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Auto-Enrolment and the National Employment Savings Trust

Auto-Enrolment and the National Employment Savings Trust

Following publication of an independent review commissioned by the DWP, “Making Automatic Enrolment Work”, the Government confirmed on 27 October 2010 its commitment to the proposed requirements on employers to auto-enrol eligible employees for pension provision from 2012.

A key part to meeting the auto-enrolment requirements will be the National Employment Savings Trust (NEST), aimed at small employers and lower paid workers. The Government confirmed that the launch of NEST will go ahead, and NEST Corporation believe this is on track for 2011.

The summary below takes into account the announcements on 27 October 2010, but some of the proposals made in the independent review, “Making Automatic Enrolment Work”, have yet to be confirmed.

Employers will be required to auto-enrol eligible employees into a ‘Qualifying Workplace Pension Scheme’ (QWPS). The QWPS will be either an employer sponsored pension arrangement that satisfies specified quality tests or NEST. The requirements will begin from October 2012, phased over a four year period starting with the largest employers.

Eligible employees will be those aged between 22 and State Pension Age, who have earnings above the standard personal tax allowance of £7,475 (in 2011/2012 terms). Employees at other ages will be able to opt in, as will employees who have earnings above the primary threshold for National Insurance contributions (currently £5,715).

The original proposals required employers to auto-enrol eligible employees within the first month of employment. The Government has now proposed an easement of this timescale to within the first three months of employment. However, employees can request to be enrolled earlier and the employer is obliged to act on this.

Individuals can opt out of the QWPS but employers face financial penalties if they induce this. Employees choosing to opt out will face auto-enrolment every 3 years.

Auto-enrolment is likely to be relevant to your business if:

• You do not operate a pension arrangement(s) for all of your eligible employees;

• You have a significant number of employees who opt out of the pension arrangement that you operate; or

• The pension arrangement you operate does not satisfy the specified quality tests.

We give brief details below of our current understanding of NEST and the quality tests to be used to assess whether your existing pension arrangement(s) qualifies as a QWPS. Our calculator estimates the minimum potential costs in relation to your non-pensioned eligible employees.

Details of NEST

• Minimum employer contributions of 3% and minimum total contributions of 8% (8% includes basic rate tax relief on employee contributions).

• If the employer pays the minimum, then the 8% total contribution will comprise: Employer 3%; Employee 4% and Tax Relief 1%.

• Minimum contributions to be phased in:

	Minimum Employer	Minimum Total
Oct 2012 to Sept 2016	1%	2%
Oct 2016 to Sept 2017	2%	5%
Oct 2017 onwards	3%	8%

• Qualifying earnings will be total earnings (i.e. not restricted to base salary) falling within an earnings band, the proposed band is £5,715 to £38,185.

• Maximum contributions of £3,600 p.a., this limit is due to be reviewed (and potentially removed) in 2017.

Qualification as a QWPS

• Defined Benefit (DB) schemes (also known as “final salary”) – these should qualify if contracted out, or contracted in and a pension accrual of at least 1/120th of qualifying earnings;

• Defined Contribution (DC) plans (also known as “money purchase” ) – these should qualify providing contributions are at least comparable with NEST, i.e. in terms of contribution rates and qualifying earnings (many arrangements do not currently recognise all fluctuating earnings); and

• DB/DC Hybrid plans – qualification likely to be as above for core DB or DC benefit.

The Government has supported the independent review’s proposal for simplified certification tests for DC pension arrangements that have different definitions of pensionable pay to NEST’s definition of qualifying earnings.

Impact Assessment

We would be happy to give you a free indication of whether your current pension arrangement(s) will qualify as a QWPS. If they will not qualify, we can then offer our advisory services to explain the main options for benefit re-design to gain qualification. We can also analyse potential increases in costs and explore cost management strategies.

Even if your pension arrangements meet QWPS qualification, you may have non-pensioned eligible employees, e.g. for reasons of opting out, ineligibility (under the arrangement’s rules) or closure to new joiners. These eligible employees will have to be auto-enrolled into a QWPS, and we would be happy to advise on the relative merits of the options available.

For an approximate guide to the minimum potential costs involved for enrolling your non-pensioned eligible employees for DC pension provision, click here .

For further information

For more information we recommend visiting either the Pensions Advisory Service website at the following address: www.pensionsadvisoryservice.org.uk/employer-guidance/auto-enrolment/advice-for-employees

Please click here to view our training video on Pensions Reform - Auto Enrolment.

Alternatively, please contact your usual Barnett Waddingham contact or email employeebenefits@barnett-waddingham.co.uk