The basics

• What is pensions reform?

  Pensions reform is a package of both state and private pension changes, expected to be introduced in 2012, which will completely change the face of the pension industry in the UK. Employers will have new responsibilities to contribute to their workforce’s pension plans, and this will have a big impact on their business.

  The overall aim of the government’s pension reform strategy is to get more people saving for retirement. The Pensions Act 2008 is the second phase of these reforms and sets out new duties for employers. It allows for the establishment of the National Employment Savings Trust (NEST), aimed at low-to-medium earners.

  All employers in the UK, small and large, will need to take action to comply with their new responsibilities under the Pensions Act 2008.

• When will it start?

  The new employer responsibilities start from October 2012 and will be staged in over four years.

  Employer size	Staging date
  10,000 or more	Between 1 October 2012 and 1 March 2013 (determined by number of workers)
  500 to 9,999	Between 1 April 2013 and 1 November 2013 (determined by number of workers)
  50 to 499	Between 1 January 2014 and 1 July 2014 (determined by number of workers)
  Less than 50	Between 1 March 2014 and 1 February 2016 (determined by last two characters of PAYE reference number)
  New companies established on or after 1 April 2012	Between 1 March 2016 and 1 September 2016 (determined by date PAYE income first becomes payable)

  Once all employers have started their employer responsibilities, the contribution requirements will be phased in to allow employers and jobholders to adjust their cash flow to meet these new responsibilities.

• What are the main employer responsibilities from 2012?

  Employers will have two main responsibilities:

  • they’ll have to automatically enrol all eligible jobholders into a pension scheme which meets certain criteria, and
  • the total minimum contribution made to the pension scheme (if it's a money purchase) must be 8%, with employers paying at least 3%.

  However, if the jobholder decides they don’t want to remain as a member of the scheme, they can opt out within a month. Their contributions will be refunded and the employer doesn’t have to make any contributions. However, the jobholder will be auto-enrolled again every three years to give them an opportunity to rejoin the scheme at a later date.

• How much will employers and jobholders need to contribute?

  Employers will be required to pay at least 3% of qualifying earnings for those jobholders who don’t choose to opt out. They can choose to pay more but the total contributions from employers and jobholders must be at least 8% of qualifying earnings.
  
  There will be three phases of contributions as shown below.

• 	Employer contributions	Jobholder contributions*	Total
  Staging date to 30 September 2016	1%	1%	2%
  1 October 2016 to 30 September 2017	2%	3%	5%
  1 October 2017 onwards	3%	5%	8%

  *Including tax relief

  Phasing in of contributions won’t start until the employer responsibilities have been fully ‘staged’ in. However, employers may choose to phase in their contributions quicker or pay higher contributions.

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What does this mean for employers?

• What does this mean for employers with existing pension schemes?

  Employers will have to auto-enrol all their eligible staff into a qualifying scheme, which can be their own private pension or the new National Employment Savings Trust (NEST). They may decide to choose to have different pension schemes for different employees, but they have to understand and make sure that their existing scheme meets the qualifying criteria.

  If jobholders don’t opt out, employers must contribute at least 3% of the jobholders’ qualifying earnings to the qualifying scheme.

• Can employers use a group personal pension (GPP) and a group self-invested personal pension (GSIPP) as an automatic enrolment scheme?

  Yes, contract-based group private personal pensions such as GPPs and GSIPPs can be used to auto-enrol eligible jobholders, as long as they meet the qualifying criteria.

• What does this mean for employers without an existing pension scheme?

  These employers will have to set up a private pension scheme that meets the qualifying criteria or auto-enrol their eligible jobholders into the National Employment Savings Trust (NEST). If the individual doesn’t opt out, their employer must contribute at least 3% of their employees’ qualifying earnings to the scheme.

• Which ‘eligible jobholders’ have to be automatically enrolled?

  From 2012, all jobholders who are at least 22 and under state pension age must be auto-enrolled into a qualifying scheme by their employer. Jobholders who are 16 and over but under 22, or between state pension age and under 75, must be given the chance to join the employer's qualifying scheme if they want to, as long as they're receiving qualifying earnings.

• What is automatic enrolment?

  This is a core employer duty under the pensions reform legislation, whereby an employer will have to arrange to automatically enrol all eligible jobholders into a qualifying scheme, unless the jobholder:

  • is already active in a qualifying scheme at the auto-enrolment date, or
  • decided to stop their active membership of such a scheme within a certain period before the auto-enrolment date

• Is automatic enrolment different to how a person joins their employer’s scheme now?

  Yes. Currently an employee has to agree, in writing, to join a pension scheme and to have pension contributions deducted from their salary, and often they have to decide where their contributions are invested. With auto-enrolment, they don’t need to do anything to become or remain an active member of the scheme. So they don’t have to sign an application form.

• Can employees be automatically enrolled into a scheme ahead of 2012?

  Currently, legislation doesn’t allow for automatic enrolment into a contract-based scheme such as a group personal pension. But if employers want to start enrolling their employees, they can use a ‘simplified’ joining process, offered by many providers, which reduces the employee’s involvement. However, they still need to give consent to having pension deductions taken from their pay.

• What about jobholders who are aged at least 16 and under 22 or between state pension age and under 75, and so aren't automatically enrolled into a qualifying scheme?

  You must inform these jobholders of their entitlement to join a qualifying scheme if they wish to do so and they have qualifying earnings. If any jobholders choose to join, you'll be required to pay contributions for them at the minimum level.

• If a jobholder opts out, does the employer still have to pay the contribution?

  No. If a jobholder chooses to opt out of the pension scheme, then the
employer doesn’t have to pay a contribution on their behalf.

• What do employers have to do if people choose to opt out?

  Employers must make sure that they follow the prescribed opt-out process, which is set out in regulations. They’ll have to stop deducting pension contributions from the jobholder’s salary, notify the scheme, refund any contributions that were paid during the opt-out period and automatically re-enrol the jobholder every three years.

• What is inducement?

  It’s illegal for employers to encourage employees to opt out or give up active membership of the pension scheme – known as inducement – for example by offering them cash or any other benefit.

• What is automatic re-enrolment?

  When an eligible jobholder has opted out at the last enrolment date, or has chosen to stop making contributions or otherwise stopped being an active member of the scheme, the employer will have a duty to automatically re-enrol them, normally every three years, as long as it's not within a 12-month period of the auto re-enrolment date.

• What are qualifying earnings?

  In a pay reference period of 12 months, qualifying earnings are gross earnings between £5,035 and £33,540 (with proportionate amounts for a period of less than 12 months). These figures are based on 2006 earnings and will be revised in the future. They’re expected to be increased for 2012.

  ‘Earnings’ include:

  • salary or wages
  • commission
  • bonuses
  • overtime payments
  • statutory sick pay, statutory maternity pay, ordinary or additional statutory paternity pay and statutory adoption pay
  • such other sums as are allowed under regulations

  Most private pension schemes won’t currently base contributions on all of these earnings.

• What happens if the scheme doesn’t base contributions on all of these earnings?

  Many schemes don’t include all the elements of qualifying earnings in pensionable pay, but the overall level of contributions must still be at least as good as the legislative minimum contribution. The Pensions Act 2008 includes the ability for employers to self-certify in advance that their contributions will meet the test for each of their jobholders. This is called self-certification and its terms are currently under review.

• What is the minimum contribution requirement?

  Minimum contribution requirements apply for jobholders whose qualifying scheme is a wholly defined contribution scheme. The Pensions Act 2008 sets the level of minimum contributions for any pay reference period as 8% of qualifying earnings.

  Of this 8%, the employer must pay at least 3%. If the employer only pays this minimum amount, the balance will be met by a 4% jobholder contribution, and 1% tax relief.

• What about employers who currently pay more than the minimum requirement?

  There's no change.

• Are part-time workers who don’t earn the minimum level of qualifying earnings excluded?

  The legislation may require their employer to arrange for them to become a member of a registered pension scheme, but the scheme doesn’t have to be a qualifying scheme and their employer has no obligation to make contributions on their behalf.

• What about temporary, fixed-term, part-time and foreign workers?

  A worker is defined as an individual who has entered into or works under a contract of employment or any other contract to do work or perform services personally for the other contracting party. It doesn’t matter whether the contract is in writing or implied. An individual who contracts to do work for a customer or client of their business undertaking or profession is specifically excluded (for example, an employer company contracts with a trader business to provide certain services or contracts with a professional firm, such as external lawyers, to provide legal advice).

  This therefore covers full-time, part-time, fixed-term/temporary and agency workers, where there’s a contract with the employer to do work for them (not as part of a business relationship).

  There are special provisions in the Pensions Act 2008 for agency workers who don’t have a worker’s contract with either the principal or agency, as employer, and also for company directors, the armed forces, those in Crown employment or working offshore or on vessels, and certain others.

  A company director isn’t a worker unless they’re employed by the company under a contract of employment, and at least one other person is employed. (In other words, one-person companies aren’t included in the legislation.)

• What is a qualifying scheme?

  In relation to the UK, a qualifying scheme is:

  • an occupational pension scheme (as defined in section 1(1) of the Pension Schemes Act 1993), or
  • a personal pension scheme registered under the Finance Act 2004

  Which, while the jobholder is an active member, meets the quality requirements in relation to the jobholder.

  There are different quality requirements for different types of schemes. These are:

  Defined benefit (DB) schemes

• There are two ways in which DB schemes can qualify:

  • All schemes that are contracted out of the State Second Pension (S2P) should already meet the quality requirement.
  • Schemes whose members aren’t contracted out of S2P must meet the test scheme standard. Broadly, this means these schemes must have a benefit accrual rate of 1/120th of average qualifying earnings for each year of membership.

  Defined contribution (DC) schemes, including GPPs

• To be a qualifying scheme, the total contributions should be a minimum of 8% of a jobholder’s qualifying earnings, of which the employer contribution must be at least 3%.

  Hybrid schemes

• These must satisfy the DB and DC tests in proportion to the benefits that are defined benefit and defined contribution.

• What is an auto-enrolment scheme?

  An auto-enrolment scheme is a qualifying scheme under which the member doesn’t have to make any decisions (for example, choosing an investment fund) or provide any information in order to be an active member. It must allow auto-enrolment, enrolment or re-enrolment.

• What about employers who are registered abroad?

  Cross-border schemes are complex and employers should take advice about how the law applies to them.

• Will charges be same for private pension schemes and the National Employment Savings Trust (NEST)?

  An anticipated 0.3% annual management charge over the longer term. However small additional charge of 2% on contributors will be charged initially to meet the costs of establishing the scheme.

• How will contributions be collected?

  The new process is different from what most employers currently use. Employers will have to deduct contributions from jobholders from the first pay date after their auto-enrolment date. They then have to pay the total contributions (jobholder and employer) to the scheme/provider in line with the contribution schedule that the scheme/provider will issue.

• How will the Pensions Regulator know if employers have a qualifying scheme in place?

  Employers will have to ‘register’ (likely to be online) to tell the Pensions Regulator which pension scheme they’re using to comply with their duties.

• What happens if an employer fails to carry out its responsibilities?

  All employers – except for single person companies will have to comply with pensions reform legislation. The Pensions Regulator will monitor employers to make sure they comply with the legislation. Measures can be taken against employers or third parties where there has been a breach. These include the issue of a compliance notice or unpaid contributions notice, which, if not complied with, may be followed by the issue of a fixed or escalating penalty notice.

• How will employers be told about their new responsibilities?

• It’s the responsibility of the Pensions Regulator to make sure that employers are aware of their duties and how to comply with them. The Pensions Regulator is planning a programme of targeted communications campaigns to both employers and intermediaries.

• Will the new legislation be reviewed after 2012?

  Yes. The Department for Work and Pensions (DWP) made a commitment to monitor the effectiveness of the new legislation from 2012, and will review the policies in 2017.

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What does this mean for working individuals?

• How will it affect working individuals?

  Working individuals, if they’re eligible jobholders, will be automatically enrolled into a qualifying scheme, be it their employer’s pension scheme or the National Employment Savings Trust (NEST).

  The working individual doesn't need to do anything to become an active member of the scheme – their employer must make all the arrangements. If the individual doesn't opt out, a total of 8% of the employee's qualifying earnings must be contributed , with at least 3% coming from the employer.

• How will employees know about the new requirements?

  It will be the responsibility of the Department for Work and Pensions (DWP) to keep employees informed about how the pensions reform will affect them.

  But if employers want their employees want to be engaged, they can get support from their advisers and providers on communication programmes, tools and so on. Search our library for marketing support.

  Also, the legislation will require employers to give their employees information about how automatic enrolment will affect them.

• What is opting out?

  A jobholder who is enrolled (whether this is through automatic enrolment, automatic re-enrolment or exercising the right to opt in) has the right to opt out within the opt-out period. In this event, the jobholder is treated as if the enrolment that had just taken place hadn’t happened.

• How will a jobholder tell their employer they want to opt out?

  The jobholder has a one-month (six weeks if the form is invalid) opt-out period after they’ve been automatically enrolled during which they may choose to opt out of their employer’s scheme.

  But before they can opt out, they must be given certain information about the scheme they’ve been enrolled into. This is to make sure they fully understand the effect and benefits of automatic enrolment before deciding to leave the scheme. If the jobholder chooses to opt out within the opt-out period, the employer will refund them any contributions made. The process for opting out is set out in the regulations.

• How are the self-employed individuals affected?

  The government has indicated that the self-employed can opt into the National Employment Savings Trust (NEST) if they want. But, by definition, they’ll receive no employer contribution.

• What if employers don't meet their duties?

  Non-compliance of duties can be reported by employees. If they want to report their employer they're protected by the Public Interest Disclosure Act 1998.

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What does this mean for advisers?

• What do advisers have to do?

  All employers will need to take action and will need the support of advisers. Employers are likely to come to advisers first to find out what they need to do. Visit our Take the opportunity section for more details.

• Will advisers have to ‘police’ employers’ compliance?

  There’s no statutory duty on advisers, but there will be a whistle-blowing facility to report non-compliance to the Pensions Regulator if they become aware of an employer’s non-compliance.

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The regulators

• What is the Department for Work and Pensions’ role?

  The Department for Work and Pensions (DWP) is the government department responsible for the development of UK pension policy and the law governing UK pension schemes.

  The DWP sponsors a wide range of public bodies to achieve its objectives, including the Pensions Regulator and Personal Accounts Delivery Authority.

• What is the Financial Services Authority’s role?

  The Financial Services Authority (FSA) is responsible for regulating financial services. This includes the regulation of the sale and marketing of personal and stakeholder pensions to individuals.

  The FSA also oversees the financial viability of organisations that manage pension investments, and can take action to make sure that the individuals who run financial organisations are fit and proper for the task.

• What is the Pensions Regulator’s role?

  The Pensions Regulator is the UK regulator of work-based pensions. The Pensions Act 2004 gives it three main statutory objectives:

  • to protect the benefits of members of work-based pension schemes
  • to promote good administration of work-based pension schemes, and
  • to reduce the risk of situations arising that may lead to claims for compensation from the Pension Protection Fund

  The Pensions Act 2008 gives the Pensions Regulator a new objective to maximise compliance with the new employer duties, as well as the safeguards to protect employees who want to save in a pension.

• What is the Personal Accounts Delivery Authority’s role?

  The Personal Accounts Delivery Authority (PADA) has been established by the Pensions Act 2007 to deliver the National Employment Savings Trust (NEST). It’s a non-departmental time-limited public body. Once the scheme has been delivered, PADA will hand over to the Trustee Corporation.

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More about the National Employment Savings Trust (NEST)

• What is NEST?

  This is aimed at low-to-medium earners who don’t have access to a pension scheme through their employer, and is intended to complement existing workplace pension provision. It will be a qualifying scheme under the government’s reforms and will be set up as a large trust-based occupational pension scheme, with employers’ and members’ panels to represent their interests. It will be run by the NEST Corporation, made up of people appointed by the government.

• What options will be available under NEST?

  NEST will be a very simple scheme, which means there will be limited choices. It will include a default investment fund plus a small number of additional investment options. At retirement, an open market annuity may be the only choice. For more details, please see our Private pensions versus NEST sales aid.

• Are there any contribution limits under NEST?

  Yes, there will be a maximum amount which can be paid into NEST by, or on behalf of, a member. This is likely to be around £5,000 a year. It’s possible to pay higher contributions to private pension schemes.