Pensions Act 2008 - Auto Enrolment Legislation
PENSIONS ACT 2008 - AUTO ENROLMENT LEGISLATION
As a result of Government legislation, in the form of the Pensions Act 2008, all employers will be responsible for automatically enrolling employees who are not currently saving for their retirement into a pension arrangement.
This legislation became active on the 1st October 2012 with the largest of employers being the first to auto enrol ‘eligible’ workers (Jobholders) into a ‘qualifying’ workplace pension scheme. Along with the responsibility employers will also be obligated to make pension contributes.
Employers such as DHL Supply Chain, Network Rail and Amey, to name just a few, have already started to have discussions with RMT representatives about their auto enrolment proposals and as a result the General Grades Committee have suggested that a briefing is sent out to all Branches and Regional Councils so that there is a clearer understanding of this legislation. Please find below a summary of the obligations placed on employers and how members will be affected by auto enrolment.
In 2005 a Government Pensions Commission concluded that the present State Pension system was not adequate to prevent future pensioners being placed in poverty. Therefore the commission recommended that to avoid pensioner poverty there needed to be an increase in private savings i.e. workers saving for their retirement via workplace pension schemes.
Who is an Eligible Worker (Jobholder)?
For a worker to be ‘eligible’ to be automatically enrolled the following criteria must be met:
· Are not already in a qualifying workplace pension scheme
· Are at least 22 years old
· Are below state pension age
· Earn more than £8,105 a year
· Work or ordinarily work in the UK (under their contract)
What type of Pension Scheme Qualifies?
A qualifying scheme can be:
· A Defined Contribution (Money Purchase) scheme with a minimum contribution
· A Defined Benefit (Final Salary or CARE) which meets certain conditions
When do Employers have to Auto Enrol Eligible Workers?
Depending on the size of the employers PAYE scheme, employers will have to start to auto enrol between the 1st October 2012 and 1st April 2017. Each employer will be given a ‘staging date’ to begin auto enrolling employees. See Appendix One for staging dates.
Thereafter employers will be obligated to carryout auto enrolling those Eligible Workers every three years.
What information should employers give to Eligible Worker prior to Auto Enrolment?
Employers are required by law to write to all Eligible Workers explaining auto enrolment.
The employer should provide the Eligible Worker with information telling them that they have been, or will be, automatically enrolled and what this means for them. They should also inform them of their right to opt-out and their right to opt-back in.
What if an Eligible Jobholder wishes to Opt-Out?
Those Eligible Workers who decide they do not wish to be a member of a pension scheme should be provided with an ‘opt-out notice’ to be handed to the employer. Those wishing to opt-out must do so within a ‘specific timescale’.
The opt-out notice should be provided by the pension scheme to ensure that the Eligible Worker’s decision to opt-out is taken without influence from the employer.
The opt-out period starts from the later date of either:
· when the Eligible Worker either becomes an active member of the chosen pension scheme with effect from the automatic enrolment date,
· or from the date the Eligible Worker is provided with written enrolment information
When an employer receives the opt-out notice they must refund the Eligible Worker with any contributions already made.
Please note that employers will still have to auto enrol those Eligible Worker’s who opt-out every three years.
Can Eligible Workers Opt back in?
Yes. If an Eligible Worker opts-out the employer is required to arrange for the individual to become an active member of an automatic enrolment pension scheme once in any 12-month period.
What about workers under 22 and over State Pension Age?
Employees under age 22 and over their State Pension Age may opt-in to personal accounts, a form of DC arrangement, and receive an employer contribution on qualifying earnings. (See below for qualifying earnings.)
What if the Employer does not have a Pension Scheme in place?
Where an employer does not have a pension scheme in place, the Government reforms has introduced the National Employment Savings Trust (NEST) which can be used as the qualifying pension arrangement.
NEST is a Defined Contribution (DC) pension scheme which means that retirement benefits are based on the amount of money which is built up in an individual’s ‘pension pot’ and investment returns. Once a member reaches retirement they can purchase a pension from a provider (Insurance Company) called an annuity.
How much do employers and employees have to contribute?
Contributions are based on qualifying earnings between £5,564 and £42,475 (2012-13). This means that the first £5,564 is non pensionable and therefore contributions are based on any monies earned between this amount and £42,475.
As already outlined above it will be mandatory for employers to contribute to an employee’s future retirement provision and in the case of DC schemes the following phased minimum contribution rates will apply:
Phasing Period Minimum % of qualifying earnings
Employer Minimum Contribution
1st October 2012 to
1st October 2017 to
1st October 2018
*As pension contributions receive tax relief, based on a total employer minimum contribution of 1% in the first Phased Period then the 2% total contribution will comprise: Employer 1%; Employee 0.80%% and Tax Relief 0.20%.
Please note the employer can use alternative contribution rates using a different definition of qualifying earnings. Further information can be found at:
Can an employer delay auto enrolling employees?
Yes. An employer can only postpone auto enrolling on certain dates:
· the employer’s staging date, is the same date the worker(s) are employed
· the first day of a worker(s) employment, in respect of any worker(s) starting employment after the employer’s staging date
· the date a worker(s) employed by the employer meets the criteria to be an eligible jobholder after the employer’s staging date
An employer can also delay auto enrolling if the pension scheme to be used is a Defined Benefit (DB) arrangement. The length of the postponement, known as the transitional period, is until 30 September 2017. If an employer chooses to delay auto enrolling an eligible jobholder the following conditions must be met:
· the eligible jobholder has been employed continuously before the employer’s first enrolment date
· the eligible jobholder was entitled to become an active member of a DB pension scheme before the employers staging date
· the eligible jobholder is, and always has been since the employers staging date been entitled to become an active member of the employer’s DB pension scheme
While the above auto enrolment information is far from comprehensive it does cover many of the key issues RMT representatives and their members will be facing over the coming years as many employees for the first time will have the opportunity to save for their retirement.
However, while automatic enrolment is generally welcomed by the RMT there are a number of principles that need to be considered:
1. Defined Benefit (DB) Pension Schemes Versus Defined Contribution (DC) arrangements.
Representatives need to be aware of what type of pension arrangements individual employers are currently offering employees. While each employer needs to be looked at in isolation, representatives need to be alert to those offering under auto enrolment inferior DC arrangements where a DB scheme is still open to new members. DB Pension Schemes offer a far better opportunity for members to receive a decent pension at retirement than DC arrangements, and therefore employers should not be allowed to use an inferior auto enrolment pension facility. While DB contribution rates can often be high for members, employers should be encouraged to offer these arrangements to employees.
2. DC Contribution Rates
The minimum DC employer contribution rate above is exactly that, a minimum. Employers should be encouraged to make greater contributions into a member’s pension fund as DC schemes are reliant to return a decent pension at retirement on the amount of money invested in each individual fund.
3. Levelling Down Benefits
There has been concern expressed that employers may use auto enrolment as an opportunity to reduce the level of contributions that they are already offering. An example of this is where two DC arrangements are being offered but one has a higher employer and member contribution rate than the other. If the employer is prepared to make greater contributions into a member’s ‘DC Pension Pot’ but the member has to make higher contribution themselves, this would be something an individual would need to consider. While the RMT are not legislated to give financial advice it is important that if members are confused to what option to take in this scenario they should seek Independent Financial Advice.
4. Employer Compliance
If an employer fails to comply with their auto enrolment responsibilities, they could be subject to statutory notices, penalties or escalating fines. In addition employers are banned from offering incentives to workers to opt out of an auto-enrolment. This also includes refusing to employ someone because they want to join the company pension scheme. The Pensions Regulator will take action against employers where there is evidence of this behavior. The regulator has provided a ‘whistle blowing’ facility, where employees can report instances of non-compliance.
I will keep you informed of future developments.