A Comprehensive Guide for Employers

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INTRODUCTION

From 2012, changes to pension laws will affect all employers – with or without existing pension arrangements and regardless of size.

Auto enrolment will bring new challenges to employers with existing pension schemes, such as: new prescribed employee information; new enrolment processes; revised eligibility criteria; enforced contribution rates or funding levels; as well as collecting, maintaining and reporting new information in respect of individual employees.

Past legislation has affected employers of differing sizes in different ways, with smaller companies typically being treated with a lighter touch. But all employers with at least one employee in the UK will have to comply with the new rules. Employers with no pension arrangements in place will have the most to do in order to comply.

Cost Estimates

Along with the complexities of the changes, the indirect and direct costs to employers of the new pension laws are likely to be very substantial. Hence why we believe auto enrolment could be the biggest pensions challenge to UK employers ever.

For example, even for employers with existing pensions in place, many employees do not choose to join, thereby saving any employer contribution for these employees. Across the UK, private sector pension scheme take up is only around 40%. Auto enrolment could increase take up to as much as 90%.


This example assumes an even spread of salary costs between pension savers and non savers and bases employer costs on 3% of full payroll before and after auto enrolment. The only difference is a change from 40% to 90% in employee participation, i.e. a massive rise in scheme take-up as a result of auto enrolment.

The increase in direct costs will clearly be felt the most by employers with no existing pensions in place. On the flip side, the indirect costs of compliance could be lower for these employers, as they have no existing pensions to take into consideration. Indirect costs could add up. They are difficult to quantify with the principal indirect cost being time. Management time to set and manage strategy alone could equate to a heavy cost.

The actual costs to employers will vary dependent on a range of factors, including the support and expertise available to plan and implement an effective strategy.

Creative Benefits can help to cap the indirect costs and can consult on pension policy to ensure that, as far as possible, direct costs are aligned with business goals.

Why is auto enrolment happening?

The answer is simple: to increase private retirement savings.

With UK life expectancy continuing to rise and retirement savings insufficient to meet the needs of future retirees, The Government has responded with a range of measures. These include auto enrolment in the private sector, proposed changes to public sector pensions and consultations on state retirement benefits and pensions.

These three key strands of change were all proposed in the Pensions Commission report of 2002. However, while auto enrolment is already scheduled and will be introduced from next year, changes to public sector pensions and state benefits are only in consultation. This is a cause for concern.

Value for Money Concerns

Pension saving is worthwhile and necessary for the majority. With the welcome support of employers and disciplined self sacrifice to set aside enough when working, pensions offer a great way to provide for the income wanted in retirement.

However, pension saving is not necessarily sound financial advice for all.

For some, even modest contributions could tip the balance on household expenditure. For others, more pressing financial planning priorities may apply. For example, many low earners have substantial debt which many would argue should be repaid before long term savings are considered.

This is because of the ‘Pension Credit’ rules. These are complicated and cannot be explored in any detail in this guide. But, in short, Pensions Credit provides a guaranteed minimum income well above the current basic state pension level. For some, this guaranteed minimum income will negate the value of pension savings.

The Government is consulting on ways to change the system, but, it could be years before any impact is felt. In the meantime, the blanket approach of auto enrolment will be phased in for all employers. And, it is anticipated that many employees, possibly those most impacted by value for money concerns, will not consider whether pension saving is right for them, and simply start to save because it is the least line of resistance.

Informed Decisions

Employers must not give employees advice and as detailed later in this guide, they must beware doing anything that might be perceived as coercing employees not to join their pension.

Creative Benefits can and does provide employee advice to guide informed decisions.

WHAT IS AUTO ENROLMENT?

It’s a process where employers automatically enrol eligible employees into a qualifying pension scheme without any action on the part of the employee.

In fact, prior to them being auto enrolled, eligible employees will have no option but to wait and become members of the pension scheme. Only once they have been auto enrolled will employees have the choice to opt out. This is fundamental to the legislation – employees should have information about the pension and see the difference in their take home pay before there is an opportunity to opt out.

This shift (from employees having to elect to join to becoming auto enrolled) is expected to dramatically increase pension take-up. Employer costs are consequently set to rise significantly too.

WHEN IS IT HAPPENING?

Auto enrolment is being enforced in stages over 4 years, starting in October 2012.

Each employer will be allocated a ‘staging date’ from when the duties will first apply to them. The date is based on the number of people in the employer’s PAYE scheme, or largest scheme for employers with multiple payroll schemes. The staging date for employers with less than 50 employees will also be dependent upon the PAYE reference.

A later date cannot be selected. Voluntary early adoption will be possible from July 2012, providing The Pensions Regulator is notified. The largest employers will have the earliest staging dates with smaller and new companies all included by 2016.

Check your staging date where you will also find a timeline guide and a range of information and news dedicated to auto enrolment.

EMPLOYER DUTIES

AT A GLANCE SUMMARY

Employers will need to:

  1. Provide employees with prescribed information at set times about the changes and how they will affect them
  2. Select and maintain access to a qualifying scheme or schemes
  3. Automatically enrol eligible employees into a qualifying pension scheme
  4. Pay contributions on their employees’ behalf
  5. Collect and forward (to the pension provider) employees’ own contributions
  6. Allow certain other employees to opt in to a qualifying pension scheme -Some with a consequent employer contribution, -And, some without
  7. Register with The Pensions Regulator (TPR)
  8. Collect and maintain new records (some for a minimum of 6 years)
  9. Provide regular reports to TPR and all providers (of schemes being used to meet overall qualification)

Selecting a pension scheme or schemes

Employers will need to select at least one qualifying pension scheme to use for automatic enrolment. Multiple schemes may be suitable for many employers. For example, an existing scheme may be supplemented by a new scheme for employees not already members of the existing scheme.

Qualifying pension schemes

To qualify, any existing or new scheme must:

  1. Meet set contribution or benefit levels
    Minima apply for Defined Benefit and Defined Contribution schemes.
  2. Impose no barriers to joining
    Examples:
    • Any employee between the ages of 16 and 75 will be able to opt in to an employer’s pension scheme even if they are not eligible for auto enrolment
    • Employers must not coerce employees to opt out.
    • The 2011 Pensions Bill may allow employers to operate a 3 month waiting period, but employees must be able to opt in immediately (and if eligible, receive the employer contribution immediately).
  3. Not require staff to:
    1. Make an active choice to join
    2. Take action, like having to complete an application form (i.e. operate auto enrolment)
    3. Take action or provide information to retain active scheme membership

Wide choice

The legislation does not prescribe the type of pension scheme employers must provide. So, providing the rules are met, there is a very wide choice, including:

  • Defined Benefit (DB) Schemes
    • Final Salary, ‘CARE’ (Career Average Revalued Earnings) and Hybrid Schemes
    • Operating on both contracted in and contracted out terms
  • Defined Contribution (DC) Schemes
    • Occupational Money Purchase Schemes
    • Group Personal Pensions and Group SIPPs (Self invested Personal Pensions)
    • Stakeholder Schemes
    • NEST (National Savings Employment Trust)

Selecting a pension scheme or schemes

Pension Scheme Selection Issues

Warning: Existing Schemes

Not only will existing schemes need to comply with the new legislation, employers must also ensure that any changes to existing schemes are properly consulted with employees. Wherever contractual employment rights are affected, more time will be needed to communicate and implement the changes.

NEST: A Default Pension Scheme For All?

NEST is a new pension scheme type being introduced in 2011 in readiness for auto enrolment. It is sponsored by the Government and is designed, in particular, for low to medium earners.

Some of the key features of NEST have been designed specifically with this target audience in mind. For example, NEST will have to accept any statutory level of contribution, even if only paid once, whereas some pension providers will impose minimum contributions.

But, while NEST could prove to be a suitable scheme for some employees, and may act as a useful default mechanism, it may not be the best solution for many employees. For example, the choice of investment funds (so important in determining long term returns) in NEST is quite limited compared to other pension schemes. And, employees will not be able to transfer other pension benefits into NEST and will not be able to transfer any funds they accrue in NEST to another pension plan. For higher earners there is a further lack of flexibility too, as contributions will be capped at £4,200pa.

The above is included purely as food for thought. This guide focuses specifically on auto enrolment which does not depend on NEST. Employers can choose NEST for some or all employees, but, they don’t have to use it all.

Creative Benefits can and does consult on all pension scheme designs and types. We can provide services dedicated to solving one need or you can appoint us to provide a complete solution to all your employee benefits, including all aspects of pension provision so you are able to comply with auto enrolment and other pension rules.

IN RELATION TO EMPLOYEES

Employers will need to assess their duties for all employees, as age and earnings will dictate exact responsibilities in relation to each individual employee.

Provide information

Information will need to be provided to employees in advance of the employer’s staging date and regularly, as and when new employees become eligible in the future. The information to be provided will be specified and may include all of the following:

  • A statement that the employee has been or will be automatically enrolled into a pension scheme.
  • The date of enrolment.
  • Name, address, telephone number and electronic contact details of the scheme.
  • The value of contributions payable to the scheme by the employer and employee.
  • Confirmation of/that:
    • Contributions have been or will be deducted from qualifying earnings/pensionable pay.
    • How tax relief will be given (through the Relief at Source or Net Pay Arrangement).
  • A statement that:
    • The employee has a right to opt-out of the scheme during the 'opt-out period'.
    • Indicates the start and end dates of the opt-out period.
  • The source from which the opt-out notice can be obtained.
  • Confirmation that:
    • Once opted-out, the employee will be treated for all purposes as not having become an active member of the scheme on that occasion.
    • Once a valid opt-out notice has been given to the employer, any contributions paid by the employee will be refunded.
    • After the employee has opted-out, they can opt back in.
    • After the opt-out period, the employee may stop paying contributions to the pension
    • If they opt-out, the employee will be automatically re-enrolled into a qualifying scheme.
  • Details of where the employee can obtain further information about pensions and saving for retirement.

The specified information must be provided in writing, which can be email. But, it should be provided, rather than requiring the employees to find it. So, it is not enough to rely on internet or intranet content, worksite posters or other such displays.

If the specified information requires personal or individual data to be communicated, it should not be included in a generic communication. Where the specified information does not require personal data, e.g. an employee with the right to opt in, a generic communication, such as a joining pack may suffice.

The duty is on the employer to provide the right information to the right individual at the right time. Someone acting on the employer’s behalf (such as Creative Benefits) can provide the information, but it remains the employer’s responsibility to make sure it is provided on time and is complete and correct.

Creative Benefits has extensive experience of pension record keeping and employee communications. We cannot take over employer responsibilities, but, we can devise and implement the processes necessary to ensure compliance.

Auto Enrol Eligible Employees

Employers must identify, communicate with and auto enrol all employees who are:

  • Aged between 22 and State Pension Age
    State Pension age is currently 65 for men and 60 for some women, rising in stages to 65 for other women by 2018. Increases in state pension age, from 65 to 68, for both sexes are being phased in from 2018 to and 2046.
  • Working, or ordinarily working, in the UK
    An employee’s nationality and the length of their stay in the UK are not relevant.
  • Earning above a set amount
    Proposed to be £7,475pa for 2011/2012 – in line with the lower tax threshold.

In addition, employers will be responsible for repeating auto enrolment every 3 years for all employees who opt out (and whom continue to be eligible).

Employees who may opt in

  • Eligible for employer contributions
    Some employees may not have to be auto enrolled but will be eligible for employer contributions if they elect to join, i.e. opt in. This option applies to all employees who are:
    • Aged between 16 and 22, or over State Pension Age but below age 75.
      And,
    • Earning more than £5,715pa (this is in line with the primary national insurance threshold for 2010/11).
  • Ineligible for employer contributions

Employees earning less than the set minimum earnings (£5,715 for 2010/11) may elect to join the employer’s pension but employers will not have to contribute for these employees (until such time as the employee becomes eligible, at which time, the employer must start to contribute).

PAY CONTRIBUTIONS OR BENEFITS

Pay Reference Period

To assess and carry out their pension responsibilities, employers must calculate each employee’s earnings. For this purpose, there is a ‘Pay Reference Period’. This is simply the period used to determine earnings and is normally a year. It is defined in the regulations as:

12 months beginning on:

  • The staging date (or the employee’s first pay reference period), and
  • Every anniversary of that date.

For new employees joining an employer, the first pay reference period begins on the employees’ auto enrolment date and finishes on the same date as that of other employees. And, for leavers, the pay reference period ends on the date they cease employment.

Qualifying Earnings

For the purposes of assessing eligibility, qualifying earnings include: salary, overtime, commission, bonuses, sick pay, maternity, paternity and adoption pay. Pension contributions and other benefits do not need to be taken into account. (The actual earnings taken into account in setting contribution rates or scheme benefits can be different, subject to meeting set criteria).

Defined Benefit Schemes

Subject to complying with the qualifying pension scheme rules, a Defined Benefit scheme will be able to apply for certification with The Pensions Regulator, providing it provides minimum benefits of at least:

  • 1/80th accrual for contracted out schemes
  • 1/120th accrual for contracted in schemes

The majority of UK employers have now closed their Defined Benefit Schemes to new entrants and many have closed them altogether. While we can help to manage the certification process for employers with DB schemes, this guide focuses on the cost implications for employers with Defined Contribution schemes, as these costs are more likely to be relevant.

Creative Benefits can and do consult trustees and employers on all aspects of Defined Benefit pension schemes, including administration and record keeping, scheme reviews and valuations, investment strategy and implementation and one off exercises like Enhanced Transfer Exercises.

Defined Contribution Plans

As a quick guide, DC plans will eventually require employers to pay an overall minimum contribution of at least 8% of eligible employees’ ‘band earnings’, of which at least 3% of this contribution must be from the employer.

The minimum contributions are being phased in, as shown here:

Pensionable Earnings

The Pensions Bill 2008 specified one basis for earnings, but this may be extended to a total of 3 separate earnings definitions, with a total of 4 separate benchmarks for minimum contributions. The following table summarises the possible scope of different earnings/contribution bases:

* Proposed bases. Alternative earnings bases were proposed during consultation to account for the fact that the majority of existing schemes operate on either basic or full pay, making the imposition of a single basis determined by band earnings unduly inflexible.

RECORDS AND REPORTING

All employers will need to keep accurate and detailed records, some of which should be retained for a minimum of 6 years.

Keeping accurate records has always been good practice, but the new rules bring new responsibilities, including registration and regular reporting to The Pensions Regulator and specified reporting to all pension providers (i.e. all providers of pension schemes being used to meet compliance).

Employers can use electronic or paper filing systems to keep or store any records, as long as they are legible or can be produced in a legible way, should The Pensions Regulator ask to see them.

An employer must also be able to keep track of the ages and earnings of everyone who works for them at all times. This is important to retain ongoing compliance with the requirements.

Opt Outs

Employees will have the right to opt out within 1 month of being auto enrolled and receive a refund of their contributions. Employers will have to: record the employee’s choice, ensuring they have the formal opt-out notice from the employee; report all opt-outs to The Pensions Regulator; notify the pension provider and process the refund to the employee. Employer contributions will be refunded to the employer in respect of employees who do opt out during the opt out period.

Employees can choose to cease membership at any time, although they may not be entitled to a cash refund of contributions after the end of the 1-month opt-out period.

To opt out, employees must complete a formal ‘opt-out notice’ and give this to the employer. These notices will usually only be available from the pension scheme provider and not the employer, so that workers do not feel pressured into opting out.

Creative Benefits can help with all aspects of compliance.

Opt Ins

As well as auto enrolling eligible employees, employers must also allow other employees to opt in. Again, detailed records will be needed to ensure that each employee has been correctly informed and treated. For some employees, an employer contribution will be required and for others not, but in all cases, the deduction of the employees’ own contributions must be handled and reported by the employer.

SANCTIONS AND PENALTIES

In line with the principles of the legislation, any employee’s decision to opt out of a scheme, or stop saving for retirement, should be taken freely and without influence by the employer. Due to concerns that some employers might seek to reduce costs by encouraging employees to opt out, the new rules are accompanied by safeguards, in place from 2012, intended to protect the rights of employees to have access to pension provision.

These rules mean that employers must not take, or fail to take, any action, with the sole or main purpose to attempt to induce an employee to opt out of a pension scheme. Furthermore, an employer must not try to screen out job applicants on grounds relating to potential pension scheme membership, or suggest that a job applicant’s success could depend on whether or not they opt out of a pension scheme.

Employers coercing Employees to Opt Out

Fixed penalties will apply which are geared to employer size:

Non-Compliance

In addition to the above, employers may face financial penalties for simply failing to comply with the new rules. Note that these fines are cumulative, so any prolonged non-compliance could prove to be very costly.

Wilful non-compliance could lead to a prison sentence of up to 2 years.

CONCLUSION

Auto enrolment and the associated rules and regulations pose a considerable challenge to employers irrespective of existing pension arrangements and regardless of the employer’s size – there is no opt out option for employers. But, employers can exercise considerable choice in making suitable pension provision available to employees. Employer choices may reduce or increase indirect and direct costs and will influence whether the pension plan or plans are suitable for the needs of the employer and employees.

Advance planning is vital. The time needed to set strategy and implement procedures should not be under-estimated. Employers acting quickly are likely to have more time to consider their options and conclude on the most appropriate strategy.

New processes, records and reporting will all be needed to comply. New employee communications will need to be devised, timetabled and carefully recorded.

Direct and indirect pension costs will rise for the majority of employers.

Expertise on call

Creative Benefits specialise in helping UK companies and organisations gain the most from their pension and other benefit plans. From complex Defined Benefit pension scheme challenges through to clear, yet engaging communications for employees, we cover the lot.

Our innovative delivery through Employee Benefit Consultants and Employee Benefit Advisors ensures that we can help decision makers and staff alike. Creative Benefit Solutions is independent and we select from the whole market to give our clients the best terms and features available.

We aim to solve problems and create opportunities by looking beyond the obvious – this is part of the ‘creative approach’ – think and then think again! We are constantly reviewing new developments and considering how any changes will impact on our clients.

Just give us a call!