium sized employers their 'staging date' will still be some time away. However all employers should be aware that a new pension regime is being brought in from October 2012, and start to prepare for the impact on their businesses.
In this update we answer some of your most frequently asked questions on the new regime. This gives an overview of some of the most pressing issues arising. We can provide more detailed advice on the specific circumstances facing individual businesses, given their particular workforce make-up and existing pension provision that is already in place.
When will the requirements affect my business?
Every employer has a 'staging date', which is based on the number of people in its largest PAYE scheme. In order to find out your staging date, visit the Pensions Regulator's website, where there is a tool you can use to determine your staging date, for which you will need to know how many people are in your PAYE scheme and the PAYE reference. Alternatively there is a page setting out the 43 different PAYE bandings. See http://www.thepensionsregulator.gov.uk/employers/tools/staging-date.aspx. Staging will take place over four years from October 2012 to September 2016, with larger employers being staged in before smaller employers.
What happens on our 'staging date'?
The duty to automatically enrol eligible jobholders will apply to your business from its staging date. There will be a number of other duties, chiefly the provision of information to the workforce. There are tight timescales within which automatic enrolment must take place, therefore it is important to prepare the business in advance of the staging date. This will involve assessing the workforce, considering existing pension provision, and deciding what provision is going to be put in place going forward to ensure compliance with the new regime. It will also involve putting in place processes to monitor the workforce, to automatically enrol new eligible joiners and those who 'opt-in', to process 'opt-outs', and to automatically re-enrol all those who are eligible and do not belong to a scheme every three years.
What is this going to cost?
There will be a number of costs arising from the new duties:
- Management time spent deciding what pension provision the business is going to use to comply with the new requirements going forward
- On-going administration required to monitor the workforce and to process automatic enrolment of new joiners, opt-ins and opt-outs
- Higher rates of employer contributions because it is expected that a higher percentage of the workforce will end up belonging to a pension scheme with employer contributions due to the effect of automatic enrolment
- It may be that your business will need to raise the levels of employer contributions that it is currently making to ensure they comply with the contribution requirements under the new regime
We have a high turnover of short term workers – will they be caught by the new requirements?
The new requirements apply to 'workers'. This essentially catches all employees (including part-time), and other workers such as fixed or short term workers and agency workers. The only category not covered are truly self-employed contractors – those who are in business on their own account. If your business engages contractors but it is not clear whether they are self-employed, it would be sensible to review the position, and we can provide legal advice on this. Short term workers (including agency workers) will be covered by the new requirements, although there is a three month waiting period that employers can use, which will mean that workers engaged for less than three months will not have to be automatically enrolled, provided the correct procedures are in place.
How does the regime operate in relation to agency workers?
The regime expressly covers agency workers including workers known as "PAYE temps" (paid under ss 44-47 of the Income Tax (Earnings and Pensions) Act 1993 (ITEPA)) and "umbrella workers". Generally the person who pays an agency worker will have responsibility for automatic enrolment of that worker, and liability to make employer contributions to a pension scheme on their behalf. Where an agency worker has fluctuating income, it will be necessary to monitor their income to ensure that they are automatically enrolled if their income triggers the qualifying earnings threshold. There are anti-avoidance provisions which will prevent staffing companies or umbrella companies from encouraging agency workers to opt out. An example of these provisions is that it is likely to be unlawful to pay agency workers who have opted out of the new regime more than those who have not opted-out and who must therefore receive employer contributions to their pension. We can provide specific advice on the details of how the new regime will apply to agency workers, staffing companies and other structures used to engage and supply agency workers, and the details of how its provisions will apply to these situations - which do not necessarily fit neatly within the legislation and guidance available.
We already have a pension scheme in place. Will this satisfy the new requirements?
This depends on the type of pension scheme that you currently have in place, and the levels of employer and employee contributions that are made to the scheme. The requirements differ depending on whether the existing scheme is defined benefit or defined contribution, and trust or contract based. It also depends on whether the existing scheme will cover just existing members, with workers not already in the scheme and new joiners after the staging date being put into another automatic enrolment scheme, or whether the existing scheme is to cover all workers.
To be fully compliant under the new regime, a scheme will have to meet automatic enrolment criteria and certain minimum criteria mainly relating to contribution levels. We can advise further on the specifics of your individual situation, and on amendments needed to make existing schemes compliant. Areas to consider legal advice on include:
- amendments needed to ensure there are no barriers to entry in order to make a scheme into an 'automatic enrolment scheme'
- the procedure to 'certify' an existing scheme as being compliant with certain minimum contribution criteria under the new regime
- the definition of pensionable salary that your business currently uses and how this interacts with the concept of 'qualifying earnings' under the new regime
- ensuring that the necessary binding legal contracts between the employer, the provider and members of a contract based scheme are in place in relation to contribution levels
We already make employer contributions into a scheme and employees are contractually entitled to this – how will this fit with the new requirements?
Where employees have a contractual right to a certain level of employer contributions, the new regime will not take this away. It will be necessary to maintain the higher level of benefits for existing employees, although it would be possible to introduce the minimum level of benefits for new joiners. If contractual entitlements are below the minimum levels required under the new regime, and a worker wished to continue with those lower levels, s/he could opt-out of automatic enrolment and request to continue with the lower levels of contributions.
Our current scheme is salary sacrifice – can this continue?
The Pensions Regulator has said that a scheme will not comply with the new regime if it is compulsory for members to be salary sacrifice, as this could be a barrier to entry. However schemes can continue to offer salary sacrifice on an optional basis.
We currently offer pensions as part of a flexible benefits package – will this be acceptable under the new regime?
It will be necessary to automatically enrol eligible jobholders into a qualifying scheme with the minimum levels of required contributions as a minimum core aspect of the flexible benefits package. It will not be possible to offer it simply as an option, and employers will have to be careful that the structure of the flexible benefits package could not in any way be seen to 'induce' workers to opt-out of the auto-enrolment regime.
What is NEST?
NEST (the National Employment Savings Trust) is a scheme set up by the government (but run independently of government) which will be open to UK employers of any size. It is designed to meet the needs of employers who are largely new to pension saving, and is aimed at low to medium earners. Contributions to NEST will be capped and transfers in and out are not allowed (at least until 2017). The default fund has a cautious investment approach. There will be a 1.8% charge on contributions, and an annual management charge of 0.3% of fund value. You may want to consider using NEST for a section of the workforce that is lower paid or transient.
Can we pay cash instead of pension contributions to avoid the administration associated with automatic enrolment?
No. There are strict anti-avoidance provisions under the new regime, and employers may not take any action which is designed to induce workers to opt-out of the new regime. Offers of cash instead of pension contributions would almost certainly amount to inducements.
What will happen if we simply ignore the new requirements?
The Pensions Regulator is going to police the new regime. It will have the power to issue compliance notices and penalties varying according to the employer's size. Large employers that do not comply could be liable for escalating penalties of up to £10,000 per day. Criminal penalties could apply in the case of "wilful" failure to comply.
What can Osborne Clarke do to help?
The new regime represents a massive change in pension provision in this country, and a significant new administrative and financial burden on employers. We can advise on the legal issues your business faces in order to comply with the new regime including:
- advising on the make-up of your workforce, who is a worker and who is not, and therefore who will be covered by the new regime
- we can carry out an audit of your existing pension provision, and advise how this will need to be amended going forward, and new pension provision that will need to be put in place
- advising on how to certify an existing scheme and the details of the requirements such as the definition of pensionable pay currently used in your business and how this will interact with the requirements of the new regime
- advising what will constitute an inducement or a prohibited recruitment practice and how you can avoid these pitfalls in practice.
If you would like further personalised advice on the issues facing your business under the new regime please get in touch with one of our experts.
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