The new pension auto-enrolment scheme
The Pensions Act 2008 includes proposed improvements to the State Pension and extending people’s working lives. However, the key reforms for employers involve making it easier for more people to save for retirement by means of automatic enrolment into a pension scheme.
Under the new pension auto-enrolment scheme, all employers will have to automatically enrol eligible jobholders into a qualifying pension scheme. This could, for example, be an existing pension scheme (if it meets, or can be changed to meet, the necessary automatic enrolment criteria), or the new National Employment Savings Trust (NEST).
The first step for an employer is to determine whether they employ anyone classed as a ‘worker’. A worker may be:
• An employee, or
• A person who has a contract to provide work or services personally and is not undertaking the work as part of their own business.
There are three categories of workers: eligible jobholders; non-eligible jobholders; and entitled workers.
Workers for whom automatic enrolment will be required are those who are:
• Aged between 22 years and the State Pension Age (SPA)
• Earning over the minimum qualifying earnings threshold (£9,440 in 2013-14)
• Working or ordinarily working in the UK
• Not already a member of a qualifying pension scheme.
These are categorised as ‘eligible jobholders’. Most workers will fall into this category unless the employer already has a qualifying pension scheme.
As well as ‘eligible jobholders’, employers also have certain duties to other types of workers who do not meet the criteria for automatic enrolment. Depending on their classification, these workers may have the right to ‘opt in’ (i.e. join a scheme).
Earnings cover all of the following pay elements (gross):
• Statutory sick pay
• Statutory maternity, paternity and adoption pay.
Contributions will be payable on earnings between the lower threshold of £5,668 and the higher threshold of £41,450 for 2013-14. The earnings between these amounts are called qualifying earnings. The thresholds will be reviewed by the Government each tax year.
What is a qualifying scheme?
A qualifying scheme may be a UK scheme (one with its main administration in the UK) or a non-UK scheme (with its main administration outside of the UK). For a UK pension scheme to qualify it must:
• Be an occupational or personal pension scheme;
• Be tax registered; and
• Satisfy certain minimum requirements (the requirements differ according to the type of pension scheme).
Further information on the minimum features required can be found on the Pensions Regulator’s website.
All businesses will need to contribute at least 3% of the qualifying pensionable earnings for eligible jobholders. However, to help employers to adjust, compulsory contributions will be phased in, starting at 1% before eventually rising to 3%.
There will also be a total minimum contribution which will need to be paid by employees if the employer does not meet the total minimum contributions. If the employer only pays the employer’s minimum contribution, employees’ contributions will start at 1% of their salary, before eventually rising to 4%. An additional 1% in the form of tax relief will mean that there is a minimum 8% contribution rate.
Auto-enrolment is being phased in over a number of years, starting from 2012 (larger employers first, smaller employers last). Each employer will be allocated a ‘staging date’ from when their duties will begin.
The staging date is based on the number of people in the employer’s PAYE scheme. Employers with the largest numbers of workers in their PAYE schemes will have the earliest staging date. The date is based on their size (fixed by the number of HMRC employee records on file as at 1 April 2012) or the letters in their PAYE scheme reference. Employers can check…