Your questions answered
Have a look at some of the questions our experts have answered below.
Your questions answered
Assessing the workforce
Q. I have an employer with a Scottish Widows GPP. They have a significant number of part time staff who are not eligible to receive the GPP employer contribution. Most of the part time staff earns less than the Lower Earnings Limit. Will they need to be offered access to NEST or an alternative scheme for their own contributions?
A. All staff will have to be assessed for eligibility under auto-enrolment and, if their earnings exceed the minimum earnings threshold (£7475 pa) in the pay reference period and they are over 22 and under 65, will have to be auto-enrolled into the employer's GPP or an alternative scheme (e.g. NEST). Employees earning more than the threshold but who are under 22 or over 65, or employees earning between the qualifying earnings lower limit (£5715pa) and the minimum earnings threshold, must be invited to opt in to the selected scheme and the employer will have to make contributions at the agreed rate.
Q. In the scenario that Auto Enrolment is in place, if a person is being treated as being self employed but HMRC then review and state should have been classed as employed for previous years what is our understanding of treatment for Auto Enrolment. As the employee will not have been auto enrolled would this be an issue for the employer or is it more likely to be a realistic / pragmatic view taken in that the employee would just be auto-enrolled from then.
A. Our view is that the auto-enrolment status is based on an employee's status at the assessment date and cannot be backdated. However, the employee may have a good case to request backdating of employer contributions in line with his change of status.
Q. If somebody is not entitled to automatic enrolment- ie a non-eligible job holder and they decide to opt in do the contribution rates have to be the same as those automatically enrolled.
A. Not necessarily, but the contribution rates must still meet one of the qualifying scheme tests. As opt ins are likely to be relatively uncommon it might be an unnecessary complication to apply different contribution rates to this category.
The automatic enrolment proces
Q. The rules prevent employers from issuing opt out forms to employees. If the advisers to the company were to operate a help desk which employees could contact to obtain opt out forms or perhaps were to make regular site visits where employees were to complete opt out forms would this breach the regulations?
A. In principle this shouldn't be a problem provided that the process for providing an opt out form is quite separate from the process for giving employees information about the scheme. However, the employer would need to be careful not to be seen to encourage staff to opt out.
Q. If the employer were to allow employees who opt out of the pension to use the salary equivalent of the employer contributions to pay as a contribution to a corporate ISA would this be considered an inducement to opt out?
A. There are no precise rules about what will constitute an inducement but I suspect that this would as it is effectively offering employees cash in hand instead of a contribution to a fund which isn't accessible until age 55.
Q. Would your answer to the above question change if the offer was made to foreign nationals only who want to opt out because they have no intention of remaining in the UK?
A. No, because they are subject to the same automatic enrolment rules.
Contributions
Q. We currently pay pension contributions (8% non-contributory) to our staff annually, in March. Under automatic enrolment, we will be able to continue with this provided eligible employees have joined the scheme within the allowable time period?
A. No. There is no provision for the payment of contributions annually in arrears. You would need to move to a weekly or monthly payment basis.
Q. Is it possible for the employer to pay more and the employee to pay less?
A. Yes, as long as the total contribution is at least the minimum. For example, from October 2017 an employer can pay the full 8% and the employee does not need to make any contribution.
Q. Do tips paid in cash or by special arrangement form part of qualifying earnings?
A. The Department for Work and Pensions has confirmed that in its view, tips paid in cash or by a special arrangement used to distribute tips, gratuities and service charges (a ‘tronc’) do not form part of a person’s qualifying earnings.
Employees
Q. Re an employee’s option to opt out. If they do, does they employer still have to contribute. Can you explain in a little more detail please? Also what is to stop an employer pressurising all employee’s to opt out?
A. If an employee opts out there's no requirement for the employer to contribute. It's highly illegal for employers to pressurise employees into option out. There are potentially high fines and even the possibility of imprisonment. The Pensions Regulator will largely rely on whistle-blowing to identify offending firms, but it will also be taking a risk-based approach and if all employees opted out that would sound alarm bells and make an investigation very likely.
Q. If an employer has a GPP qualifying scheme with (e.g) 5% employer and employee contributions and takes on a new (eligible jobholder)employee who has been a member of a previous employers scheme with minimum contributions (e.g Nest) and does not want to join the new employers scheme, what will the employer need to do to meet obligations? Will the new employer have to be automatically enrolled then opt out? Will the employer have to contribute to the new employee's existing (Nest) scheme?
A. The employee could be automatically enrolled into the employer's qualifying scheme and can then opt out. Alternatively the employer could also agree with the employee that the nominated scheme for that employee was NEST and make contributions at the minimum level but there is no obligation on him to do so.
Q. My client is the sole director and 100% shareholder of his own Ltd Company. He has a personal pension plan. The company is making contributions of in excess of 8% of my client's annual earnings and there are no other employees. Does introduction of NEST affect him or his Company?
A. If your client is the sole employee his company is exempted from the automatic enrolment legislation.
Q. Who are 'eligible employees'?
A. Employees eligible for automatic enrolment will be:
- those who aren't already active members of a qualifying scheme; and
- aged between 22 years and the State Pension age; and
- earn above the earnings threshold for automatic enrolment (£7,475 gross a year in the 2011/12 tax year)
- Working or ordinarily working in Great Britain
Other employees can choose to opt in. If they earn above qualifying earnings threshold, normal contribution rules apply.
Q. Does automatic enrolment apply to workers who are employed on a casual/freelance basis?
A. The answer will depend on the precise nature and duration of the employment. However, the three month deferral period is likely to mean individuals employed on a strictly short-term basis will not need to be automatically enrolled (although they may choose to opt in). Similarly, the automatic enrolment rules will not apply to other individuals performing services for an employer on a self-employed/freelance basis.
NEST
Q. What is NEST?
A. NEST (National Employment Savings Trust) is the permanent name of the new national workplace pension scheme, formerly known as personal accounts. The NEST scheme is intended as a vehicle for lower earners who don’t have access to a good company scheme. It is designed to be a simple, low-cost way to save. NEST has:
- A limited choice of investment funds and a default fund for those who do not make a choice.
- An annual contribution limit of £4,300 a year (in 2010/11 terms). This limit is likely to be reviewed in 2017.
- Low charges - currently 0.3% Annual Management Charge (AMC) and 1.8% contribution charge. The contribution charge is expected to end once the set up costs have been met.
NEST will operate as a centralised scheme, run by a not-for-profit trustee corporation called NEST Corporation. Like other company schemes the NEST scheme will be regulated by the Pensions Regulator.
Q. What will the charges for NEST be?
A. NEST will initially have a combination charge made up of an Annual Management Charge (AMC) of 0.3% and a contribution charge of 1.8%. The contribution charge is to end once the set up costs have been met.
Q. What investment options will there be?
A. NEST’s investment approach includes a managed investment approach for people who don’t want to choose (Default Fund) and a focused set of choices for members who do.
The Default Fund option will consist of 45 Retirement Date Funds, a series of yearly target date funds. Members will be enrolled in the fund that targets the year they are expected to retire (normally the year the member reaches SPA or State Pension Age). It is expected that up to 90% of NEST members will invest in a Retirement Date fund either through choice or as a result of not making a choice. Each fund will aim “to target investment returns in excess of inflation after all charges over the long term” through three phases: Foundation, Growth and Consolidation.
Foundation Phase: This is a lower risk start for younger members joining NEST. It is expected to last around 5 years for a member joining NEST aged 22. The investment objective will be to match inflation (as measured by CPI).
Growth Phase: Lifetime savers with NEST will spend the majority of time in this phase. The objective is to outperform inflation by 3%.
Consolidation Phase: As members move closer to retirement the objective of this phase is to gradually reduce exposure to more volatile return seeking assets.
In addition to the Retirement Date Funds, NEST will provide a focused range of other fund choices, including the NEST Higher Risk Fund, the Lower Growth Fund, the Sharia Fund, the Ethical Fund and the Pre-Retirement Fund.
For more information about NEST, visit their website at www.nestpensions.org.uk.
Qualifying earnings
Q. Are regular (monthly) dividend payments classed as 'earnings' for these purposes or would they not qualify as earnings under the qualifying criteria?
A. No. Dividend payments are not classed as earnings.
Q. I have read several documents that use slightly different figures for minimum earnings; either £5,035 or £5,715. The DWP seems to use £5,035 as the minimum earning in their most recent information. Please can you clarify what figure should be used for the minimum earning in 2011/2012?
A. The DWP has still to announce the basis for future limits from 2012/13 onwards. The figure of £5035 as the bottom end of qualifying earnings was given in the Pensions Act 2008 and £5715 was based on an assumed uprating. A recent DWP consultation suggested that the figure might tie in with the Lower Earnings Limit of £5,564 for 2012/13. There is no requirement to use a figure in 2011/12 as automatic enrolment doesn't take effect until the 2012/13 tax year.
Qualifying schemes
Q. Where employees utilise their own contribution basis (eg 5% plus 5% of gross basic pay) under tiers one and two, will there be a prescribed phasing-in basis for them? If not, will they simply have to devise their own phasing-in basis but ensure that it is at least equivalent to the "statutory" basis (ie 1% plus 1% of band earnings)?
A. It is the employer's responsibility to ensure that the contributions paid exceed the minimum for the contribution basis selected, taking into account phasing if necessary. Provided contributions are equal to or exceed the minimum the employer/employee can devise their own phasing-in basis.
Q. Can an employer apply different pensionable pay criteria to different groups of staff? This assumes they wouldn't be able to use certification as that applies to the whole scheme.
A. There is no reason why an employer can't segment his workforce and use different contribution tests for each segment as long as this does not breach discrimination legislation.
Q. What is a qualifying pension scheme?
A. A qualifying scheme:
- permits auto-enrolment
- facilitates the payment of contributions from the employer’s payroll
- offers a default investment fund
- delivers a minimum accrual rate or minimum contribution
Contracted-out final salary schemes |
Contracted-in final salary schemes |
Money Purchase, Stakeholder & GPP schemes |
|---|---|---|
Minimum accrual rate of 1/80 of pensionable earnings. |
Minimum accrual rate of 1/120 of pensionable earnings. |
Minimum total contribution of 8% (from October 2017) of all qualifying earnings between the minimum threshold of £5,715 and an upper limit of £38,185 (in current prices), with at least 3% paid by the company. |
If the company scheme passes these relevant criteria, then it will qualify, if it doesn't then employees must be auto-enrolled into a qualifying scheme.
Q. Can an employer change the qualifying pension scheme?
A. Yes, but there can't be a long gap. The regulations allow for up to a month to finalise administration. In practice, when an employer decides to change scheme the move is generally immediate with no break in contributions.
Regulatory requirements
Q. What regulatory requirements are there?
A. Employers must:
- inform the Pensions Regulator about how they have met their obligations within two months of their staging date, and two months from each re-enrolment date; and
- retain records for six years, including details of opt-outs
- There will be a fixed £400 penalty for employers who fail to comply, followed by penalties of between £50 and £10,000 a day for persistent or serious non-compliance, depending on employer size. Various other sanctions for the Pensions Regulator are also being put in place – these are still in consultation.
Q. Are there other options for meeting contribution requirements?
A. Where an employer calculates contributions based on different rates, earnings bands or definitions of pensionable pay, they will meet the contribution requirements if they meet one of the following criteria:
- if the scheme provides for minimum contributions for each jobholder of at least 9% of pensionable pay (4% minimum employer contribution), the employer can certify that the scheme meets the scheme quality test
- if contributions for each jobholder are at least 8% of pensionable pay (3% minimum employer contribution) and pensionable pay is at least 85% of total pay
- at least 7% of pensionable pay for each jobholder, and 100% of pay is pensionable
Q. What are 'pay reference periods'?
A. The frequency with which the individual is paid, or one week if longer. The reference period for checking that contributions have met the minimum requirement is 12 months.
Timing
Q. When does the pension scheme start for charity organisations?
A. The automatic enrolment staging dates for charitable organisations are determined in the same way as for any other organisation, i.e. based on number of employees on PAYE payroll.
Q. When a company runs salary exchange they normally have an election window. What is the impact of automatic enrolment and opting out as staging dates will not necessarily align with election windows?
A. Our recommendation is that the salary exchange option is offered as part of the terms of employment at outset of employment. Provided that the contributions meet the minimum requirements, anyone accepting the package will not be subject to automatic enrolment. Any employee declining the package will need to be automatically enrolled into a qualifying scheme within the time limits set by legislation.
Q. When are the changes going to happen?
A. From sometime between 2012 and 2016 (dependent on the size of the business from largest to smallest), employers will have to automatically enrol all eligible employees in a qualifying pension scheme and make contributions to their plan.
Q. Is it possible for employers to choose to start the process earlier?
A. The largest employers (those with a staging date of October 2012) will be allowed to automatically enrol employees as early as July 2012 if they want but they will have to be able to convince the Pensions Regulator that they already have a qualifying scheme in place or can establish arrangements by their chosen date.
General
Q. I am advising a Company 'A' with a complex structure. Over time they have acquired a number of businesses and the share ownership of those businesses varies. For example some businesses have a shared ownership where Company 'A' owns 52% and another business often a partnership (with employees) owns 48%. The variations can mean that the partnership sometimes owns more than Company 'A'.
My question is who is responsible for automatic enrolment? The detailed guidance says look at who owns the contracts of employment for the employees and I know that this will be the jointly owned business. Since these often have 10 to 20 employees automatic enrolment should be around 2016. However at what point (if ever) does the jointly owned business become a subsidiary of Company 'A' and therefore will require its employees to be automatically enrolled and the same time as the largest subsidiary of Company 'A'? - this is 4,800 employees and the Staging Date is 1st May 2013.
A. Responsibility for automatic enrolment and determination of staging date is based on which company the individuals are employed and PAYE schemes. The corporate structure in terms of ownership is not relevant. In this case it will depend on all the employees have contracts with Company A and whether they are all within the same PAYE scheme. If this is the case the staging date will be determined by the size of the whole group.
Q. I am sure you will agree that at the moment there is a gap in the market for one stop automatic enrolment administration tool. We can see three possibilities evolving in terms of who comes up with a solution.
a) Payroll providers (as the TPR has always been saying)
b) Middleware providers (The new providers who have come to the market now)
c) Pension providers like yourself
Who is best placed for dealing with this?
A. We would agree that there is a gap in the market. In our view it is likely to be filled by providers like ourselves, payroll providers, flex benefit system providers and employee benefit consultants. In each case they may develop their own middleware or commission it from another supplier.
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