The introduction of the automatic enrollment reforms on 1 October marked the beginning of a new era in pensions saving in the United Kingdom.
Under the new legislation, employers will have to automatically enroll their workers who meet specified criteria (relating to age, location of work and earnings) into a pension scheme and make contributions in respect of them. Membership will not be compulsory, and workers will be able to opt out of the pension scheme once automatically enrolled. Other workers will be able to ask the employer to enroll them into a pension scheme, and the employer will have to comply with these requests. In some cases, employer contributions will be payable.
These new requirements will not come into force for all employers at the same time. They are being introduced in stages from 1 October 2012 to 1 April 2017, working from the largest to the smallest employers.
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| Mike Burns | Cathryn Everest |
The new laws mark a significant change for employers both in terms of the payment of employer contributions and the administrative processes that will be needed to be put in place. This is particularly the case for those who have not previously had significant numbers of workers in a pension scheme; a recent analysis by the Department of Work and Pensions listed hotels and restaurants as one of the industries where workers are least likely to have a workplace pension.
Early planning is essential to ensure that employers are ready to comply when they reach their staging date.
Identifying the staging date
The first step is to identify the staging date. The dates for the different sizes of employer are available on the Pensions Regulator's website. The Pensions Regulator also will write to employers at least a year before their staging date.
The staging date is determined by the size of the “pay as you earn,” or PAYE, scheme as of 1 April 2012. If the employer operates more than one PAYE scheme, the staging date for all its workers will be determined by the largest PAYE scheme. If the employer shares a PAYE scheme with other employers, subject to exceptions for small employers, they will all use the date of that PAYE scheme.
Which workers are affected?
The next step is to identify who in the workforce will be affected by the reforms. Employers in the hotel industry might have a wide variety of staff, and therefore this exercise might be complex. Some key points to note are set out below.
Who is a worker?
The definition of worker is wider than just those who have contracts of employment. It also catches those who have a contract to perform work or services personally, provided they are not undertaking that work as part of their own business.
Assessing whether an individual is a worker can be a complex exercise, particularly where it is not obvious whether they are under a contract to perform work or services personally (and therefore caught by the reforms) or whether they are self-employed contractors (who would not be caught by the reforms).
While the person's tax status might be useful in making the assessment, it is not conclusive.
Work or ordinarily works in the U.K.
In order to be caught by the reforms, the worker will need to either work or ordinarily work in the U.K. If a worker is wholly based in the U.K., the position will be straightforward.
However, in the case of workers who are not wholly based in the U.K. (for example, an employee who works across various hotels in an international chain) then the position will be less straightforward.
Short-term workers and agency workers
Provided the criteria to be a worker are met, those who are on short-term contracts will be covered by the reforms. For employers in the hotel industry, which might have a high turnover of short-term workers, this will be of particular note. The use of a waiting period to defer the automatic enrollment duty might be useful here.
In the case of agency workers (that is, those who do not have a contract with either hotel), the employer for the purposes of these reforms and therefore the party with the obligations under the legislation will be whoever has the responsibility for paying the worker. Employers will therefore need to review any arrangements they have with agencies.
Which workers are eligible for automatic enrollment?
The next step is to assess the affected workers to see who is eligible for automatic enrollment and who has the right to opt in.
The categories of workers
The table below summarizes the categories of worker, whether they have a right to be automatically enrolled or opt-in and whether employer contributions are payable.
When making the assessment of qualifying earnings, it is important to note that the figures above are for the tax year 2012/2013 and are subject to annual review. The earnings that are relevant are those that fall into a statutory definition of "qualifying earnings"—a broad term that covers salary, wages, commission, bonuses and overtime as well as certain statutory payments. While annual figures are set out above, the assessment is made over a relevant pay reference period. For example, if a worker is paid by reference to calendar months, the assessment will be of the qualifying earnings payable in the relevant month compared to a pro-rated amount of the annual thresholds.
For employers in the hotel industry whose employees work irregular hours so their earnings are subject to fluctuation, the assessment of whether the earnings thresholds are met can be particularly complex. Employers will therefore need to ensure they have effective systems in place. (This is something about which they might want to speak to their payroll providers.)
Automatically enrolling all workers
Employers might feel they would prefer to simply automatically enroll all of their workers under the terms of their contract of employment, irrespective of whether they qualify for automatic enrollment under the legislation. This option might not prove as simple to implement as it might at first sound. In practice, employers still will need to assess the category into which that the worker falls. Employers would need to consider issues such as:
- ensuring the contracts of employment contain appropriate provisions, for example, to permit the deduction of member contributions from earnings; and
- the treatment of the worker if they leave the scheme, for example, ensuring that if there is a change in earnings, and the employee becomes eligible for automatic enrollment under the legislation, this obligation is complied with.
Which pension scheme will be used?
Employers will need to decide what pension scheme to use to meet their duties and can use an occupational or a personal pension scheme provided it meets statutory requirements.
For those eligible for automatic enrollment or who have the right to opt-in and receive an employer contribution, the requirements are that contributions are of at least a minimum level and that the worker does not have to take any action to join the scheme or continue membership. Workers cannot be required to complete an application form or make an investment choice.
For workers who have the right to opt-in but not to an employer contribution, the scheme will simply need to be a registered pension scheme and the employer will need to facilitate member contributions.
If an employer already has a scheme it wishes to use, it will need to assess the scheme to ensure it meets the statutory requirements or make amendments so that it does.
The minimum levels of contributions are determined by reference to the band of qualifying earnings between £5,564 ($8,904) and £42,475 ($67,968). This is based on the same definition of qualifying earnings as set out above for assessing workers and, again, these figures are subject to annual review. The contribution requirements are being phased in as follows.
If employers are planning to use a scheme where the definition of pensionable pay does not match the statutory definition of qualifying earnings or contributions are paid on all pensionable pay rather than just a range of earnings, it might still be possible to use this scheme if it meets a set of alternative quality requirements. Employers using this process will need to certify that the scheme meets these alternative requirements.
Waiting periods
An option available to employers is the use of waiting periods (also known as postponement). This effectively allows employers to defer the automatic enrollment duty for up to three months. A waiting period can commence from the staging date, the first date a worker commences employment or the first date after the staging date that the worker becomes eligible for automatic enrollment.
It is important to note that during the waiting period, while employers will not have to automatically enroll workers, their workers can still ask to be enrolled into a scheme. If they do so, employers will have to comply with this request.
Administrative and communication issues
As noted above, the duties also impose administrative obligations on employers. Employers will need to ensure that as part of their implementation plan they put in place processes:
- to deal with automatic enrollment that involves passing information to the scheme and giving information to the worker;
- to inform those with the right to opt-in that they can do so and to process any such requests;
- to process opt-outs by workers including processing any refunds of contributions payable; and
- to meet statutory requirements on providing information to workers, registering with the Pensions Regulator and keeping records.
Conclusion
As can be seen, there are many issues for employers to consider. Therefore, planning is essential to ensure that once the staging date arrives, employers are ready to comply with their new duties.
Mike Burns is a partner in the Employment team based in the Manchester office. He acts for a variety of medium to large sized businesses predominantly based in the North West. He has practiced employment law for 20 years and advises organizations on all aspects of employment law, with particular specialism in the management of contractual change, employee relations, TUPE and senior employee issues.
Cathryn Everest specializes in pensions law having joined the team on qualification as a solicitor in September 2006. Cathryn's areas of expertise include reviewing and updating scheme documentation both in relation to rule amendments and to ensure compliance with legislation, advising trustees and employers on compliance with pension legislation, including employers' duties legislation, advising trustees in relation to benefit queries to ensure compliance with the scheme rules and legislation and advice in relation to the Pensions Regulator, including moral hazard legislation and clearance applications.
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