Consultation on final changes to automatic enrolment legislation

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The Government is consulting on implementation of changes recommended by the independent Making Automatic Enrolment Work (MAEW) Review, and on some minor amendments to ensure that legislation correctly expresses pension policy.

A number of changes to the legislation governing automatic pension scheme enrolment from October 2012 were recommended in 2010 by the Making Automatic Enrolment Work (MAEW) Review, some which require amendments to primary legislation and are currently included in the Pensions Bill 2011.  These are:

• a new earnings trigger for automatic enrolment and re-enrolment

• greater flexibility for employers on their re-enrolment date, so that it can be up to three months before or after the third anniversary of the staging date or last re-enrolment date

• an optional waiting period of up to three months before the automatic enrolment duty commences

• certification by an employer that its pension scheme meets a specified requirement based on all earnings rather than a requirement based on qualifying earnings.

Additional changes have to be made to secondary legislation and the amendment regulations have been published in draft for consultation.  The consultation period runs until 11 October 2011 and the final regulations will come into force in early 2012.

The key payroll-related changes included in the amendment regulations are set out below.  It must be understood that these are still draft amendments and some aspects of their provisions could change further as a result of the consultation exercise.

Changes to the implementation schedule

Automatic enrolment will be introduced in monthly stages during the four-year period between October 2012 and September 2016.  The existing schedule includes the following features:

• larger employers (more accurately, larger PAYE schemes) will introduce auto-enrolment first, followed by smaller employers

• employers with more than one PAYE scheme must introduce auto-enrolment across all of their schemes from the earliest staging date

• the number of persons in a PAYE scheme includes both employees and pensioners

• a test group of smaller employers will start auto-enrolment in March 2014, to enable the Pensions Regulator to identify particular problems that may affect smaller employers before the remaining smaller employers start to introduce auto-enrolment from August 2014 onwards

• there are a number of months, at particularly busy times, at which no employers are scheduled to introduce auto-enrolment, namely, each December, and April and July 2016.

The Government announced at Budget 2011 that, between April 2011 and April 2014, a moratorium on new legislation would apply to employers with fewer than 10 employees, a factor which the implementation schedule does not take into consideration.  A number of changes are, therefore, being made to the schedule in order to ensure that no employers with fewer than 10 employees will have a staging date earlier than April 2014.  To achieve this, changes are being made in three situations:

1. the March 2014 test group of small employers
2. PAYE schemes that cover multiple employers
3. PAYE schemes that have no employees.

Test group of small employers

The staging date for the test group of smaller employers (March 2014), which includes some employers with fewer than 10 employees, is reduced marginally in size and swapped with the group that is currently allocated to April 2014.  As this limits the time available for the Pensions Regulator to evaluate the experience of the test group, the August 2014 group is moved to September 2014 and adjustments are made to the definitions of the groups with staging dates between October 2014 and October 2015.

The new definitions in that part of the “Staging Date Table” affected by these changes are reproduced below.

Multiple employer PAYE schemes

The staging date changes described above are not entirely successful in preventing employers with fewer than 10 employees having to start auto-enrolment before April 2014.  The problem remains, as identified in the consultation document, where two or more employers of differing sizes use the same PAYE scheme, e.g. a corporate group with one PAYE scheme covering several limited companies, each of which is a separate employer, or a local authority which has one PAYE scheme covering all of its subsidiary business operations.  (This situation should not be confused with a single employer with a number of PAYE schemes – see below.)

Where such a situation exists, a staging date prior to April 2014 could apply to a large employer (as intended) but also, in breach of the moratorium, to another employer with fewer than 10 employees that shares the same PAYE scheme reference.  As there is no way for the Pensions Regulator to identify such situations, the regulations are being amended by defining, in this particular context, an employer with fewer than 10 employees as a “micro employer”.

A “micro employer” is defined as an employer who

• has fewer than 10 full-time equivalent workers immediately before 1 April 2011, and

• is part of a PAYE scheme with more than 239 persons in that scheme.

The number of an employer’s full-time equivalent workers is calculated by dividing their total weekly contracted hours by 37½.

The reference to “more than 239 persons” limits the application of this arrangement to staging dates up to the end of the moratorium period.  From 1 April 2014, the staging dates apply only to employers with 239 or fewer employees.

The regulations then provide new staging dates for “micro employers” that replace the staging dates shown in the Staging Date Table, as follows:

(This arrangement does not apply in the case of a single employer with a number of PAYE schemes.  In that situation, auto-enrolment starts for all of the PAYE schemes from the earliest staging date and, as a result, it would be possible for a PAYE scheme with fewer than 10 employees to have to start auto-enrolment before the end of the moratorium.  However, the moratorium applies to very small employers, not to very small PAYE schemes.  As the employer in this situation has more than 10 employees, the moratorium is not breached.)

PAYE schemes that have no employees

A related problem is the situation of employers who pay a pension to former employees.  The size of a PAYE scheme is determined by the number of “persons” in the scheme, whether or not they are also employees.  So a pension PAYE scheme may have no employees but still have a staging date determined by its size.

The special arrangement described above for PAYE schemes with multiple employers resolves the problem for “micro employers”.  However, there is no resolution for other employers as it is not possible to identify accurately the different types of “persons” in each PAYE scheme and provide a staging date accordingly.

Early auto-enrolment

As originally defined in regulations, an employer may take up the auto-enrolment duty from a staging date that is earlier than that specified in the Staging Date Table if the employer has

• agreed with a qualifying pension scheme that auto-enrolment may start from the earlier staging date (which exceptionally includes 1 December 2012, the only December that is available as a staging date), and

• notified the Pensions Regulator in writing not less than one month before the earlier staging date.

This facility provides all but the largest employers with the flexibility to introduce auto-enrolment many months, even years, earlier than their official staging date.  The MAEW Review recommended that employers with 50,000 or more employees, who are required to commence auto-enrolment in October or November 2012, should also be given a longer period to advance their staging date.  Accordingly, the amendment regulations allow these employers to choose to start auto-enrolment on 1 July, 1 August or 1 September 2012, with 1 October 2012 as the earliest possible start date for all other employers.  The requirement to have notified the Pensions Regulator at least one month earlier than the new earlier date is unchanged.

Bringing forward the earliest automatic enrolment date by three months means that

• the first transitional period for money purchase and personal pension schemes, during which minimum pension contributions are required, increases from four years to four years and three months, i.e. from July 2012 to October 2016, and

• the transitional period for defined benefits and hybrid schemes, during which contributions sufficient to maintain the fund value must continue to be paid, increases from four years to four years and three months, i.e. from July 2012 to October 2016.

Maintaining continuity of scheme membership

Automatic enrolment information

The regulations provide a detailed list of information that must be given to jobholders who are automatically enrolled or who opt-in to membership, and to existing members of qualifying schemes.  Initially, this list included a requirement that they be informed that the employer is not permitted to take any action that would end their scheme membership without them becoming a member of another scheme.  This employer duty has been strengthened and now requires the information provided to state that, if membership ends as a result of any action by the employer, the employer must automatically re-enrol the employees affected into another scheme on the following day.

Immediate re-enrolment

This strengthened requirement for an employer to maintain continuity of membership is also added to the regulations governing automatic re-enrolment.  The existing provision, which allows employers not to automatically re-enrol a jobholder who has opted out or cancelled membership within 12 months before the three-year automatic re-enrolment exercise, is being moved from the Pensions Act 2008 into the regulations.  In addition, the regulations now make it clear that an employer must immediately re-enrol a jobholder whose membership has ceased as the result of an act or omission on the employer’s part, but not where the employer has terminated membership at the jobholder’s request.

Pay reference periods and the jobholder test

The current auto-enrolment regulations provide that a worker with earnings below the trigger point for auto-enrolment must be automatically enrolled if the worker’s earnings in a “pay reference period” exceed the pro-rata trigger point for that pay reference period.  In normal operation, a “pay reference period” is the worker’s or jobholder’s earnings period.  However, to prevent a worker being automatically enrolled because of an abnormally high payment in a single earnings period, the regulations define a “pay reference period” in this situation as a period of 12 months.  This has the effect of averaging, or smoothing out, the worker’s earnings and thereby preventing the worker from becoming an “accidental” jobholder.

The consultation document proposes removing this smoothing process altogether for the following reasons:

• an annual pay reference period would usually span two tax years and, as most payroll systems do not retain pay details for each earnings period in previous tax years, the process imposes a manual record-keeping requirement on employers, and

• the Pensions Bill 2011 introduces a new earnings trigger (£7,475) that is set at a higher level than the qualifying earnings threshold (£5,035), thereby reducing the possibility of an earnings spike forcing automatic enrolment.

The second of these reasons does not, however, remove the one-off high payment problem.  The consultation document seeks views on whether abolition of the annual pay reference period is a sensible approach.  (Perhaps the 8-week period used to calculate average earnings for statutory payments would be a sensible alternative.)

Pay reference periods and the quality test

Auto-enrolment is required for jobholders who meet the age and earnings conditions and qualifying jobholders must be enrolled in a qualifying pension scheme which, in the case of money purchase/personal pension schemes, pays at least 8% of the jobholder’s earnings in the annual qualifying earnings band, i.e. between £5,035 and £33,540, as currently defined.

This quality requirement must be met in each person’s “pay reference period” which, for the purpose of the quality test, is a year starting with the employer’s staging date and each anniversary thereafter.  However, a jobholder may not be an active scheme member for the full year period as a result of various events during the year, namely, automatic enrolment, automatic re-enrolment, opting-in, leaving the employment, opting-out, or periods of low earnings.  A jobholder may also choose to remain an active member but pay less than the minimum required contribution (where the rules of a qualifying scheme permit it) and the quality test does not have to be met by the employer in respect of the jobholder in that situation.

Currently, the only situations that the regulations recognise that can affect the start and end dates of a person’s pay reference period (in the context of the quality test) are starters and leavers during the year period.  The draft regulations correct that situation by accommodating all of the different situations that can govern the start and end of a person’s pay reference period, including the new provision for a three-month waiting period before automatic enrolment (as included in the Pensions Bill 2011).

Automatic enrolment waiting periods

The MAEW Review recommended replacing the automatic enrolment postponement provisions in the initial legislation and regulations with an optional three-month waiting period.  This is included in the Pension Bill 2011 and the new consultation document sets out replacement regulations.

The waiting period provision will apply from:

• the employer’s staging date,

• a new employee’s starting date, or

• the date on which an existing employee becomes eligible for automatic enrolment.

A waiting period will allow employers to

• avoid having to auto-enrol short term workers

• stagger automatic enrolment of a large workforce

• allow the automatic enrolment process to be aligned with internal payroll procedures, so as to avoid part-period calculations.

To use the waiting period, an employer will have to issue a notice to the worker prior to starting the employment or within one week of starting, giving (1) details of the intention to auto-enrol by a certain date, and (2) information about the right to opt-in during the waiting period.  The format and content of the initial notice will be flexible, allowing employers to provide

1. generic information to all workers about the waiting period, followed by specific information about scheme membership at the end of the waiting period when it is clear whether or not the person is subject to automatic enrolment, or
2. generic information to non-members and separate information to existing scheme members
3. specific information immediately, tailored as appropriate to jobholders subject to auto-enrolment, jobholders who do not qualify for auto-enrolment, and workers.

In the case of defined benefit and hybrid schemes, where automatic enrolment can be deferred for existing employees who are not yet scheme members until the end of the transition period (October 2016), a deficiency in the existing regulations is being corrected.  In addition to, or instead of, the notice that must be given within two months of the employer’s first enrolment date, the jobholder must be given notice by the end of one week following the employer’s first enrolment date, giving notice of deferment.  This change does not affect new employees, who are liable for automatic enrolment from the employer’s first enrolment date.

Uprating of earnings trigger and qualifying earnings band

The annual earnings trigger, currently defined in legislation as £7,475, and the annual qualifying earnings band, currently set at between £5,035 and £33,540, will be updated by statutory Order in January 2012, ready for the first operational year 2012/13.

Paying contributions to scheme trustees or managers

Pension legislation requires pension contributions to be paid to a pension scheme by the 19th of the month following the end of the month in which the amount is deducted, e.g. 19 August for contributions deducted during July.

The MAEW Review recommended that, wherever possible, the auto-enrolment procedures should be aligned with the PAYE deadlines.  The consultation document, therefore, proposes that payment of pension contributions to both occupational and personal pension schemes should be made, counting from the day following the last day of the month in which the amount is deducted, within

• 22 days for payments made electronically, and
• 19 days in all other cases.

The due date, following which the Pensions Regulator is able to issue unpaid contribution notices, will also be changed to the 22nd of the month.

There is no change to the deadline for paying over contributions deducted between the automatic enrolment date and the end of the opt-out period, which is the last day of the second month following the month in which automatic enrolment occurs.

Certification of quality requirement

In this section,

• “earnings” refers to salary, wages, commission, bonuses and overtime, plus any SSP, SMP, OSPP, ASPP and SAP
• “basic pay” refers to a jobholder’s earnings, disregarding any commission, bonuses, overtime or similar payments
• “pensionable earnings” refers to the earnings of a jobholder on which contributions are payable by the employer and jobholder.

The quality requirement for qualifying pension schemes sets a minimum level of contributions for each jobholder.  In the case of money purchase and personal pension schemes, the minimum contributions are defined in terms of percentages of the jobholder’s earnings that fall within the “qualifying earnings band” (QEB), currently defined as annual earnings between £5,035 and £33,540.

The minimum contribution levels are as follows:

However, many pension schemes have rules that define members’ “pensionable earnings” in terms of

• all earnings, not just earnings above a threshold or between thresholds, and
• earnings that do not include overtime and other payments.

As a result, it is very difficult for employers with such schemes to determine whether the total employer/employee contributions meet the statutory quality requirement, and whether their scheme is a qualifying scheme.  The original automatic enrolment draft regulations included a process by which employers would be able to “certify” that their scheme was at least as advantageous to employees as the quality requirement, but it was removed following consultation, basically on the basis that it did not meet the policy intent.  The MAEW Review subsequently proposed a simplified certification process and the consultation document explains how it would work and provides the necessary draft regulations.

The new certification procedure will apply to money purchase and personal pension schemes, and to the money purchase element of some hybrid pension schemes, and which are based in the UK or in another member state of the European Economic Area.

Such schemes will be taken to satisfy the quality requirement if the employer is able to certify that one of three different tests relating to the employer and employee contributions, as set out in the scheme rules, are satisfied.  A “self” certificate is given, or issued, by the employer and retained by the employer.

The tests relate to each jobholder’s pensionable earnings in a “certification period”, i.e. a period of up to one year in length.

For money purchase schemes, the three tests are as follows.

Test 1:

1. the employer’s contribution must be equal to or more than 4% of pensionable earnings in the certification period,
2. the total contributions paid by the jobholder and the employer must be equal to or more than 9% of pensionable earnings in the certification period, and
3. the jobholder’s pensionable earnings must be equal to or more than the jobholder’s basic pay.

Test 2:

1. the employer’s contribution must be equal to or more than 3% of pensionable earnings in the certification period,
2. the total contributions paid by the jobholder and the employer must be equal to or more than 8% of pensionable earnings in the certification period,
3. the jobholder’s pensionable earnings must be equal to or more than the jobholder’s basic pay, and
4. the combined pensionable earnings of all of the relevant jobholders must be at least 85% of the combined earnings of those jobholders in the certification period.

Test 3:

1. the employer’s contribution must be equal to or more than 3% of (total, not pensionable) earnings in the certification period, and
2. the total contributions paid by the jobholder and the employer must be equal to or more than 7% of (total, not pensionable) earnings in the certification period.

During the transition periods, the minimum percentages defined in the three Tests are set at lower rates, in line with the percentages defined for the quality requirement.  The minimum contribution levels are as follows:

 

 

The rules for certification are as follows:

• A certificate is a written document, given by the employer and describing
  • whether it relates to part of a scheme and, if so, which part
  • the employer pension scheme reference
  • whether it relates to all jobholders and, if not, a description of those jobholders to whom it does relate
  • which of the three tests are met by the pension scheme
  • the certification period, and details of any changes made to that period.

• Where it is necessary for the employer to use certification, the certificate must be given not later than the staging date.  The period of certification is one year, or part of a year.  The date from which each “certification period” starts is flexible; for example, an employer’s first certificate could run from the staging date to the end of the tax year, or to the end of the current pension year, and each subsequent certificate could apply to each tax year or pension year.

• The employer must give a jobholder, or trade union representing jobholders, a copy of the certificate within two months of receiving a request.

• Before one certificate is replaced with another, the employer must assess whether the conditions under which the first certificate was issued have been met and, if not, take the necessary action before giving the new one.  Records of each assessment must be retained for six years.

• If the Pensions Regulator takes the view that, when the certificate was given, the scheme could not have been treated as meeting the quality requirement, the employer will be given notice to pay the shortfall in contributions.  If that is not done, the employer will be treated as being in breach of the employer duties and subject to the appropriate penalties.

Further information:

Workplace pension reform: consultation on draft regulations and guidance

Tags: automatic enrolment, changes to automatic enrolment schedule, early auto enrolment, money purchase schemes, pay reference periods, PAYE, quality test, Recent Payroll News

This entry was posted on Monday, July 25th, 2011 at 14:58 and is filed under Pensions. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.