Updated to reflect new earnings thresholds from the start of the 2013/14 tax year.
Auto-enrolment: a quick guide
The main points about new legal requirements that mean all employers in the UK must automatically enrol eligible jobholders in a pension scheme from a date after 1 October 2012. Under a five-and-a-half-year staging process, employers must enrol eligible jobholders in a qualifying pension scheme or the National Employment Savings Trust (NEST), unless they are already members of a qualifying scheme.
New laws that came into force on 30 June 2012 will eventually require all UK employers to automatically enrol eligible jobholders in a pension scheme. This note summarises the key points about the regime.
For a closer look at the measures, including detailed cross-references to the legislative provisions enacted in the Pensions Act 2008 (as amended by the Pensions Act 2011) and underlying regulations, see Practice note, Auto-enrolment: overview (www.practicallaw.com/4-500-1097).
Implementing the new employer duties
The new duties will eventually apply to all employers in the United Kingdom. They came into force on 30 June 2012, but are being formally implemented over a five-and-a-half-year period that started on 1 October 2012, with larger employers being affected before smaller employers and new businesses.
From the date an employer becomes subject to the new duties - referred to as its "staging date" - the employer must automatically enrol its eligible jobholders (www.practicallaw.com/2-521-1968) in an automatic enrolment scheme (www.practicallaw.com/4-521-1745), unless a jobholder is already an active member of the employer's qualifying scheme (www.practicallaw.com/2-521-1751). An employer can use an occupational (www.practicallaw.com/8-107-6900) or personal pension scheme (www.practicallaw.com/4-107-7001) as an automatic enrolment scheme if it meets certain quality requirements or else enrol jobholders in NEST (www.practicallaw.com/7-501-1896), the central government-established scheme. Details about staging dates are available by checking the Staging dates timeline (www.practicallaw.com/6-506-5205) published by the Pensions Regulator.
To ease the compliance burden, staging dates for small businesses have been delayed. Broadly, employers with between 50 and 249 workers have been assigned revised staging dates running from 1 April 2014 to 1 April 2015. Employers with fewer than 50 workers have been given staging dates between 1 June 2015 and 1 April 2017. New businesses have staging dates at the end of the overall timetable.
NEST is an occupational DC scheme set up under trust. There is an annual limit on contributions to NEST (£4,500 in the 2013/14 tax year), but this is due to be abolished in April 2017. Transfers into and out of NEST are currently banned, though this prohibition will be lifted when the DWP's new "pot-follows-member" automatic transfer mechanism is introduced.
Assessing whether a scheme can be used for auto-enrolment
When checking whether a scheme can be used for auto-enrolment, different quality tests apply depending on whether the scheme is a defined contribution (DC) scheme (www.practicallaw.com/6-107-6072), a defined benefit (DB) scheme (www.practicallaw.com/0-107-7545) or a hybrid scheme (www.practicallaw.com/7-206-1984).
An employer with a DC scheme will be able to self-certify in advance that its scheme satisfies the quality test if certain criteria are met. A contracted-out DB scheme automatically counts as a qualifying scheme.
Eligibility requirements and paying minimum contributions
To be eligible for auto-enrolment, a worker must qualify as a "jobholder". Jobholders include permanent and temporary employees and agency workers. In addition, the worker must be between age 22 and state pension age and must earn at least £9,440 a year (in the 2013/14 tax year). Employers can choose to use a three-month postponement period before a jobholder is enrolled.
If an employer auto-enrols its eligible jobholders in a qualifying scheme operating on a DC basis, it will eventually be obliged to pay contributions of 3% of a jobholder's earnings that fall within the qualifying earnings (www.practicallaw.com/3-521-2175) band each year, with jobholders ultimately required to pay 5% of band earnings. These requirements are being phased in over six years. For 2013/14, an employer is required to pay 1% of a jobholder's qualifying earnings, while the jobholder is also required to pay 1%.
Opting out and opting in
Jobholders who have been automatically enrolled will have a statutory right to opt out of whichever scheme they have joined by giving notice within a month of joining (due to be extended to six weeks from April 2014). Jobholders who have opted out will be automatically re-enrolled every three years during a six-month window.
Jobholders who are not automatically enrolled (for example, because they earn less than the earnings trigger or they opted out or are aged under 22) can opt in by giving their employer notice requiring the employer to arrange for them to join an automatic enrolment scheme. But they can only do this once in a 12-month period. Individuals earning less than the lower end of the qualifying earnings band can ask to join a pension scheme too, but will not be entitled to receive any employer contributions.
Telling jobholders about auto-enrolment
Employers will be required to provide information to jobholders (and other workers) about auto-enrolment, including details of the pension scheme that they are using and the right to opt out. The Pensions Regulator has published an Employer letter template tool that can be used to generate standard-form communications.
Employers will not be allowed to induce jobholders to opt out of scheme membership or make job offers conditional on opting out. These employment protection measures came into force on 30 June 2012 and apply to an employer even before it has reached its staging date.
The Pensions Regulator will police employer compliance and has issued Detailed guidance. Some of its functions will be delegated to the private sector. Employers that breach the new duties will face compliance notices and penalties that vary according to the employer's size. Large employers that do not comply could be liable for escalating penalties of £10,000 a day. Criminal penalties could apply in the case of "wilful" failure to comply.
Further reading and listening
For more information, see the following practice notes:
For a standard-form letter of advice to an employer client explaining the basics about auto-enrolment, see Standard document, Advice to an employer about auto-enrolment and new pension duties (www.practicallaw.com/9-517-3798).
We have also produced a CPD-accredited Podcast: Getting ready for auto-enrolment: key pensions issues (www.practicallaw.com/5-509-1224).