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  • International Workplace
  • 14 February 2017
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Pensions automatic enrolment: changes ahead

Pensions automatic enrolment (AE) has been with us since October 2012, but over the next two years some important developments will take effect.  So how should employers prepare?

First timers

Although very many employers have successfully already implemented AE, others still have to go through the process for the first time.  They are typically small or recently established employers, whose staging dates (when the AE obligation first applies to the employer) fall between now and February 2018.

Some employers may need to provide access to a pension scheme and pay contributions before their staging date, for example an employer receiving employees via a TUPE transfer from an employer that has already passed its staging date and enrolled job-holders into a scheme.

No employer should underestimate the time required to implement AE properly.  Whilst it can sometimes be done very quickly, it is better to plan a lead-in time of at least six months.

For employers with no existing pension scheme, the process can often be simpler than it is for employers who already have a scheme in place.  Existing schemes need to be reviewed to assess their suitability.  If the employer wants to change or replace an existing scheme, it should consider the required process, including whether any consultation obligations apply.

Often the payroll and other administration aspects of AE prove to be a bigger headache for employers than selecting a suitable scheme.  Thankfully for first timers, systems and industry expertise are now well developed.

Old hands

The legal framework for AE includes a cyclical re-enrolment obligation on employers.  An employer must automatically re-enrol into a suitable scheme any eligible job-holder who was previously auto-enrolled but who opted out.  The automatic re-enrolment date will be around three years after the employer’s staging date.  (The legislation gives the employer some scope to select the date.)  Therefore re-enrolment is now very much a live issue and not just for the largest employers.

This cyclical re-enrolment obligation is intended to ensure that the eligible job-holders who are affected reconsider their pension provision from time to time.  They can choose to opt out again following re-enrolment if they wish.  However, the ability to postpone enrolment (which has been widely used by employers reaching their staging date) is not available for automatic re-enrolment.

Increasing contribution rates

Parliament implemented AE softly by imposing a low minimum contribution obligation on employers using a defined contribution scheme for AE purposes.  The minimum rates vary depending on the design of the scheme but the current standard requirement is for a total contribution of at least 2% of qualifying earnings between the upper and lower earnings limits (currently £5,824 to £43,000 respectively).  Of the 2%, at least 1% must be paid by the employer.

The original plan had been for the initial contribution requirement to increase in October 2017 and October 2018.  The dates have been pushed back and now coincide with the end of the tax years.  The minimum contribution requirements will now increase as follows:

Transitional period

Dates

Employer minimum contribution

Total minimum contribution

1

Before 5 April 2018

1%

2%

2

6 April 2018 to 5 April 2019

2%

5%

 

6 April 2019 onwards

3%

8%

Again, different rates will apply to some schemes (particularly some which have used ‘certification sets’ 1 and 3 when designing their schemes).

We would urge employers to plan well ahead for the changes.  Plans should include member communications and ensuring payroll systems are ready.  We also recommend that employers check the pensions clauses in their workers’ contracts of employment to ensure they accommodate the changes.  We have seen some that reflect only the initial AE contribution rates.  They will need to be amended to ensure certainty and to avoid any difficulties around unauthorised deductions from members’ pay. 

Enforcement

The law gives the Pensions Regulator a range of powers to compel employers to comply with the law and to sanction those who do not comply.  The powers include the ability to impose financial penalties which can escalate on a daily basis for the most serious breaches.  Employers who plan ahead and take appropriate professional advice should be well placed not only to avoid sanctions but also to operate an employee benefit which will be accepted and valued by many of its workers. 

Mark Poulston, Partner, Head of Pensions, Weightmans LLPmark.poulston@weightmans.com