Between October 2012 and February 2018 employers will need to start automatically enrolling all of their 'eligible jobholders' in a pension scheme which meets minimum requirements. Employers will need to assess their workforce to determine who is an eligible jobholder. They must put processes in place to ensure workers are enrolled once they become eligible, and that those who have opted out are re-enrolled every three years.
A defined contribution pension scheme does not guarantee what employees will get when they retire. Employees contribute to the pension scheme and the money is then invested in the way agreed. At retirement, the employee can buy a pension with whatever funds are available.
Employers who want to use a defined contribution pension scheme for auto-enrolment purposes will need to check that the scheme meets minimum contribution requirements. They also need to issue information about the scheme to their staff.
To meet the minimum contribution requirements the total contributions for each worker must be at least 8% of that worker's qualifying earnings. The employer must contribute at least 3%. Qualifying earnings are the worker’s earnings between £5,668 and £41,475 (figures for 2013/14). These figures will be reassessed each year. Earnings include the worker's salary as well as any commission, bonuses, overtime and statutory sick pay.
These contribution rates are being phased in over five years, with full contributions not becoming payable until October 2018. Employees will initially have to contribute only 1%.
It is not straightforward to check whether the minimum requirements are met if contributions under the pension scheme are not based on qualifying earnings - for example, if the contributions are based on basic pay. Instead, employers will be able to self-certify that the scheme meets the minimum contribution requirements. They can do this if the contributions payable for each worker are at least:
- 9% of pensionable pay, with the employer contributing at least 4%; or
- 8% of pensionable pay, with the employer contributing at least 3%. Pensionable pay must be at least 85% of all pay; or
- 7% of all earnings, with the employer contributing at least 3%.
Employers will have to re-certify each year.
Existing pension schemes
Employers who want to use a personal pension plan will need to put in place an agreement with the provider to make minimum contributions. Existing plans are unlikely to have done this.
If an existing scheme is to be used for auto-enrolment purposes, jobholders will need to be able to join without first having to provide any additional information. Employers with an occupational pension scheme may need to amend their scheme rules so that this can happen.
Schemes which provide death benefits will need to be considered carefully. Insurers will usually want medical information about a member before agreeing to provide life cover.
The majority of workers will not want to make any investment choices. Their contributions will be invested in the default investment option. The design of this option is therefore important, but the scheme should offer other suitable options and monitor these regularly. Employers using a personal pension plan will need to agree with the provider who takes responsibility for this.
Employers will have one month from the date when they must start auto-enrolment to auto-enrol all their qualifying workers. Employers should discuss the timetable with the pension scheme provider or the trustees to ensure that this deadline is met.
Employers will need to keep records about the scheme for six years. The Pensions Regulator can ask the employer to provide this information.
Employers may want to offer a more basic pension benefits packages to staff who are not currently members of their pension scheme. Employers should consider whether these workers include a disproportionate number from a minority group as this may lead to discrimination claims.