Workplace pensions reform: A summary of the new provisions and requirements
New workplace pension requirements are being introduced, beginning in October 2012. This will require all employers to provide pension arrangements for their employees (automatic enrolment), and make contributions into these pensions. Details of this new plan are currently under review by the government, and this article only considers matters generally.
Basically, the new requirements are that all employers will have to automatically enrol all eligible jobholders into a qualifying pension scheme.
The obligations to enrol employees will be staged over a four year period, beginning 1 October 2012 and finishing February 2016, based on the number of employees of the relevant employer.
Eligible jobholders of an employer are employees aged at least 22 and who have not yet reached state pension age, and who have qualifying earnings of more than £5,035 per year.
Qualifying earnings are wider than salary, as they include fluctuating pay elements such as overtime, bonuses and commission. This is relevant to the contributions that must be paid in respect of eligible jobholders.
What is a qualifying pension scheme? A qualifying scheme may be an employer's existing scheme, provided it complies with minimum requirements specified by legislation.
All currently contracted-out defined benefit (final salary) schemes meet the quality standards required; new schemes or schemes that are not contracted-out will need to meet a "Test Scheme Standard" which compares benefits to a hypothetical benchmark scheme.
For a defined contribution (money purchase) scheme, at least a minimum level of contributions must be paid. This again will be phased in, with minimum contributions (from 1 October 2017) of 3% employer and 8% total contribution, as a percentage of qualifying earnings (ie if the employer pays the 3% minimum, the employee's contribution will need to be at least 5% of qualifying earnings).
The government has established a centralised trust-based scheme that employers can join to discharge their obligations, which is called the National Employment Savings Trust (NEST). This is also under review by the government, to consider whether it is the most appropriate vehicle for such employers and employees.
An employee may opt-out of the employer's arrangement by notice within one month of becoming eligible for automatic enrolment. In this case, the employer must automatically re-enrol them every three years (unless the employee reconfirms their opt-out).
Employees that fall outside the criteria of jobholders can opt-in, in which case the employer will have to make at least the minimum required contributions in respect of that employee.
Clearly there will be an increased administrative burden, and the employer will need to consider current arrangements and whether they meet the requirements or whether existing arrangements can be adapted/amended to comply; otherwise the employer will need to consider implementing arrangements that comply, and make arrangements for the provision of the required information to employees.
The Pensions Regulator will be taking a role in keeping employers informed of their duties in the run up to the staging dates.
Of course, all of these details are subject to the government review currently being undertaken, and we will hopefully be able to comment on this in a later article.
This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.