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In this edition of Employment Write we examine implications for employers of the Pensions Act 2008 (the Act).
Pensions Act 2008
This Act will overhaul the UK’s private pensions system by introducing the concept of auto-enrolment of eligible workers into pension schemes. Additionally, there will be requirements for employers to provide minimum contributions or benefits. These changes are intended to encourage greater pension savings.
The new duties are being rolled out to employers from October 2012 over 5 years on a month by month staged basis beginning with employers with the largest number of employees. Employers will need to carefully consider their obligations and ensure that they take all of the necessary preparatory steps.
The Employer’s Duties
The Act places various new duties on employers. In summary, these are as follows:
- giving specified information to groups of workers within the specified categories;
- enrolling ‘Eligible Workers’ into a pension scheme without the need for any action by the worker;
- arranging membership of a pension scheme for workers who choose to opt in or join a pension scheme;
- administering the opt out process for workers who decide they do not want to be a member of a pension scheme;
- ultimately, making the required contributions to the pension scheme.
When the Duties Arise
Employers are required to register with the number of people in the employer’s largest PAYE scheme as of 1 April 2012. It does not matter if the size of the PAYE scheme subsequently changes, the staging date will remain the same. Employers are also required to register with the Pensions Regulator shortly after their relevant staging date. The table below broadly sets out the staging dates. Specific dates have been set within these broad categories in accordance with the size of the PAYE scheme.
An employer can choose to enrol employees in advance of the staging date, but it must ensure that the prescribed procedure is followed. Employers should be able to calculate their own relevant staging date but, in any event, the Pensions Regulator will contact each employer 12 months and 3 months prior to the relevant staging date.
Some small employers may be able to modify their staging date to a prescribed date. Small employers are those who had fewer than 50 workers on 1 April 2012 but who had or were part of a PAYE scheme in which there were more than 50 persons as of 1 April 2012. This may occur, for example, in the context of group companies.
Who Must be Enrolled
An employer will need to assess its workforce in order to determine which categories its employees and workers fall into. This will then determine the employer’s obligations in relation to each worker.
Eligible Jobholders must be automatically enrolled by their employers into an Automatic Enrolment Scheme on the Eligible Jobholder’s Automatic Enrolment Date (the AED) unless they are already an active member of a qualifying scheme with that employer. Employers are allowed to operate a waiting period and delay an Eligible
Jobholder’s AED for up to three months by giving the jobholder the notice prescribed in the Act. This is referred to as Postponement and it is expected to be utilised by most employers.
An employer must also inform Eligible Jobholders that they have been (or will be) automatically enrolled, what this means for them, their right to opt out and their right to opt back in. In the interest of simplicity, employers may decide to enrol all new joiners in a qualifying scheme when they start work or after they have been employed for three months (utilising the postponement period), regardless of whether or not they are an
Eligible Jobholder. The Pensions Regulator has termed this approach Contractual Enrolment.
The benefit of Contractual Enrolment is that it will remove the need to continually assess individual workers. However, there will still be an administrative burden. This will include the actual enrolment process, providing the employee with the required statutory information and the process of reassessing their status if they subsequently decide to leave the contractual scheme (in which case the normal rules would apply again).
Employers will be required to undertake automatic re-enrolment of Eligible Jobholders every three years. This is to ensure that Jobholders who have opted out of a scheme will be forced to regularly reconsider their pension arrangements.
Opting in and out
Having been automatically enrolled into a scheme, a worker has a right to opt out of the scheme. However, if a worker decides to opt-out, the worker can change his/her mind and join the employer’s scheme at a later date (by giving the prescribed notice). The right to opt out will not apply to workers who are already active members of the employer’s qualifying scheme as of their AED or if they have been contractually enrolled. A worker in such circumstances who wishes to leave the pension scheme will need to follow the relevant rules of their particular scheme.
Non-Eligible Jobholders have the right to opt in to the employer’s scheme. The process for this is the same as when an Eligible Jobholder opts back into a scheme after previously opting out of membership. On joining the Non-Eligible Jobholders will be entitled to receive the benefit of mandatory minimum employer contributions (or benefits) in the same way as auto-enrolled Eligible Jobholders.
Entitled Workers can give their employer notice that they wish to join a registered pension scheme. This doesn’t have to be the same scheme used for auto-enrolment and the employer is not required to contribute to the scheme. The employer will however be required to administer deduction of contributions on behalf of the Entitled Worker. The employer will also be required to provide the Entitled Worker with prescribed information about joining a pension scheme. There is no statutory right to opt out for Entitled Workers.
Employers must inform both Non-Eligible Jobholders and Entitled Workers of their right to opt in to a pension scheme. The employer will also have to continue to assess the earnings (and age) of both categories of worker in order to monitor when they become Eligible Jobholders and subject to the automatic enrolment provisions.
Pension Schemes, Contributions and Benefits
Eligible Jobholders must be automatically enrolled by their employers into an Automatic Enrolment Scheme unless they are already an active member of a qualifying scheme with that employer.
To be a qualifying scheme, an employer’s pension scheme must be an occupational or personal pension scheme which is tax registered and satisfies specific minimum requirements (which depend on whether it is a defined contribution, defined benefit or hybrid scheme).
The basic minimum requirement for a defined contribution scheme is that the employer must make specified minimum contributions in respect of the jobholder. Contribution requirements will be phased in over 6 years. Eventually, the minimum total contribution will be 8% of the jobholder’s earnings (a minimum 3% of which must be the employer’s contribution).
The minimum requirements for a defined benefit scheme are based on the benefits which the jobholder is entitled to under the scheme. The scheme must provide benefits that are broadly equivalent to (or better) than a hypothetical test scheme standard.
There are separate requirements for hybrid schemes which provide an element of both contributions and benefits. These requirements will depend on the nature of the scheme.
Auto Enrolment Schemes
To qualify as an Automatic Enrolment Scheme, the pension scheme must meet the qualifying scheme requirements and also the additional automatic enrolment criteria. The automatic enrolment criteria are essentially that the pension scheme rules must not contain any provisions which could act as a barrier to automatic enrolment (for example, the requirement for a minimum age to join the scheme), or which require the worker to provide any information or to express a choice in order to remain an active member of the scheme.
The Government has established the National Employment Savings Trust (NEST), an automatic enrolment defined contribution scheme, to enable employers who do not have their own Automatic Enrolment Scheme to meet their automatic enrolment duties.
With effect from 1st October 2012, the Act abolishes the previous requirements in relation to stakeholder pensions, which are effectively replaced by the automatic enrolment regime.
Employment Protection Measures
The Act prescribes various safeguards in order to protect the rights of individuals to have access to pension schemes. These rights, on the whole, apply to all workers regardless of whether or not they are Eligible Jobholders, Jobholders or Entitled Workers. The safeguards mean that employers must ensure that they do not:
- take any action (or omission) by which an Eligible Jobholder ceases to be an active member of the qualifying scheme;
- take any action (or omission) by which a scheme ceases to be a qualifying scheme;
- take any action for the sole or main purpose of inducing a jobholder to opt out of a qualifying scheme, or worker to give up membership of a pension scheme (“inducement”);
- ask any questions or make any statements to either state or imply that a job candidate’s success depends on whether or not they intend to opt out of pension scheme (“prohibited recruitment conduct”); or
- breach the employment rights of individuals not to be unfairly dismissed or to suffer a detriment on grounds related to the new employer duties.
The new Act also introduces penalties for non compliance and creates new criminal offences, such as wilful failure to comply with Act’s auto-enrolment provisions, punishable by imprisonment and/or fine.
The Pensions Regulator has advised employers to follow a seven step process to ensure that they comply with all of their new duties
- Know the relevant staging date;
- Assess the workforce;
- Review any pension arrangements;
- Communicate the changes to all of the workers;
- Automatically enrol the Eligible Jobholders;
- Register with the Pensions Regulator and commence record keeping; and
- Contribute to workers’ pensions.
We also recommend that, from a practical perspective, smaller employers should consider whether the relevant staging date can or should be pushed back. Employers may also wish to review and amend contracts of employment, handbooks, offer letters and induction information to accommodate these changes and to ensure that the requirements to provide information under the Employment Rights Act 1996 and the Pensions Act 2008 are satisfied.
It will also be appropriate to consider whether data protection consents are adequate for the purpose of facilitating pension benefits through third party providers.
Other News In Brief
The Government has confirmed that Tribunal fees will be introduced next summer. There will be a two stage charging system, with the first fee being due at the issue of a claim and the second fee due prior to the hearing. The level of the fee will depend on the type of claim and stage in proceedings (and will be higher if a case involves multiple claimants).
There will also be fees payable when making certain applications, for example, a review of a judgment, to issue a counter claim and to request written reasons for a Tribunal’s decision. It is also intended that Tribunal Judges will be given a discretionary power to order an unsuccessful party to bear the other side’s fees.
A “fee remission” system will also apply. No fee will be payable by individuals in receipt of benefits such as Income Support or Jobseeker’s Allowance or who have gross income less than a prescribed amount. It is intended that this remission system will address concerns that the fee system will prevent access to justice for those without the ability to pay.
Review of Tribunal System: Mr Justice Underhill’s review of the Tribunal system and rules was published over the Summer. This proposes (amongst other things) the adoption of new shorter and simpler rules to assist with more efficient case management. Another proposal is the removal of the cap (of £20,000) on cost awards. The Government is now consulting on the best way to implement these proposals.
The Enterprise and Regulatory Reform Bill continues its progress through the Houses of Parliament. This will rename Compromise Agreements as Settlement Agreements, create standard format settlement agreements and also introduce “protected conversations” to enable frank discussions regarding an employee’s future with an employer.
The Government is currently consulting on proposed template letters and agreements and has asked for views as to what behaviour should be excluded from the protection offered by “protected conversations” (for example discrimination, and undue pressure to accept an offer). The Bill will also introduce:
- pre-claim conciliation periods;
- financial penalties for employers who lose at Tribunal; and
- a different maximum compensatory award payable for unfair dismissal. This proposal is currently subject to consultation but it has been suggested that the cap of £72,300 is likely to be reduced to 12 months’ salary.
Please keep an eye on our website for the latest developments as this Bill passes through Parliament.