2012 Pension Reforms – Completing the Picture
Following on from our previous article on the ‘Progression of 2012 reforms’, we can now expand on the various topics covered in the consultation on ‘Workplace Pension Reform - Completing the Picture’.
Following on from our previous article on the ‘Progression of 2012 reforms’, we can now expand on the various topics covered in the consultation on 'Workplace Pension Reform - Completing the Picture'.
Transitional Arrangements
To reduce the impact of automatic enrolment on employers, the Government has set out a series of transitional measures to help ease the introduction of these provisions.
- Staged process for entering employers into the automatic enrolment regime
This process will occur in monthly stages over a three year period from October 2012 to September 2015. Employers will be split into approximately 25-30 groups based on the number of employees in their PAYE scheme(s), with the largest employers having to comply first with the new automatic enrolment duties.
Each group will be given a ‘staging date’ by the Pensions Regulator, although an employer will be able to apply for an earlier date if they so wish. The Regulator will issue a reminder including details of the employer duties 12 months, and again at 3 months, before this date.
- Phased minimum contributions
Employers using a defined contribution scheme will only be required to pay contributions of at least 1% (in total 2%) of the jobholder’s qualifying earnings up to the end of the staging process (i.e. September 2015), increasing to at least 2% (in total 5%) for the following year and at least 3% (in total 8%) thereafter.
Within the enrolment information provided by the employer, the jobholder must be informed of any changes in contribution rates as a result of this phasing.
- Transitional arrangements for defined benefit and hybrid schemes
Where an employer runs a qualifying defined benefit or hybrid scheme, then they will be able to defer automatic enrolment until the end of the staging process for jobholders that are eligible to join throughout this period.
Opting In
Workers that fall outside of the automatic enrolment age band (i.e. over age 16 and under 22, or over State Pension Age but under 75) will be able to opt in to a qualifying scheme and receive an employer contribution where they have qualifying earnings.
Workers earning less than qualifying earnings will be able to request that their employer enters them into a tax registered pension scheme (not necessarily a qualifying scheme), but no employer contribution will be required.
Automatic Re-enrolment
Jobholders will have to be automatically re-enrolled every three years if they continue to work for the same employer. The employer will only have to carry out one re-enrolment exercise every three years based on their staging date (and not, for example, based on the date an individual jobholder opted out).
An exception to re-enrolment will be made where the jobholder has opted out of a qualifying scheme within 12 months of the re-enrolment date.
Employers to maintain membership of a qualifying scheme
Unless the jobholder opts out of scheme membership, an employer must make sure that jobholders remain active members of a qualifying scheme. Where an employer wishes to change their qualifying pension scheme, then it will be acceptable to allow a one month gap between membership of the old and new scheme.
Certification of a qualifying scheme
A certification process will allow schemes to continue to use their existing definitions of pensionable pay and contribution structures, yet certify that they meet overall quality requirements over the period of the certificate. The certification process is required because many schemes use basic pay for their pensionable pay definition, whereas the definition of qualifying earnings includes items other than just basic pay, e.g. overtime and bonuses.
The overall quality test varies depending on the type of scheme; a brief summary is set out below:
Defined contribution schemes - the minimum contributions (subject to phasing-in) must be 8% of qualifying earnings of which the employer must pay at least 3%.
Defined benefit schemes - must either have a current Reference Scheme Test certificate in place or satisfy the ‘test scheme standard’ (TSS). The TSS requires the annual pension at State Pension Age to be at least 1/120th of average qualifying earnings in last 3 tax years prior to date of retirement, multiplied by years of pensionable service (max 40)
Career average schemes – whilst these schemes will be tested as defined benefit schemes, it is important to note that if they do not provide for the revaluation of accrued benefits in relation to a jobholder then they may be excluded from being a qualifying scheme.
Hybrid schemes - The test required will vary depending on the nature of benefits provided. This could be based on a DB, DC or a combined method.
Non-UK schemes - can be used as a qualifying scheme where they meet one of the tests set out above, provide an income in retirement, and are regulated by a relevant body.
Employer compliance
Employers will be required to register with the Pensions Regulator within 9 weeks of their staging date and then re-register every 3 years. This will require providing information about how they have met their automatic enrolment duties as well as membership statistics, including the number of opt-outs.
To ensure compliance, the Regulator will require employers to keep records of the pension arrangements they used to discharge their duties, the enrolment of jobholders and opt-out/opt-in processes, and the contributions they have paid. As well as the standard member information, pension scheme providers will have to keep records of enrolments and opt-outs in respect of each employer.
Whilst the Regulator’s approach is to educate and enable in the first instance, it will have the power to issue fixed and escalating penalty notices where there is evidence that the employer has not met their duties under the automatic enrolment regime. The financial penalties vary in amount depending on the nature of the non-compliance and the size of employer (determined by number of employees).
Consultation details
The consultation will run for six weeks up to 5 November 2009. If you would like to view the consultation in full then please use the link below:
www.dwp.gov.uk/docs/workplace-pension-reform-completing-the-picture-consultation240909.pdf
