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Auto-enrolment pension schemes and aggregation of earnings
Thursday, April 21st, 2011
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How do the auto-enrolment rules apply for employees with two or more jobs with the same employer?
One of our tutors, Vince Ashall, has been investigating some of the more complex issues that arise from the statutory rules for the auto-enrolment pension schemes that start to be phased in from October 2012. One of these relates to situations where an employee has two or more jobs with the same employer.
The issues came to light as a result of a presentation made by a representative of The Pensions Regulator (TPR) to software developers. The latest view, as explained on Slide 5 of the presentation, is that, where an employer considers that there is a single employment but with two or more separate employment contracts, earnings should be aggregated in order to determine whether or not the employee in question is subject to auto-enrolment.
The following is a list of the questions raised by Vince Ashall in correspondence with TPR and the answers provided. The references to “NEST” in the text below should be taken as referring to the NEST scheme and to any other pension schemes that, from October 2012, are qualifying schemes because they provide for auto-enrolment of jobholders.
- There is an implication from your Slide 5 that payroll will have to deal with two definitions of ‘aggregation’ – one for NEST purposes and one (which already exists) for National Insurance Contribution (NICs) purposes. It would be sensible if the same criteria / definition could be used for both purposes.
Reading the pensions duties legislation concerning the definition of worker in conjunction with relevant employment case law, the Regulator’s legal view is that, if tested by a court or tribunal, the underlying nature of the employment relationship and not simply the number of written contracts between an individual and the employer would be taken into account.
That is why the Regulator’s guidance to employers is that, where they have a worker with multiple employments, they should consider the underlying nature of their relationship with the worker and decide whether, on the balance of all relevant factors, the employment relationship is of a single employment with services being performed across each of the contracts. In such circumstances, the employer should aggregate the qualifying earnings for the totality of the relevant employment contracts. If an employer is of the view that each of the employment contracts with an individual are wholly separate, they must apply the duties separately in relation to each contract.
- Will TPR be providing details of the criteria to be applied? “Where the employer considers…” is somewhat woolly and does not provide any criteria for aggregation.
The pensions regulator cannot provide objective indicator(s) to determine where aggregation should take place, as the nature of the employment relationship will depend on any number of case-specific factors. The employer will need to make a judgement based on a balanced consideration of a number of factors and they may need to take advice.
- If an employer is currently aggregating for NICs, should aggregation for NEST purposes automatically follow?
Where an employer must aggregate earnings for the purposes of National Insurance, it does not necessarily follow that they will also be obliged to do so under their pensions duties because aggregation for the pensions duties depends solely on an assessment of the employer’s relationship with the individual.
- Are earnings only aggregated for NEST purposes if separately they both fall below the PAYE threshold? Also see next question.
When an employer decides that the employment relationship is of a single employment with services being performed across each of the contracts, then earnings should be aggregated and the duties applied once across all employments in all circumstances. In other words aggregation should take place no matter whether the earnings of each/any of the employments, and/or the combined sum across all employments, are above or below the automatic enrolment eligibility threshold.
- What happens if the earnings from one of the employments meet the earnings criteria, i.e. is more than £7475, but the earnings from the second are less than £7475? Is the second employment automatically enrolled into the qualifying pension scheme as the earnings from the first employment are sufficient on their own to meet the requirement for automatic enrolment? There is a possibility that aggregation would be ignored / not considered by employers in this situation when they should be.
Where the aggregated earnings exceed the automatic enrolment eligibility threshold and all other eligibility conditions are met, then automatic enrolment should take place once. Automatic enrolment would result in membership of a qualifying pension scheme (be that NEST or any other scheme) in respect of each of the aggregated employments.
- If the answer to the above is
- ‘Yes’, what happens if the Scheme rules prevent the automatic enrolment of the second employment? I’m thinking of the situation in the NHS where a nurse has a full time job and is also employed on the nurse bank. The NHS Pension Scheme rules do not allow membership over full time. Something similar may also apply in the Local Government Pension Scheme and other defined benefit schemes.
- ‘No’, what is the position where, owing to Scheme rules, the second or subsequent employments cannot be enrolled into the Scheme?
We are aware that some pension schemes, particularly public-sector ones, may not currently be set up to recognise membership across multiple employments. They will need to change their rules in order to be used as qualifying schemes under the duties, although depending on the existing levels, this may not necessarily mean an increase in contributions/benefits. We are working with DWP and Cabinet Office to ensure all public sector schemes are made aware of this to prepare accordingly.
- As earnings are being aggregated for NEST purposes, it would also seem to follow that one opt-out notice would therefore apply to all employments with the same employer. Is this correct?
If the worker wished to opt-out, they would only need to submit one opt-out form and this would cancel membership in respect of all employments and lead to a full refund of any contributions deducted across all employments.
- Where an employer is using the actual NEST scheme and is aggregating, then the situation may arise where the combined earnings are greater than the upper value of the Qualifying Band of Earnings and a ‘cut off’ will need to be applied in one of the employments. Is this correct?
Where the employer was using a qualifying scheme (be that Nest or any other scheme) with rules that do not require contributions above an upper earnings limit, then the limit would be applied to aggregated earnings rather than the earnings of each employment separately.
The link below provides access to the guidance on pensions reform currently available on the website of The Pensions Regulator. Aggregation in the case of employees with multiple contracts with the same employer is not currently discussed.
However, on 14 April, it was announced that The Pensions Regulator had published detailed guidance for software developers and some basic guidance on multiple employments is provided on page 8.
Further information:
A detailed guide to Workplace pensions reform for software developers
