 By Andrew Campbell, Associate in Pensions Practise, Olswang
In stages from October this year onwards, employers must automatically enrol their workers into a pension scheme and pay contributions on their behalf. However, industry research shows that many employers are still behind the curve in preparing for auto-enrolment.
As well as the obvious financial implications of auto-enrolment and budgeting for the new regime, there are many other compliance and regulatory issues for your clients to consider – not least deciding what scheme to use, updating HR systems to deal with auto-enrolments, opt-outs and record keeping requirements and identifying which parts of the workforce need to be auto-enrolled. In this article, Olswang's pensions practice discusses just a few of the legal questions employers need to consider to prepare for the new regime.
Who needs to be auto-enrolled?
A company's workforce is essentially broken down into three categories for the purposes auto-enrolment. First, there are the "eligible jobholders" – this group must be auto-enrolled into a pension scheme (unless they are already a member of such a scheme or they choose to opt out) and the employer must make contributions on their behalf. An eligible jobholder is a person who works (or ordinarily works) in Great Britain under a contract, who is aged between 22 and state pensions age and who has earnings of at least £8,105 per annum (for tax year 2012/2013). A jobholder who does not meet this age or earnings criteria but has qualifying earnings of at least £5,564 has the right to request to be auto-enrolled into a scheme and have contributions paid by their employer – this category is "non-eligible jobholders". Finally, there are entitled workers – these are workers with earnings of less than £5,564 who have the right to be enrolled into a pension scheme if they so request. However, employers do not need to make contributions to the scheme for this category of workers.
So far, so simple. However, what may, on the face of it, appear a straightforward obligation for employers actually conceals a number of complicated issues which companies will need to get to grips with before they reach their own staging date.
Who is a worker?
In many cases, it will be self-evident who is a worker under a contract and therefore needs to be auto-enrolled. However, even where an individual does not work under a contract they may caught by the new requirements if they have contracted to perform work personally under a "contract of services". By contrast, a person who is genuinely self-employed (under a "contract for services") will not need to be auto-enrolled. In this context, guidance from the Pensions Regulator envisages an element of case by case assessment by employers as to who is under a contract of services by reference to a number of features which, if satisfied, will require the employer to auto-enrol the individual.
Another potential issue for employers is how to treat someone "ordinarily working in the UK" as this could include both non-UK nationals working in the UK and workers based overseas. Where a worker is based overseas, it will need to be established whether they are still ordinarily working in the UK and therefore need to be auto-enrolled. In this scenario, the Regulator's guidance again envisages an element of assessment on the part of employers by reference to a number of factors which will determine whether they are ordinarily working in the UK (for example, considering as where the individual begins and end their work, where their private residence is, whether they pay NI contributions and what currency they are paid in).
Another category to consider here is agency workers, who have previously not had to be provided with the same pension benefits as permanent staff, but who now may need to be auto-enrolled. The position here is that the person who is responsible for paying the agency worker who will need to comply with the auto-enrolment requirements – so companies should check their contracts with any agencies they use to identify who will meet the cost of auto-enrolment.
More generally, employers will also need to keep track of individual ages and earnings as this may see a worker move between the different categories of worker with the employer duties applicable to them changing as a result.
What must an employer pay?
An employer must contribute 3% of the jobholder's "qualifying earnings" (this is all earnings between £5,564 and £42,475) with total contributions of 8%. To simplify the compliance process, an employer with an existing DC scheme will be able to certify in advance that its scheme meets the minimum quality requirements.
However, an issue here is that DC schemes generally calculate pension contributions by reference to a definition of pensionable earnings (often this is "basic salary"), and not according to the qualifying earnings band. Also, a particular scheme rules may treat certain elements of remuneration as "basic salary" which are specifically excluded by the legislation. So to comply with the quality requirements, an employer may need to review and reconcile its own definition of earnings and salary with the definitions under the legislation.
One other point to touch on here is how salary sacrifice arrangements work in the context of auto-enrolment. This is because in order to have a valid salary sacrifice arrangement, an individual first needs to agree to give up an element of their remuneration before they become entitled to it. However, the legislation also states that an employer cannot require a jobholder to express a choice in relation to being auto-enrolled – and so the effect of this provision is that employers cannot therefore require a jobholder to agree to salary sacrifice as a condition of their membership of an auto-enrolment scheme. That said, HMRC guidance provides that employers can continue with salary sacrifice arrangements for staff in existing schemes.
This is only a flavour of some of the issues employers face in getting to grips with the new regime, but the point is that this is a complicated area where many of your clients will need detailed legal advice.
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