Push to the finish line
29 Jun 09
2012 isn’t just when the Olympics comes to London. It’s also when employers will be required to auto-enrol employees in a pension scheme and make compulsory contributions
by Jim Boyle
Pension underprovision has been a concern of successive UK governments. In 2006, the Department for Work and Pensions estimated that almost seven million people were not saving enough for retirement. The Pensions Act 2008 provides the framework for a pensions regime designed to overcome this social timebomb.
The DWP has been consulting on the detailed regulations due to come into effect in 2012. This new regime has the backing of Conservatives and Liberal Democrats, as well as the current Westminster government, so it is expected that the legislation will take effect in 2012, irrespective of any change in government.
Although 2012 seems a long way off, the implications for employers are far reaching. Employers should start planning now as employment costs will rise and there aresignificant administrative issues to address.
One issue not addressed is the question of advice to workers. The key target group for the legislation is workers who are currently making little or no provision for retirement. It is reasonable to assume that many such workers will have limited knowledge of financial issues, insurance contracts, pension schemes, taxation or state benefits (including means-tested benefits).
The timescales within which workers will be expected to make important decisions are unrealistic and do not allow time for the workers to seek advice.
Personal Accounts
One vehicle that employers will be able use is the Personal Accounts scheme to be established and run by the Personal Accounts Delivery Authority (PADA). The scheme will run on a money purchase basis and will be available in 2012. DWP and PADA are currently consulting on how the scheme will operate.
Employers should note that the obligation to enrol workers in a pension scheme will exist independently of the Personal Accounts scheme, which is simply a vehicle that the DWP is making available as one possible qualifying pension scheme which employers could choose.
Occupational pension schemes (defined benefit, money purchase and hybrid arrangements) and personal pension schemes, provided that they meet qualifying conditions, can also be used, and are likely to be more appropriate for many employers.
Devil in the detail
The employer’s administrative obligations will be set out in the regulations to be enacted this year. Consultation on the draft regulations ended on 3 June. If enacted as drafted, obligations on employers will include:
• Identification of workers who must be auto-enrolled into the pension scheme. This will be a continuing obligation on employers – any worker who becomes eligible will need to be auto-enrolled as soon as that worker meets the qualifying conditions.
This will apply to workers who are eligible when the legislation comes into effect in 2012, workers who do not initially meet the qualifying conditions but subsequently do so, workers who are subsequently employed, and workers who have opted-out when three years have passed since the opt-out.
Qualifying workers will include not just workers who are directly employed, but also agency workers. Casual workers, seasonal workers and part-time workers will notbe exempt.
Qualifying conditions means having reached age 22 (but below state pension age) and having earnings in excess of the equivalent of £5,035 per annum (in 2006/07 earnings terms).
Where a worker’s earnings vary (e.g., where a casual worker has variable hours), the worker could change from being a qualifying worker to a non-qualifying worker and back again over short periods.
• Complying with timescales for auto-enrolment. Where an occupational pension scheme is being used to satisfy the employer’s obligation, the employer must supply information about the scheme and must ensure that the worker is enrolled in it within 14 days of meeting qualifying conditions. Where a personal pension scheme is used, the information must be supplied within seven days; after a further seven days the worker will be deemed to have joined the pension scheme.
The worker’s membership of the pension scheme will be backdated to the date the worker first met the qualifying conditions. This means that if a payday occurs during the process of enrolment, contributions to the scheme will become due; the employer will need to provide these contributions and deduct from pay any contributions payable by the worker.
The employer will also need to provide information to the managers of the qualifying pension scheme so that the worker can be enrolled.
• Opt-out procedure. Workers will have the right to opt-out of the pension scheme, but only after having been enrolled in the scheme. In-advance opt-out is not permitted, and employers must not induce workers to opt out.
Details of the opt-out process must be supplied to the worker at the time of enrolment. The worker then has 30 days in which to opt out.
To opt out, the worker must obtain an opt-out form from the scheme manager. This form must not be supplied by the employer. However, on completion of the form, it is passed to the employer who has five days to check that the form has been completed correctly and to inform the worker if it has not.
On opt-out, it is the employer’s responsibility to refund any contributions deducted from the worker’s pay. This must be done within 21 days or by the second pay day after the worker gave effective notice to opt out, if later.
The obligation to refund contributions to the worker exists irrespective of whether or not the employer is able to recover contributions from the pension scheme managers.
Postponement of automatic enrolment
If an employer provides a pension scheme which meets certain conditions, the process of automatic enrolment can be postponed for up to 90 days. (Employers using the Personal Accounts scheme will not be able to use a postponement period.)
The key conditions for postponement are:
• If the pension scheme is money purchase, the employer contribution must be at least six per cent of qualifying earnings, and the total contribution must be at least 11 per cent.
• If the pension scheme is defined benefit, it must provide an accrual rate of at least 1/120th of qualifying earnings for each year of membership.
What should employers be doing?
Employers should be thinking now about the effect of the legislation. Particular issues are:
• Does the employer’s current pension scheme (if any) meet the requirement of legislation? If not, what needs to be done to make it comply?
• If there is no pension scheme in place, what type of pension scheme best fits with the employer’s workforce, and who can supply that pension scheme?
• What are the cost implications? Can current administrative procedures and payroll systems cope? If not, what needs to be done and what will this cost?
• What training is needed? Early dialogue with corporate pension advisers, insurance companies and pension lawyers is essential.
JIM BOYLE FFA is head of actuarial practice at Bluefin, one of the top five corporate pension advisers in the UK, and a member of the ICAS Pensions Working Party.