Auto-enrolment into pension schemes

Unite pensions briefing – updated May 2014

In 2012 a new requirement for employers to auto-enrol employees into a qualifying pension scheme  started to come into operation. This requirement is  influencing employer attitudes towards existing company provision.

In short, most employees will be given a right to be a member of a pension scheme to which their employer contributes. If not in a scheme they will have to be automatically enrolled. This is a huge change nationally, as at present under a half of all employees work for an employer who offers them access to a scheme and many employees offered a scheme have chosen not to join.

It is important for Unite representative and member trustees to consider the implications of auto-enrolment for the development of pensions in their workplace. This may help you to respond to employer initiatives but also may suggest proposals we would like to make as to how and when employers should implement this.

Who has to be auto-enrolled?
Auto-enrolment will apply to all employees earning over £10,000 p.a. (2014/5) who are aged over 22 but under State Pension Age.

Auto-enrolment must take place no later than three months after appointment to a job, or the date when the employee reaches the qualifying age. Employees will have the right to opt-out but

Where employees choose to opt-out, when auto-enrolled, the employer is required to arrange for re-enrolment at intervals of three years.

Qualifying schemes for auto-enrolment must be established on a basis whereby members are not required to fill in any forms or take any decisions before being admitted to membership. This means that if there are different contribution/benefit options within a scheme one must be selected as a default for automatic enrolment.

In a DC scheme this also means there must be a default investment fund into which members funds are placed until they express a wish for a different investment choice

While employees younger than age 22 will not have to be auto-enrolled they must be given the right to opt-in to their employer’s auto-enrolment scheme, and so gain access to an employer contribution to their pension.

An employer is not allowed to take any action to encourage employees to opt-out or to penalise employees who do not.

What is a qualifying scheme?
Auto-enrolment has to be in a scheme which meets prescribed standards.

It could be a pre-existing company scheme, or a new scheme which the employer designates for the purpose. The employer can choose to designate a new Government established scheme called NEST (the National Employment Savings Trust)

The prescribed minimum standard for a defined benefit scheme will be only that it satisfies the reference scheme standard for contracting-out (roughly equivalent to 1/80 of qualifying earnings for each year of membership) or, if employees are not contracted-out, a minimum benefit standard equivalent to 1/120 of qualifying earnings for each year of membership. In the case of a CARE scheme there must be a minimum revaluation rate of CPI with a cap of 2.5%

The prescribed minimum standard for a defined contribution scheme will be that a total annual contribution of 8% of qualifying earning is made, of which at least 3% will have to be an employer contribution. However, this requirement is being phased in and initially the minimum contribution need only be a total contribution of 2% of which 1% is from the employer (see phasing of contributions in Appendix 2)

There is some flexibility for pre-existing  employer DC schemes to meet the DC qualifying standard  reflecting recognition that schemes may have different definitions of pensionable earnings, and this is covered in Appendix 1

What are qualifying earnings?
Qualifying earnings in this context will be gross pay within a band of £5,772 - £41450 p.a. (2014/5) ., the bands being subject to annual up-rating.

As noted above there is flexibility for schemes to have different definitions of pensionable earnings but the intention is that these should provide a reasonable approximation to this standard

When is auto-enrolment required?
The requirement for auto-enrolment is being staged so that larger employers are affected first in 2012, and smaller employers phased in over the following three years.

The first auto-enrolment must take place within three month of the employers staging date. An exception to this is where employees are and will remain eligible to join a defined benefit which meets the qualifying standard then they do not have to be auto-enrolled for the first time until 2015.

The minimum levels of contributions, where a defined contribution scheme is designated as the qualifying scheme, are being phased in over a five year period (there is no phasing period for defined benefit schemes).

A summary of these staging and phasing proposals is in the table below

A big unknown is how employees currently not in company schemes will react to being auto-enrolled. These will include those who are eligible, but have chosen not to join, and those who were not previously eligible.

The take-up of pension scheme membership will be influenced by the requirement to pay member contributions, the perception as to whether worthwhile benefits will be obtained, and the economic climate and by publicity surrounding the advent of auto-enrolment and NEST

The implications for company schemes
Assessment initially could take the form of analysing existing pension arrangements and collecting data. Key questions to consider will include :-

•    Which employees are presently ineligible to join a company scheme ?

    -    these might comprise, for example, employees who are too young or in a waiting period to join, or who are ineligible because they did not join     when first eligible, or who work in an area where pension has not been offered

    -    Scheme Rules and Scheme Booklets  will provide a part of the answer

•    What proportion of employees who are eligible have joined the scheme ?

    -    take-up levels can vary a lot

    -    for occupational schemes, Annual Reports and Actuarial Valuations will provide numbers of scheme members

•    Why have eligible employees not joined the Scheme ?

    -    this could be explained, for example, by the scheme requiring employees to apply (rather than opting-them in ) or by high contribution     requirements or poor promotion of the scheme

•    Does the company scheme offered meet the standard for a qualifying scheme?

    -    this may be easy to see from comparing  the terms of company scheme (see Scheme Booklets) with the minimum requirements for qualifying     schemes

    -    but consider carefully the basis of pensionable earnings in the company  scheme as it could for some be less than the qualifying earnings     relevant to auto-enrolment, requiring contributions or benefit rates to be higher to offset that shortfall

Analysis of this information will shed light on the implications of auto-enrolment in your company. One clear implication could be a prospective large increase in cost for the company. How might they react to that e.g will they remain happy to contribute at the same percentage levels per member if the proportion of the workforce in the scheme were to increase substantially?

A particular concern associated with auto-enrolment and NEST is that it may encourage a levelling down of existing provisions .This could add to the pressure on DB schemes arising out of rising costs and manifest itself in employers trumpeting the case for more equal, but lower quality provision across the whole workforce.

Making adjustment to scheme provision
A decision will need to be taken by the employer, before their staging date as to which pension scheme, or schemes, employees are going to be auto-enrolled in. This could well be a scheme already running in the company, or some new arrangement may be proposed for the purpose.

The scheme selected for auto-enrolment will probably require some amendment in order to be accepted as a qualifying scheme. Apart from providing for auto-enrolment the rules will need to extend eligibility to pre-excluded groups and to remove any waiting period to join.

Where schemes offer a choice of contribution/benefit levels then a default entry level will have to be identified and where DC schemes do not have a default investment option one will have to be designated.

One issue to consider is whether amendments to schemes, to make them suitable vehicles for auto-enrolment, could be achieved prior to the employer’s staging date. One particular advantage from this might be to extend eligibility to schemes to members who are currently excluded before this is legally required.

The prescribed auto-enrolment obligation cannot be discharged prior to October 2012, though it can be discharged earlier  than would be required by the staging timetable.

A scenario which could develop will be that employers may have one scheme designated for auto-enrolment but offer some or all employees the opportunity to join a better scheme. Alternatively different groups of employees could be auto-enrolled into separate schemes.

There may be situations where the present scheme has a high employee contribution rate , which is deterring members from joining. A possible development could be to establish a low employee cost auto-enrolment scheme whilst allowing employees to opt–in to the better scheme

If an employer proposes closing an existing scheme to new members because, on grounds of suitability or expense, they do not wish to use it for auto-enrolment we can argue that it be retained on an open basis with auto-enrolment to a different scheme.

In order to be a qualifying scheme a DC scheme must have an 8% total contribution of which a minimum of 3% must be paid by the employer. In respect of any company pension scheme, Unite would wish to see the employer paying a higher level of contributions than the employee. Even in a minimum contribution (8%) scheme it is possible for the employer contribution to be anything between 3% and 8%, with the employee contribution correspondingly lower.

Pre-existing DC schemes, where the employee contribution is lower than 5% of pay can still be qualifying schemes provided that the employer contribution is sufficient to take the total contribution above 8%

Unite’s policy
The Union supports the principle of auto-enrolment on the basis that it requires all employers to contribute to their employees’ pensions

The framework being implemented falls short of what we would like to have seen most notably in respect of the level of the employer contributions required. Our target is to seek improvement such that we reach a position where employers are obliged to pay at least double what employees pay, as only on that basis do we believe that lower paid workers have any chance of achieving a decent standard of pension.

Appendix 1

Qualifying DC Schemes

The core standard for qualifying DC schemes is that minimum contributions amount to 8% of gross pay between £5,772 - £41,450 . Clearly many existing schemes do not have a deduction and many are not based on gross pay.

An employer scheme with a different definition of pensionable pay may qualify if one of the following standards is met:

•    Contributions of at least 9% are paid on the scheme definition of pensionable pay (which cannot be less than total basic pay) with a minimum of 4%     from the employer

•    Contributions of at least 8% are paid on the scheme definition of pensionable pay (which cannot be less than total basic pay), provided that this is     no less than 85% of gross pay, with a minimum of 3% from the employer

•    Contributions of at least 7% of all gross pay with a minimum of 3% from the employer

.Appendix 2
Auto-enrolment – staging and phasing

The obligation to auto-enrol is being staged in by size of employer, as defined by their number of employees, on the following basis

Staging date Employer size
Staging date Employer size
01 October 2012 120,000 or more 
01 September 2013 1,250 – 1999
01 November 2012 50,000 - 119,999
01 September 2013 1,250 – 1,999
01 January 2013 30,000 – 49,999
01 October 2013 800 – 1,249
01 February 2013 20,000 – 29,999
01 November 2013 500 – 799
01 March 2013 10,000 – 19,999
01 January 2014 350 – 499
01 April 2013 6,000 – 9,999
01 February 2014 250 – 349
01 May 2013 4,100 – 5,999
April 2014 to April 2015 50 – 249
01 June 2013 4,000 – 4,099
August 2015 to October 2015 30 - 49
01 July 2013 3,000 – 3,999
January 2016 to April 2017 under 30

01 August 2013 2,000 – 2,999

Phasing in of contributions for defined contribution schemes

During the staging period ending in September 2017 minimum employer contributions will be limited to 1% and the total minimum contribution is 2%. This steps up in the two following years, as follows:

Phasing Date                                      Minimum % of qualifying earnings   

                                                            Total         Employer minimum

October 2012 to September 2017        2%                    1%

October 2016 to September 2018        5%                    2%

October 2018 onwards                         8%                    3%

If the employer only pays the minimum then the balance of the total minimum contribution would have to be paid by the members and via tax relief e.g at the outset the member would be required to pay either 1% of pre-tax pay or 0.8% of post-tax pay (in which case the balance of 0.2% would be rebated tax)

Further information
The Pensions Regulator - An introduction to work-based pension changes 
The Pensions Regulator - Introduction timelines
National Employment Savings Trust (NEST)
Department for Work & Pensions - workplace pension reform