Pension Personal Accounts – Third DWP consultation document publishedThursday, October 8th, 2009
The Department for Work and Pensions (DWP) has published the third of the three consultation documents that were promised on the rules and procedures that will apply to the provision by employers of Pension Personal Accounts. Employers will be required, during a transitional period starting in 2012, to enrol employees in either an existing occupational or personal pension scheme or in a new workplace pension personal account scheme. Whichever scheme is used by an employer to meet the statutory requirements, it must provide for automatic enrolment of jobholders and the employer must make contributions into the scheme.
This third consultation considers
- arrangements for implementing the workplace pension reforms, including measures to manage the burdens on business, such as allowing employers to phase in contributions gradually over time.
- Elements of the employer duty requirements not covered in the earlier consultations, including pay reference periods; voluntary joining for individuals not eligible for automatic enrolment; re-enrolment of eligible individuals; requirements on employers to maintain membership of a qualifying pension scheme; changes to the “19-day rule”; and modifications to when postponement can be used for high qualify schemes
- the quality requirements for pension schemes, including self-certification for defined contribution schemes
- powers to enforce compliance with the employer requirements.
The consultation document also incorporates the two key sets of regulations, albeit in draft form, that will govern the implementation, administration, automatic enrolment and compliance aspects of the new workplace pension personal accounts. As the final shape and content of the reforms are now settled, these notes will provide a fairly detailed explanation of how the reformed pension arrangements are expected to operate, with particular emphasis on their effect on payroll and personnel procedures. Note, however, that some aspects of the arrangements are still the subject of consultation, so the details below should not be taken to be the final scheme.
First, however, is a summary of the new proposals that are presented in the document for consultation:
- The employer duties relating to pension personal accounts are now scheduled to commence in October 2012, not in April of that year.
- Other than for defined benefit and all hybrid schemes (i.e. schemes that may or may not provide defined benefits when they are eventually drawn), the reforms will be implemented in stages, involving around 25 to 30 groups of employers, generally month-by-month over a 3-year period, with an average of 100,000 new employers being brought into the scheme each month. Employers will be able to join the scheme earlier if they wish.
- Employers will be included by size, starting generally with the largest and ending with the smallest, but with some small employers included at an early stage. Employer size will be decided in the same way as for online filing, using the number of employees in each PAYE scheme.
- During the 3-year implementation period, total contributions must be at least 2% of qualifying earnings, with employers required to pay 1%. In the 4th year, from October 2015, the total contributions will be at least 5%, with at least 2% from the employer. From the 5th year, starting October 2016, total contributions must be at least 8%, with at least 3% from the employer.
- Employers with defined benefit and hybrid schemes may defer automatic enrolment until the end of the 3-year transition period, although jobholders must be able to opt in to a qualifying scheme at any time during that period. If a defined benefit scheme closes during the transition period, the employer will have to pay missed employer contributions back to the original automatic enrolment date.
Other issues are raised for consultation and these are highlighted at the appropriate place in the general description of the scheme presented below.
Statutory basis for pension personal accounts
The Pensions Act 2008 requires pension personal accounts to be established through secondary legislation. The following draft Regulations have been published for consultation:
- the Employers’ Duties (Implementation) Regulations 2010, which define the way in which the date from which each employer’s duties apply is decided and how an employer can bring that date forward.
- the Occupational and Personal Pension Schemes (Automatic Enrolment) Regulations 2010 which define the rules for pay reference periods, voluntary saving, automatic re-enrolment, and the employer duty to maintain active membership.
- the Employers’ Duties (Registration and Compliance) Regulations 2010 which consider registration, record keeping, compliance and penalties.
- the Pension Scheme Order 2009, which sets out the way in which the PPA scheme, which employers may choose to use to meet their obligations to provide a workplace pension, will be established and operated.
- the Transfer Values (Disapplication) Regulations 2009 which, at least initially, prevents funds being transferred out of the scheme, other that at minimum pension age or in the event of incapacity.
The 2008 Act does not give a name to the scheme that will provide pension personal accounts if an employer chooses to use that facility to fulfil the new duties. It is unhelpfully called a “scheme established under section 67”. In these notes it will be known as the “pension personal accounts scheme” or “PPA scheme”.
The draft legislation has been prepared by the DWP in conjunction with the Pensions Regulator (TPR) and the Personal Accounts Delivery Authority (PADA). The Pensions Regulator is the UK regulator of workplace pension schemes and is responsible for compliance and enforcement with the laws governing such pension schemes. The PTR’s website is at http://www.thepensionsregulator.gov.uk/.
PADA is a non-departmental public body and was set up under the Pensions Act 2007. Its functions include advising on and assisting in the establishment and operation of the PPA scheme. Its powers were extended under the 2008 Act and PADA is now responsible for designing and procuring the administration elements of the scheme. It has its own website, at http://www.padeliveryauthority.org.uk/.
PADA will cease to be operational once the PPA scheme has been effectively handed over to the trustee corporation, after which the trustee corporation will manage the scheme on an on-going basis. The trustee corporation will also be a non-departmental public body, sponsored by the DWP, and will have 9 to 15 members. A member’s panel will be directly involved in the selection of trustees and an employer’s panel will ensure that the trustees take the views of employers into consideration in the running of the scheme.
It is estimated that the PPA scheme will have between 5 and 9 million members and hundreds of thousands of participating employers, who will not be associated in any way other than their use of the scheme for their workers. It is estimated that this may result in around £100–300 billion of funds under management in the scheme by 2050 in 2007/08 earnings terms. The intention is that the scheme will operate as much as possible like any other trust-based, multi-employer, occupational pension scheme. For example, it will be regulated by the Pensions Regulator. The scheme will provide benefits on retirement, death, the onset of ill-health or serious ill-health.
There will, however, be differences.
- The scheme will have a public service obligation to accept any employers that wish to use the scheme to fulfil their employer duties.
- Once an employer is participating in the scheme, the scheme will accept any worker enrolled by that employer.
- There will be no differentiation between contributing and non-contributing members. All members of the scheme will be able to remain active members and can choose to continue to contribute to the scheme until they access their savings at retirement.
- Members who have left the employment of a participating employer will be able to continue to make contributions irrespective of whether they are in employment or not.
- Self employed people will be able to join the scheme directly and make contributions.
- There will be an annual contribution limit of £3,600 (in 2006/07 earnings terms), adjusted annually in line with changes in average earnings.
- There will be a ban on the transfer of accrued benefits into and out of the scheme, other than in a limited number of circumstances.
- A members’ panel and employers’ panel will be established to allow the trustees to engage effectively with the diverse, large membership and employer population.
- Employers using the scheme to discharge their duties under the 2008 Act will not be able to postpone the automatic enrolment provisions (see Postponing automatic enrolment, below).
- The scheme is intended to become self-financing from member charges.
To clarify widespread misconceptions about the 2012 pension reforms, PADA published a series of “myths and realities” in 2009. See Delivery authority clarifies popular misconceptions, below.
- Jobholders are defined as workers who are
- contracted to work in the UK,
- aged at least 16 and under 75, and
- paid qualifying earnings by the employer in a pay reference period.
- The definition of worker is the same as in the Working Time Regulations 1998 and the National Minimum Wage Regulations 1999, namely:
- employees, i.e. persons who work under a contract of employment, and
- persons providing services personally to the other party to the contract, but that other party is not a client of the person’s business. Examples of workers are contractors working for the duration of a project for a single employer.
- However, the following are also workers:
- agency workers, (the employer being either the agency or the client, depending on which one is responsible for
- paying, or actually pays, the worker),
- civil servants and staff of the House of Commons and House of Lords,
- police constables and police cadets, and
- offshore workers, if a decision is made by government to include thembut the following are not workers:
- members of the armed forces,
- directors not employed under a contract of employment, unless at least one other person is employed under
- a contract of employment, and
- persons working on board a ship, unless a decision is made by government to include them.
- A person’s qualifying earnings in a pay reference period are that part of gross earnings that fall within the personal accounts earnings band (PAEB).
- The personal accounts earnings band (PAEB) has a lower annual limit of £5,035 and an upper limit of £33,540 (at 2006/07 levels). If the pay reference period is less than a year, the limits are adjusted proportionately. This band of earnings is used to calculate the pension contributions for defined contribution schemes (although the scheme’s own rules may be used to calculate contributions as long as they do not give a lower figure). The PAEB will be reviewed annually in line with increases in average earnings in order to maintain the value of contributions. It should be expected to be much higher by 2012.
- A person’s pay reference period is the person’s pay period, with a minimum of one week. It is used to check eligibility for automatic enrolment and to calculate scheme contributions. If an employee’s earnings exceed the lower PAEB limit on occasions but are normally lower, the pay reference period is 12 months. If earnings do not exceed the lower limit for the year, automatic enrolment will not apply.
- Earnings are defined as “salary, wages, commission, bonuses and overtime”, plus any SSP, SMP, SPP and SAP. A scheme’s own definition of earnings may be used as long as it does not give a lower value.
- An employer’s staging date is the date from which they are first obliged to meet their employer obligations of automatic enrolment and employer contributions.
- An automatic enrolment scheme is a qualifying scheme that
- is used for automatic enrolment and re-enrolment and allows member to opt it, and
- does not require enrolled jobholders to express a choice, e.g. about the fund in which their contributions are
- invested, or provide information, in order to remain active members. See Qualifying schemes, below.
- defined contribution pension scheme is one where the final pension benefits are related directly to the level of contributions and investment. Occupational money purchase schemes and personal pension schemes are examples of defined contribution schemes. All defined contributions schemes will be not-contracted schemes from 2012.
- A defined benefit pension scheme is one where the final pension benefits are guaranteed, irrespective of employee contributions. They are also known as “final salary” or “salary-related” pension schemes. They can continue to be contracted-out schemes from 2012.
- A hybrid pension scheme is one where it is not known, during its operation, whether it will deliver money purchase or final salary benefits until retirement.
The PPA scheme will be a qualifying scheme. All other pension schemes used by employers to meet their obligations must be able to demonstrate that they are qualifying schemes. If a pension scheme does not meet some of the quality requirements but nevertheless compensates in other respects so that the pension benefits are at least as good overall, the employer can self-certify to that effect for up to a year while the scheme rules are adjusted. See Certification, below.
A pension scheme is a qualifying scheme if it is either a registered occupational pension scheme or a registered personal pension scheme and meets specified quality requirements. However, a scheme that provides average salary benefits but does not provide for the benefits to be revalued, or that makes revaluation discretionary or dependent on the employer’s consent, is not a qualifying scheme.
From 2012, under separate pension reforms, defined contribution schemes, whether they are occupational or personal pension schemes, will be not contracted-out schemes.
The requirement for a scheme to be tax registered will not apply to schemes that operate outside of the UK with members who will receive UK tax relief on their contributions. However, to ensure that a non-UK scheme provides secure workplace pension arrangements, the scheme must provide an income for retirement, and must be regulated by a regulatory body. In addition, if the non-UK scheme does not qualify for UK tax relief, the employer will be required to make extra contributions so that the full 8% of contributions on qualifying earnings are paid. (These arrangements are the subject of consultation, as are concerns over the inability of TPR to protect members’ benefits from non-EU schemes.)
The quality requirements depend on type of pension scheme:
- Defined contribution schemes – the scheme must require employer contributions of at least 3% of qualifying earnings in a 12-month pay reference period, with total contributions from both employer and jobholder, including tax relief, of at least 8%. The Act allows for regulations to set a minimum amount below which contributions may not be accepted (because it is not economical to handle them) but no such limit has currently been set. Pension schemes may continue to calculate contributions according to the scheme rules, as long as they are not less than 3% of qualifying earnings, as defined. See Definitions, above.The 8% minimum combined contribution is made up of 3% from the employer, 4% from the jobholder and 1% from the State in the form of tax relief (For example, net pay after deducting basic rate tax from £125 is £100. If the employee’s contribution is 4%, reducing gross pay to £120, net pay is £96. The scheme gets £5 but the employee only pays £4.) There will be an annual contribution limit of £3,600 (2006/07 levels), for jobholder contributions, although this will be increased in line with earnings to 2012.Only the employer minimum contribution is defined. This gives employers the option of increasing their contribution and decreasing the jobholder contribution, as long as, combined, they come to at least 8%.
- Defined benefit schemes – the scheme must
- have either a contracting-out certificate in force, or
- provide for
- entitlement to a pension starting at the appropriate age (currently 65) and continuing for life, and
- an annual pension at that age that must be at least 1/120th of average qualifying earnings in the last three years before the end of pensionable service, multiplied by the number of years pensionable service up to a maximum of 40 (i.e. a maximum of 1/3 of pre-retirement earnings).
- Hybrid schemes – depending on the benefits that are provided on retirement, hybrid schemes must meet the quality requirements for defined contribution or defined benefit schemes, or a combination or modification of both, as defined in the Regulations.
DWP has provided, as part of the current consultation document, detailed guidance for actuaries and employers on how to decide whether a pension scheme fully meets the qualify requirements.
A certification process will be available to employers with their own defined contribution schemes that will allow them to continue with their existing scheme rules and to improve them to the full quality requirements during the period of certification. For example, the existing scheme rules may define “pensionable pay” as basic pay, resulting in lower contributions than would be payable using qualifying earnings, but may compensate for the shortfall in some other way, for example by making higher employer contributions.
The form of the certificate is prescribed in regulations and requires the employer to certify that “in my opinion, the above scheme(s) is/are able to satisfy the relevant quality requirement identified above throughout the certification period in relation to the jobholders I employ who are active members of those scheme(s).”
The employer may choose the dates between which the certificate is in force, with a maximum of 12 months. This is a self-certification process and the employer must retain the signed certificate for six years.
If, at the end of the certification period, a review shows that some jobholders have received contributions below the statutory minimum, the employer will have to make retrospective top-up payments. However, such top-up will not be required if the shortfall is not more than 5% of expected contributions and no more than 10% of jobholders are affected.
After the first certification period, the employer may re-certify for up to another year, at the end of which there will be a further review and, if necessary, shortfall payments. There is no limit set in the Regulations to the number of times an employer may re-certify. However, no jobholder may suffer a shortfall more than once in two years.
The 2008 Act is limited in its scope to England, Scotland and Wales, but Northern Ireland is expected to have the same or a similar scheme. It imposes two key duties on employers:
- Automatic enrolment: Enrolment of eligible jobholders who are not in a qualifying pension scheme into an automatic enrolment scheme, from the first day they become eligible but with the right to opt out. Employers may choose the pension scheme they provide, which must meet the defined quality requirements. The Secretary of State has powers to establish the PPA scheme in which employers can choose to participate.
- Maintain active membership: Maintenance of the jobholder’s membership of a qualifying scheme, including making relevant contributions, so long as the jobholder chooses to be part of it.
All of the various aspects of the duties of employers, as described in these notes, are expected to take effect from October 2012.
As currently proposed, employers will take up their duties in stages over a three-year implementation period that runs from October 2012 to October 2015, as follows:
- Each designated group of some 100,000 employers will take up their duties, i.e. automatic enrolment and employer contributions, on a designated date each month (the staging date), although there will be a number of single month breaks to tackle any backlogs. (Whether the staging date will be the first of the month, or the first working day of the month, or the first (named day) in the month is subject to consultation.)
- Large and medium-sized employers (50 or more workers) will be required to take up their duties during the first year, with small and micro employers joining in over the 18 months to 2 years.
- It is expected that the staging date for each employer will be included in a Schedule to the Regulations, based on their PAYE reference number.
- Employer size will be determined using the latest information available to TPR about the number of persons in each PAYE scheme. However, employers with more than one PAYE scheme will be required to take up their duties in respect of the jobholders in all of the schemes from the same staging date.
- New employers during the three-year transition period will be brought into scope in four groups at the end of the transition period. New employers after the transition period will have to take up their duties immediately.
- Some small employers will be brought into scope during the first year in order to identify potential problems.
- Individual employers will be able to take up their duties earlier than their staging date if they can demonstrate that they are ready to do so, e.g by identifying a suitable qualifying pension scheme, agreeing with the scheme that it can be used to meet the employer’s duties and notifying TPR accordingly. (How an employer should demonstrate that readiness to TPR is a subject for consultation.) If an employer has more than one PAYE scheme, all of them will have to be brought into scope at the same time. The PPA scheme trustees will be able to refuse an application if they are unable to manage the volume of work.
There are also transitional arrangements for the amount of contributions that must be made by employers in the first four years of the reforms, up to October 2016. See Transitional contribution arrangements, below.
Duty to enrol jobholders automatically
With effect from their staging date, employers must automatically enrol jobholders, who are at least age 22 but have not reached state pension age, into a qualifying scheme that meets the definition of an automatic enrolment scheme. Automatic enrolment occurs when a person first meets the criteria in that employment, i.e. a jobholder and at least age 22. The date on which this occurs is the automatic enrolment date, although there is a postponing automatic enrolment for up to three months in specific circumstances. See Postponing automatic enrolment, below.
The age 22 limit reflects the age from which the adult rate of the National Minimum Wage (NMW) is paid and recognises that, below that age, workers, particularly students, are more likely to move jobs frequently. (It is not clear whether the promised reduction in the adult NMW age to 21 will affect this age limit.)
Automatic enrolment does not occur if, within a period of twelve months, the jobholder was a member of a qualifying scheme but had chosen to end membership. This prevents jobholders being automatically re-enrolled soon after having decided to end membership.
Employers are required to provide information to both the jobholder and to the qualifying scheme in order for the enrolment to take place.
If a jobholder has two or more employments, automatic enrolment applies in each employment.
Workers who are out of work will be able to continue making contributions to their personal account. Self-employed people will be able to save in personal accounts of their own choosing.
The implications for employers are that appropriate procedures are in place to
- identify those workers who fall within the jobholder criteria
- identify those jobholders who will be eligible for automatic enrolment
- identify the automatic enrolment date for each jobholder, i.e.
- the staging date for all current qualifying workers
- the first day of employment if a new employee already meets the criteria, or
- the employee’s 22nd birthday, or
- the date from which the employee’s earnings exceed the lower earnings band threshold for the first time.
Automatic enrolment procedure
The first requirement is for the employer to enter into an arrangement with the PPA scheme or other qualifying pension scheme so that, within one month following the automatic enrolment date,
- if it is an occupational pension scheme, the jobholder becomes an active member of that scheme with effect from the enrolment date, or
- if it is a personal pension scheme, the jobholder is given specified terms and conditions about the scheme.
The specified terms and conditions referred to above are, at least,
- the nature and aim of the scheme,
- the services to be provided by the provider,
- the value of any contributions payable by the jobholder,
- the deductions and charges, and
- the scheme providers’ investment strategy (unless the jobholder chooses a different strategy).
If the scheme is a personal pension scheme, the jobholder is deemed to have agreed to be an active member of that scheme with effect from the enrolment date on the later of the date on which the employer gives the jobholder
- the specified terms and conditions referred to above, and
- the enrolment information.
The second requirement is for the employer to give, within one month after the automatic enrolment date,
- the enrolment information to the jobholder, and
- the jobholder information to the trustees or managers of the pension scheme.
The enrolment information is the following information:
- a statement that ‘You have been or will be automatically enrolled into a pension scheme to help you save for your retirement’
- the jobholder’s automatic enrolment date
- the name, address, telephone number and electronic contact details of the scheme into which the jobholder is or will be an active member
- the value* of any contributions payable to the scheme by the employer and the jobholder in any relevant pay reference period†
- a statement that any contributions payable to the scheme by the jobholder have been or will be deducted from any qualifying earnings or pensionable pay due to the jobholder in any relevant pay reference period
- confirmation as to whether tax relief is or will be through relief at source‡ or under net pay arrangements‡
- a statement that the jobholder may remain an active member of the scheme without employer interference unless the jobholder is or becomes an active member of another qualifying scheme
- a statement that the jobholder has a right to opt out of the scheme during the opt out period
- a statement indicating the start and end date of the opt out period applicable to the jobholder, where that information is known to the employer prior to the employer giving the enrolment information to the jobholder
- the source from which the opt out notice may be obtained
- a statement that opting out means that the jobholder will be treated for all purposes as not having become an active member of the scheme on that occasion
- a statement that, after an opt out notice is received by the employer, any contributions paid by the jobholder will be refunded to the jobholder by the employer
- a statement that, having opted out, the jobholder may opt in, in which case the employer will be required to arrange for that jobholder to become an active member of an automatic enrolment scheme once in any 12 month period
- a statement that, after the opt out period, the jobholder may cease to make contributions towards the pension in accordance with scheme rules
- a statement that a jobholder who opts out or who ceases active membership of the scheme will be automatically re-enrolled into an automatic enrolment scheme by the employer after three years
- a statement giving details of where to obtain further information about pensions and savings for retirement.* The value of contributions may be expressed as a fixed amount or a percentage of a jobholder’s remuneration.† This statement must also include any changes in contributions values as a result of the lower permitted contribution rates during the implementation period. See Implementation, above.‡ See Payroll deductions, below.
The enrolment information is
- the jobholder’s
- date of birth
- postal residential address
- automatic enrolment date
- national insurance number†
- value of gross earnings due to the jobholder in any relevant pay reference period (if this information is available to the employer)‡
- postal work address‡
- individual work e-mail address (if one is allocated to that jobholder)‡
- personal e-mail address (if the employer holds this information‡
- the value*, if any, of contributions payable by the employer and the jobholder in any relevant pay reference period.* The value of contributions may be expressed as a fixed amount or a percentage of a jobholder’s remuneration.† If not available on the automatic enrolment date, it must be provided within one month of the employee receiving it.‡ This information does not have to be provided if the trustees or managers of the pension scheme do not require it.
The third requirement is for the employer, on or after the automatic enrolment date, to deduct any jobholder contributions from the jobholder’s qualifying earnings or pensionable pay in any relevant pay reference period. Payment of the first deducted contributions to the pension scheme may be delayed for one extra month. See Opting out, below.
Postponing automatic enrolment
Employers using pension schemes other than the PPA scheme will be able to postpone automatic enrolment for a period of up to 90 days if, at the end of that period,
- in the case of defined contribution schemes, employer contributions are at least 6% of qualifying earnings and total contributions from both employer and jobholder, including tax relief, are at least 11%.
- in the case of defined benefit schemes, contributions have been made that maintain the same pension on retirement as would have applied if automatic enrolment had not been postponed.
Where a jobholder is affected by postponement of automatic enrolment, the employer must give that jobholder the following information in writing within one month after what would have been the automatic enrolment date:
- a statement giving the reasons for postponement of the automatic enrolment date
- a statement that during the period prior to the automatic enrolment date the jobholder has no entitlement to become an active member of an automatic enrolment scheme and therefore no entitlement to contributions payable by the employer
- the jobholder’s automatic enrolment date
- details of where to obtain further information about pensions and saving for retirement.
Postponement of automatic enrolment may not occur at all for jobholders who are engaged on a fixed short-term contract of three months or less.
Automatic enrolment does not make scheme membership compulsory. Some employees may not be able to save, for example, because of paying off high levels of debt. Those approaching retirement may wish to opt out or, if their accumulated pension funds amount to less than 1% of the lifetime limit (£16,000 in 2007/08), they may prefer to take these savings as a lump sum, 25% of which maybe taken tax free.
A jobholder who has become an active member of an automatic enrolment scheme may opt out of membership by giving the employer an opt out notice within one month after,
- in the case of an occupational pension scheme, the later of
- the date the jobholder became an active member of the scheme, and
- the date on which the jobholder was given the enrolment information
- in the case of a personal pension scheme, the date on which the jobholder was deemed to have become an active member of the scheme.
An opt-out notice may only be provided by the scheme in which the jobholder is an active member. The employer may not supply one.
The opt-out notice must be signed and dated by the jobholder and, if it was sent to the employer electronically, include a statement confirming that it was submitted by the jobholder personally.
The opt-out notice must be in the following form:
On receiving an opt-out notice, the employer must notify the scheme of which the jobholder is an active member. However, if the notice does not meet all of the above conditions, the employer must explain to the jobholder why it is invalid. The month period by which the notice must be provided is extended to six weeks, to allow the jobholder enough time to provide a valid notice.
On receiving a valid opt-out notice, the employer must arrange to refund all of the contributions that have been deducted from the jobholder’s qualifying earnings or pensionable pay, less any amount that must be retained as tax. If the employer receives the notice too late to make the refund with the pay due for the current pay reference period, it should be made in respect of the second pay reference period following the date the notice was given.
The scheme, on receiving the opt-out notice from the employer, must refund to the employer all of the jobholder and employer contributions that have paid to the scheme by the employer. This refund must be made before the date that is one month after the date on which the employer was given the opt-out notice.
In order to reduce the potential for refunding contributions when employees opt out, the current consultation document proposes to extend the date by which the first pension contributions deducted for new jobholders must be paid over to the scheme.
The standard rule is that contributions must be paid over by the 19th day of the month following the month in which the deduction was made, e.g. contributions deducted in October must be paid over by 19 November.
The rule that will apply only when a jobholder first becomes an active member of a pension scheme is that the contributions deducted
- between the automatic enrolment date, the automatic re-enrolment date, or the enrolment date (as the case may be), and
- the end of the opt out period
must be paid over by the 19th day of the second month following the month in which the deduction was made, e.g. contributions deducted in October must be paid over by 19 December.
The effect is that, if a jobholder decides to opt out, the time period for completing the opt out procedures will have ended before the contributions already deducted have been paid over to the scheme, allowing them to be refunded without the employer having to recover the contributions from the scheme.
Jobholders who do not qualify for automatic enrolment because they fall outside of the jobholder age limits, i.e. age 16 to 21, or over state pension age and under age 75, must be given, within one month following the staging date, the following information in writing:
- a statement that the jobholder may, by notice, require the employer to make arrangements for the jobholder to join an automatic enrolment scheme
- a statement that the opt-in notice must be in writing and be signed by the jobholder and where the notice is in an electronic format, include a statement confirming that the jobholder personally submitted the notice
- a statement that the opt-in notice must be given to the employer
- where the jobholder may become an active member of a defined contribution scheme,
- a statement that the jobholder may receive a contribution to the pension scheme from the employer and the value of that contribution in any relevant pay reference period, and
- the value* of the contributions which the jobholder will be required to make in any relevant pay reference period, and
- details of where to obtain further information about pensions and saving for retirement.* The value of contributions may be expressed as a fixed amount or a percentage of a jobholder’s remuneration.
There is no requirement for jobholders who have given notice to opt out of pension saving to be given the above information.
A jobholder wishing to opt-in must give the employer a written opt-in notice, signed by the jobholder and, if provided electronically, include a statement confirming that the jobholder personally submitted the notice. There is no prescribed format for the opt-in notice.
The procedures that the employer must follow on receiving an opt-in notice are the same as those that apply for automatic enrolment. The enrolment date is
- the first day of the jobholder’s relevant pay reference period which begins after the date on which the employee is given the opt-in notice, or
- where the notice is too late to be processed with the pay due for the current pay reference period, the first day of the second pay reference period following the date the notice was given.
If a jobholder withdraws an opt-in notice before the enrolment date, the employer need take no further action. An employee who opts in may opt out by following the standard opting out procedures. See Opting out, above.
Jobholders may give notice to opt-in more than once in a 12-month period but employers are not obliged to accept more than one notice in 12 months. This provision prevents employers having to keep enrolling a jobholder who has opted out a number of times in the same year.
Workers joining pension saving
Technically, only jobholders can “opt in”, but a similar facility is provided for workers who do not qualify for automatic enrolment because they earn below the lower PAEB limit (currently defined as £5,035 pa).
Within one month following the staging date, such workers must be given the following information in writing:
- a statement that the worker may, by notice, require the employer to make arrangements for the worker to join a pension scheme
- a statement that a joining notice must be in writing and be signed by the worker and where the notice is in an electronic format, include a statement confirming that the worker personally submitted the notice
- a statement that the worker may, in accordance with the scheme rules, choose how much to contribute to a pension scheme, and
- details of where to obtain further information about pensions and saving for retirement.
A worker wishing to join a pension scheme must give the employer a written joining notice, signed by the worker and, if provided electronically, include a statement confirming that the jobholder personally submitted the notice. There is no prescribed format for the joining notice.
On receiving a joining notice, the employer must arrange for the worker to become a member of a registered pension scheme, but not necessarily the same automatic enrolment scheme as used for jobholders. (Employers are not required to identify and set up such an alternative scheme unless a worker actually asks to join a scheme.)
As there is no requirement for the pension scheme provided to a worker in this situation to be a qualifying scheme, there are no other statutory rules relating to this arrangement, other than the normal requirement for the employer to provide the scheme with the necessary information about the worker. There is no requirement for the employer to make contributions. It would be expected that the employer would deduct the worker’s contributions from earnings and pay them over to the scheme.
On each three-year anniversary of the employer’s staging date, an employer must automatically re-enrol jobholders who are at least age 22 but have not reached state retirement age and who are not currently members of a qualifying scheme. An employer wishing to use a different date for automatic re-enrolment would have to opt to take up their employer duties earlier than the employer’s statutory staging date. See Employer duties, above.
Automatic re-enrolment follows the same procedures as automatic enrolment and jobholders have the same right to opt out if they so wish.
However, jobholders who have opted-out in the twelve months preceding the automatic re-enrolment date will be exempt from re-enrolment, on the basis that their reason for opting-out will still be valid.
In two exceptional situations, re-enrolment will be immediate:
- where a scheme is using the postponement facility because the employer will be making higher contributions and a third party, such as the scheme administrators, reduce the employer contribution rate, thereby losing the postponement facility
- where a third party, such as the scheme administrators, stop the scheme from being a qualifying scheme (in which case all jobholders must be re-enrolled in a new qualifying scheme), or end a jobholder’s membership (in which case the jobholder must be re-enrolled in another qualifying scheme).
Where workers lose jobholder status because their earnings fall below the PAEB limit or because they no longer work in the UK, re-enrolment occurs if and when their jobholder status resumes. However, re-enrolment is not necessary in these situations if the jobholder has simply become an inactive scheme member. In that situation it will only be necessary to arrange for active membership to be resumed.
Duty to maintain active membership
Employers have an ongoing duty to ensure that jobholders always have access to a qualifying scheme. An employer may not, deliberately or otherwise, bring active membership of a qualifying scheme to an end without putting the member into another scheme.
An employer may not, therefore,
- stop a scheme from qualifying, e.g. by paying less than the 8% minimum contributions into a defined contribution scheme,
- remove a jobholder from membership of a qualifying scheme, or
- force a jobholder to leave or opt-out of a scheme,
without acting to put the jobholder into another qualifying scheme.
Within two months after the automatic enrolment date, the employer must given jobholders who are active members of a qualifying scheme the following written information:
- the name, address and electronic contact details of the scheme of which the jobholder is an active member
- confirmation that the scheme in which the jobholder is an active member is a qualifying scheme
- that the jobholder may remain an active member of that qualifying scheme without employer interference unless the jobholder is or becomes an active member of another qualifying scheme.
If an employer changes one qualifying scheme for another, arrangements must be made for jobholders voluntarily to join the new scheme. If possible, membership of the new scheme should be continuous but a maximum period of one month is permitted between membership of the old scheme ending and membership of the new scheme starting.
Transitional contribution arrangements
Employers choosing to use the PPA scheme or operating an alternative qualifying defined contribution scheme, i.e. an occupational money purchase scheme or a personal pension scheme, will be able to phase in their contributions over two transitional periods.
- The first period is the three-year staging period, from October 2012 to October 2015. For most employers, however, the period will be less than three years as it will run from their staging date – sometime during the three-year period – up to October 2015. During this period, however long it is, the rules require employer contributions of at least 1% of qualifying earnings, and total contributions from both employer and jobholder, including tax relief, of at least 2%.
- The second period is one year, from October 2015 to October 2016. During that period, the scheme rules require employer contributions of at least 2% of qualifying earnings, and total contributions from both employer and jobholder, including tax relief, of at least 5%.
From October 2016, the full contributions will apply, i.e. employer contributions of at least 3% of qualifying earnings, and total contributions from both employer and jobholder, including tax relief, of at least 8%.
Different provisions apply to employers with a qualifying defined benefit scheme. The phased contribution rates cannot apply because contributions by employer and employee have to be at the levels required to maintain the value of the fund. Instead,
- in the case of existing employees who are not already scheme members, the automatic enrolment rules will not start to apply until the end of the three-year staging period, i.e. from October 2015. However, any such employees wishing to opt in at any time between the employer’s staging date and October 2015 will be able to do so immediately.
- in the case of new employees joining after the employer’s staging date, the automatic enrolment rules will apply immediately.
If an employer decides to close a defined benefit scheme during the three-year transitional period, any jobholders must be enrolled immediately into an alternative qualifying scheme. If the alternative scheme is the PPA scheme or an alternative defined contribution scheme, the employer must pay employer contributions backdated to the staging date.
Employers who automatically enrol, re-enrol or arrange for a jobholder to opt in to a scheme are permitted to deduct the jobholder’s contributions from the jobholder’s pay on or after the date on which they become active members of the scheme. The deduction is therefore made for the purpose of complying with a statutory duty, ensuring that it is not otherwise an unlawful deduction from wages under section 13 of the Employment Rights Act 1996.
As contributions are due from the automatic enrolment date, the first payroll deduction should be made on the jobholder’s first payday that falls on or immediately after that later date.
Employee pension contributions will be deducted
- using the “net pay arrangement”, i.e. pre-tax from gross pay, in the case of registered occupational pension schemes, and
- using the “relief at source arrangements”, net of tax from net pay, in the case of personal pension schemes.
If jobholders opt out of scheme membership and, by that time, contributions have already been deducted from qualifying earnings, the employer has to refund the contributions. Where the contributions have been deducted under the net pay arrangement, the contribution has enjoyed tax relief but not NICs relief. The amount of the refund must be added to gross pay for tax purposes but not for Class 1 NICs.
Compliance with the provisions of the Act is enforced by the Pensions Regulator, who is able to issue compliance notices, unpaid contribution notices, fixed penalty notices and escalating penalty notices. Appeals may be made to the Pensions Regulator Tribunal.
The Act also provides a number of associated employment rights:
- employers may not discriminate in recruitment on the basis that an applicant, if employed, may or m ay not opt out of automatic enrolment, with penalties of up to £50,000
- employers may not offer a worker or jobholder an inducement to join another scheme or to opt-out of a scheme
- employees have the right not to suffer detriment or be unfairly dismissed because of any action taken to exercise an entitlement under the Act or because the employer is prosecuted for an offence under the Act
- any contractual provision is void if it excludes or limits any right under the Act, other than if made by means of a compromise agreement.
Delivery authority clarifies popular misconceptions
During autumn 2009, the PADA embarked on a ‘myth busting’ programme to explain how the personal accounts scheme will fit in to the pension landscape from 2012. The initiative, led by PADA’s market engagement team, consists of an ongoing programme of meetings with key audiences, including pension advisers, trade bodies and employers, to explain the likely features of the pension scheme, clarify misunderstandings about its role and explore how the personal accounts scheme might be used.
The “myths” that the PDA addressed in its “Myth Buster” document are as follows:
- Myth: “Personal accounts” is the name for the Government’s workplace pension reforms.Reality: The Government is reforming workplace pension provision from 2012. It is placing a duty on employers to automatically enrol eligible workers into a pension scheme that meets certain criteria and to make a contribution into the scheme.The personal accounts scheme is one aspect of these reforms and is being set up to provide access to millions of people who currently don’t have access to a workplace pension. It will be one of the qualifying schemes on offer to employers to discharge their new automatic enrolment duties.
- Myth: Workers will be automatically enrolled into the personal accounts scheme.Reality: Under the Pensions Act 2008 employers will be required to enrol eligible employees into a workplace pension that meets certain criteria.It will be up to employers to select suitable schemes for their workers. This may mean using existing schemes, setting up a new one, using the personal accounts scheme or choosing a combination of options.
- Myth: Automatic enrolment means employers no longer have the freedom to choose the best pension scheme for their workers.Reality: Employers can choose the pension scheme they believe is most appropriate for their employees. However, the new duties mean that there are new minimum requirements for workplace pension provision. This means whichever scheme employers choose it will need to meet these criteria to comply with the legislation. The personal accounts scheme will be one such scheme.
- Myth: The personal accounts scheme is a government pension scheme.Reality: The personal accounts scheme will be an independent pension scheme run by a not-for-profit trustee corporation in the interests of its members. It will be accountable to Parliament.
- Myth: The personal accounts scheme is only suitable for small companies.Reality: The personal accounts scheme could be used in a number of ways and by employers of any size. Employers have to decide how they want to comply with the new duties and may decide that different approaches and schemes suit different members of their workforce.For example, personal accounts could be:
- the sole scheme for employers with no current provision
- an entry scheme for some employers – particularly for sectors with high turnover, to provide flexibility for workers who change jobs frequently and to save on employer admin costs
- a foundation scheme.
- Myth: The personal accounts scheme will compete with existing pension schemes.Reality: The personal accounts scheme is being designed to complement existing workplace pension provision. Rather than diminishing the current market for pensions, the reform programme, including the personal accounts scheme, will be increasing access to workplace pensions for millions of people. The personal accounts scheme is being designed specifically for low-to-moderate earners who don’t currently have access to workplace pension provision.
- Myth: The personal accounts scheme will be expensive for employers to use.Reality: PADA is building a pension scheme for the future that will be low cost, minimise employers’ administrative burden and is easy for members and employers to use. The personal accounts scheme will be an e-business with non ‘e’ services where appropriate, for example, for complex services that don’t easily fit an e-model and for members who can’t access digital channels.
- Myth: Economic turmoil means PADA will not hit its deadline of 2012 for delivering the personal accounts scheme.Reality: The recent economic situation is not expected to have an impact on the implementation of the personal accounts scheme. Pensions are a long-term investment and the position of the financial markets is likely to change many times between now and when the personal accounts scheme is introduced and beyond. PADA is on track to enable introduction in time for the onset of employer duties in 2012.
- Myth: The personal accounts scheme can only be used to meet the legal minimum.Reality: Employers can decide to offer more than the minimum requirements. There is no reason why the personal accounts scheme, or any other occupational scheme, can’t provide pension products that allow employers to offer more than the minimum requirements.
- Myth: The annual contribution limit of £3,600 for the personal accounts scheme will deter potential members.Reality: In most cases there will be headroom under the limit for employers and/or members to contribute more than the minimum and to structure their contributions in different ways. For example:
- where an employer makes contributions on the minimum band of earnings required by the Pensions Act 2008 (between £5,035 and £33,540), an 8% contribution for an average earner (approximately £25,100 – the latest median earnings figure) would be approximately £1,600 per annum.
- alternatively an employer might choose to make contributions on a broader band of earnings, for example by including the earnings up to £5,035. In this case an 8 per cent contribution for an average earner (approx £25,100) would be approximately £2,000 per annum.Further information:
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