This article examines the key workplace pension scheme requirements.
Between October 2012 and November 2016, depending upon their size, employers will be required to provide pension schemes for nearly all of their employees. Employers will be required to pay a minimum level of contributions to those schemes and employees will also be required to pay contributions to the scheme.
Even if an employer already provides a pension scheme for their workforce, and make pension contributions for their employees, they will still have some new obligations to meet.
Employer duties are to:
- pay contributions for your employees of at least a minimum amount
- auto enrol and re-enrol all qualifying employees into a qualifying scheme
- register the qualifying scheme with the Pension Regulator.
Employers must not:
- encourage workers to opt out of the qualifying scheme
- discourage employees from joining the scheme.
What is required?
Employers must automatically enrol employees into a pension scheme and make a contribution of at least a minimum level towards it.
Not all employees have to be automatically enrolled into a scheme, only those who are aged between 22 and state pension age who earn more than £10,000 per annum (2015/16) and work in the UK. These employees may choose to ‘opt out’ of the scheme but only after they have been automatically enrolled by you. You are also required to tell any other workers you may have that they can opt into the scheme.
When do employers have to start doing this?
An employer will be given a date from which these requirements will have to be in place. This is known as the employer's ‘staging date’. The Pensions Regulator will notify an employer between 6 to 12 months before their staging date.
What pension schemes can be used to meet these requirements?
Only schemes that meet the Qualifying Scheme standard can be used for these requirements.
What is the minimum Qualifying Scheme standard?
Simply, a qualifying scheme is one that receives at least a minimum level of contributions.
There must be a total minimum contribution in respect of each worker of at least 8% of qualifying earnings (qualifying earnings are defined below). Of this at least 3% of qualifying earnings must be an employer contribution with the remaining 5% payable by the employee including HMRC's added basic rate tax relief. The qualifying earnings band is designed to set minimum contributions, not a maximum saving level.
Qualifying earnings refers to earnings between £5,824 and £42,385* made up of any of the following components:
- Statutory sick pay
- Statutory maternity pay
- Ordinary or additional statutory paternity pay
- Statutory adoption pay
Calculating the minimum contribution as a percentage of all these earnings components can be complex. However, there is an alternative known as certification.
* These being equivalent to the National Insurance contribution lower and upper earnings limits.
What is Certification?
Many existing schemes base contribution amounts on percentage rates of pensionable pay. The definition of pensionable pay is likely to be different to qualifying earnings. For example, pensionable pay may be based on basic pay and may require contributions to be deducted from the first pound earned rather than on a band of earnings.
In recognition of this, employers are able to self-certify that they meet the minimum contribution requirement if the scheme requires (or agreement, in the case of a group personal pension) contributions in accordance with one of the following criteria.
- A total contribution of 9% of pensionable earnings (with an employer contribution of at least 4% of pensionable earnings).
- A total contribution of 8% of pensionable earnings (with an employer contribution of at least 3% of pensionable earnings) provided pensionable earnings are at least 85% of total earnings.
- A total minimum contribution of at least 7% of all earnings (with an employer contribution of at least 3%).
For criteria 1 and 2 pensionable pay must be at least equal to basic pay.
Which employees will need to be auto-enrolled?
On your staging date you will need to assess your workforce. Employees aged between 22 and State Pension age who earn at least £10,000 p.a. (in 2015/16), known as ‘eligible jobholders’, must be put into a qualifying pension scheme automatically if they are not members of one already.
What other help is available?
The Pensions Regulator is responsible for the delivery of communications and guidance to employer's. There is a plethora of information available on the Regulators website.
They have also launched an online tool to help employers assess whether their current scheme can continue to be used following their staging date. The tool can be accessed here.
This article is based on Old Mutual Wealth’s interpretation of the law and HM Revenue & Customs practice as at April 2015. We believe this interpretation is correct, but cannot guarantee it. Tax relief and the tax treatment of investment funds may change.