Automatic enrolment update

Loan Market Association ("LMA") - an update on recent documentary developments

When the automatic enrolment legislation was first introduced in 2012 it brought in dramatic changes for employers in respect of pension provision for their workers.  For the first time ever employers were required to contribute to a qualifying worker’s pension. 

In the past employers had been required to designate a stakeholder pension scheme but were not required to make contributions.  Because the new legislation introduced such a dramatic change for employers there were various transitional provisions designed to soften the impact of the new legislation.  There were two key transitional elements; one related to the “staging” date on which an employer would be required to implement automatic enrolment and the other related to the amount of contributions required. 

Below is a table setting out the escalating level of contributions required to comply with automatic enrolment, where contributions are based on “qualifying earnings”.  Qualifying Earnings are, broadly, a worker’s gross earnings between £5,876 and £45,000 (in tax year 2017/18).   

Period

Minimum Employer Contribution

Total Minimum Contributions (includes worker contribution, employer contribution and tax relief)

Staging Date to 5 April 2018

1%

2%

From 6 April 2018 to 5 April 2019

2%

5%

From 6 April 2019 onwards

3%

8%

 

For employers that have “self-certified” compliance with the automatic enrolment legislation, there can be different escalating levels of contribution required.  An employer may have self-certified, for example, a scheme which does not have a definition of “pensionable service” which aligns with the definition of “qualifying earnings” in the Pensions Act 2008. 

What is happening on 6 April 2018?

As can be seen from the above table, total minimum contributions to qualifying schemes are increasing on 6 April 2018.  Whether contributions need to rise will depend on the existing levels of contribution. If current contribution levels are below the total minimum contributions that will be required then contributions will need to increase.  Whether it is employer contributions that need to rise, employee contributions or both will depend on the existing contribution structure.

Contributions will need to increase for employers (and members) which use schemes such as the National Employment Savings Trust (“NEST”) and schemes which have aligned contribution levels with the transitional requirements.  For employers using other automatic enrolment schemes it will be necessary to consider what contributions are currently made to the scheme.  Employers who have “contractually enrolled” employees into their pension scheme using the employment contract will also need to consider existing contribution levels and contractual provisions.    This is something that employers may wish to take advice on.

Letting workers know about increases to their pension contributions

Employers with contribution structures which require total contributions of below 5% of qualifying earnings (to a standard automatic enrolment scheme) will need to consider how they will inform employees about the future contribution changes. 

In certain circumstances there may be a legal requirement to consult with workers about changes to their member contributions to the scheme.  This is particularly likely if changes are envisaged which go beyond simply complying with the automatic enrolment legislation. 

To the extent that an employer is not departing from the escalating increases set out in the pensions legislation (at the appropriate time) then no consultation should be required with employees.  For example if an employer is using NEST then consultation is unlikely to be necessary.

However, for employers who used the employment contract to enrol staff and to specify contribution structures, it will be necessary to check whether the contract envisages increases being made and also to consider whether any increases go beyond the employer’s duty to comply with the automatic enrolment duties in the Pensions Act 2008. 

This area is complex and in certain circumstances consultation may be required.  If consultation is required it would be for a minimum sixty day period.  We suggest that any employers who are concerned about whether they may need to consult with their employees contact us for further advice. 

New business

For new businesses set up after 1 October 2017 the automatic enrolment duties will apply without any “staging” (even though staging is still occurring for some of the smallest pre-existing companies).  This means that as soon as a new business employs a worker it will need to carry out an automatic enrolment assessment.  The escalation of contributions will follow the same pattern as for employers whose employer duties applied from their staging date. 

Automatic re-enrolment

Employers may need to start considering the automatic re-enrolment requirement.  This is a requirement which applies broadly every three years from first implementation of the automatic enrolment duties.  Employers are under a duty to re-enrol eligible workers who have previously opted out of an automatic enrolment pension scheme. 

Automatic re-enrolment will only be relevant to staff who are not already in a qualifying scheme and within that group there will be various workers for whom re-enrolment will not be required, such as staff who opted out of or left a qualifying scheme within the previous 12 months; directors or LLP members. 

Directors and LLP members

The automatic enrolment legislation was changed last year so that there is no longer a duty on the employer to automatically enrol (or re-enrol) statutory directors of the employer company or limited liability partnership members.  However, if directors have already been automatically enrolled into a pension scheme (and have not opted out) then any decision to disapply duties in respect of those directors may need careful thought.  

Contact our experts for further advice

View profile for Gabrielle HolgateGabrielle Holgate

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