Fiducia Wealth Management
Posted in Pensions & Retirement, Company Pensions on 11.01.14

Richard Birch, Technical Consultant with Lark Life & Pensions Ltd looks at the universe of Auto-Enrolment…now coming to you at warp speed!

Whilst a variation of probably the most famous split infinitive ever written, in a nutshell this is what automatic (‘auto’) enrolment (‘AE’) is all about… to seek out new people, and join them to a pension scheme.  And it’s an even longer mission than the USS Enterprise had – launched on 1st October 2012 and culminating in October 2018, AE is a 6-year mission, although we can be fairly certain that the mission won’t end there!

The biggest pension reform in generations, AE is primary legislation borne out of the Pensions Act 2008 that places onerous duties on employers to ensure that all eligible employees are enrolled into a Qualifying Workplace Pension Scheme (QWPS).  An employer’s new duties start from their ‘Staging Date’.  This is advised by the Pensions Regulator (tPR) 18 months in advance and is based on the employer’s largest PAYE scheme at 1st April 2012.  There are minimum contribution levels required by employers and employees, although employers can pay the minimum employee contributions too if they wish.

AE is much more than simply paying contributions into a pension scheme.  The regulations and communication requirements are complex, with a whole new terminology for employers and employees to cope with such as ‘worker’, ‘eligible and non-eligible job-holders’, ‘entitled workers’, ‘certification’, ‘opt-outs’, ‘postponement’, and ‘phasing’ (not quite ‘Phasers on stun’).  Access to an IT platform to manage AE, either from pension or payroll service providers, will be a prime consideration for many employers.

There must be no barriers to joining the QWPS, and workers have rights to opt-out (in other words ‘beam me out Scotty’).  Workers cannot be asked to make decisions or fill in forms before joining, they must not be encouraged to opt-out (no pushing them into the Transporter!), there must be a default investment fund in place, and contributions must be deducted through payroll.

Regulations and enforcement

The Pensions Regulator (tPR) is responsible for ensuring that employers meet their new duties, but unlike the ‘toothless’ Stakeholder legislation this time the Regulator is armed with phasers and photon torpedoes…and it’s already started to use them in the form of fines and enforcement orders.  tPR’s ‘Guidance’ (but bear in mind that a guided missile doesn’t have much choice of where it’s going!) has now swelled from 9 to 14 sections, and formal consultations between various Government departments are continuing. This means that all but the smallest employers’ will likely need professional advice from their pension, payroll, and possibly even legal advisers.

Getting started

Captain Kirk may command the Enterprise, but not without advice and support from Scotty, Bones, and Spock.  So identifying and allocating responsibilities to key internal stakeholders in the business (HR, Payroll, IT, FD etc) is vital, and a project plan invaluable to ensure the right pension arrangements, contribution levels, and employee communication structures are set-up in good time.  There’s a lot to do, so employers should start planning at least 12 months before their staging date.

Assessing the workforce

The Enterprise crew are split into three categories (command, sciences, and engineering) and similarly employers must categorise their ‘workers’ into one of three categories (a process that must be repeated every 3 years).  For 2013/14:

–         Eligible jobholders: Aged between 22 and state pension age, earning above the equivalent of £9,440 p.aThese jobholders must be auto-enrolled.

–         Non-Eligible jobholders: Age 16 to 21 or between State Pension Age and 75. Must be admitted to the QWPS on request with minimum contributions for earners over the equivalent of £5,668 p.a.

–         Entitled workers: Workers over age 16 earning less than the equivalent of £5,668 p.a. can ask to be enrolled in a QWPS, but there are no obligation for employers’ to make any contributions.

This assessment can be postponed for up to 3 months after staging date, but the employers QWPS and AE processes must still be ready to leave space dock at staging date because employees can request earlier joining.  Postponement can be useful to align payroll, provide a window to establish salary sacrifice, or bypass unusual earning spikes, but otherwise eligible jobholders must be auto-enrolled within 3 months of the staging date.

Pension contribution levels

Just as the USS Enterprise can select impulse power and then jump to warp drive, employers can opt for lower  ‘stepping stone’  contribution rates to ease the strain for themselves and their employees.  But by 1st October 2018 employers must at least be travelling at ‘warp one’ with total pension contributions at 8% of Qualifying Earnings’ (QE), of which at least 3% is paid by the employer.  QE’s are earnings within bands set by the Government but for 2013/14, the AE ‘trigger’ is equivalent earnings of £9,440.  Once hit, contributions are then based on earnings between £5,668 and £41,450 and workers stay auto-enrolled even if subsequent earnings dip below the trigger.

But there are some other options too.  Contributions can instead be linked to one of three ‘alternative’ qualifying criterion called ‘Certification’ where a different definition of earnings such as ‘pensionable pay’ could be used.  A further ‘Entitlement Check’ option is also available where neither QE nor certification ‘fit’ – for example, if individual pension plans are being used.  Earnings definitions vary depending on the route adopted, and with Certification contributions are from ‘pound one’ with no band earnings.  So undertaking some ‘modelling’ with advisors to compare contribution costs can be a valuable exercise.

However it’s not just pension contributions that are a cost to the business, as advisory costs and management time need to be budgeted for too.

Pension scheme type

Most employers that already offer a group pension scheme to employees will likely want to nominate this as its QWPS.  But it’s important to check that this meets minimum requirements, or that it can easily be adapted.  Similarly, scheme rules need to be examined.  If currently there’s a 6 month waiting period, it’s not available to all employees, there’s no default fund, or contributions are too low, your pension ‘Starship’ will need an upgrade.

Employers with no current pension scheme should seek professional advice, as pension provider terms and AE support facilities vary widely.  For businesses who do not wish to run their own scheme, there are ‘alternative’ QWPS schemes that can be nominated, although support, features and options may vary.  These include the Government’s National Employment Savings Trust (NEST), NOW Pensions, and The People’s Pension (there are others too), although NEST is the only scheme that must accept everyone.

A cautionary note

Finally, in this brief glimpse into the AE universe and before you ‘boldly go’:

–         Following the Retail Distribution Review commissions are no longer available (at least on new schemes) to remunerate advisors, so be prepared to pay realistic fees for advice and services.

–         There are already serious capacity issues in the market.  Pension providers are choosing which pension schemes they are prepared to offer terms on, and although many are still offering free auto-enrolment support services these may be on-line and telephone support only, and one provider is charging £15,000 for its AE system.

So even if your staging date is sometime off, start getting advice now – or you might just be caught in the ‘Romulan neutral zone’ with limited options!

If you would like to know more about auto-enrolment, please contact:

Richard Birch FCII APMI APFS DipIEB, Chartered Insurance Practitioner

Technical Consultant, Lark Life & Pensions Ltd

Direct Line: 020 7543 2824

E-mail: richard.birch@larkinsurance.co.uk

If you would like to know more about how we as Financial Advisers can help you  with your Pensions and overall Retirement Planning then visit the Retirement Planning section of  our website: Retirement Planning  or send us email at: email@fiduciawealth.co.uk

The information contained in website is for guidance only and does not constitute advice which should be sought before taking any action or inaction. The information is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Fiducia Wealth Management Limited, or any associated companies or persons, its officers or its employees, for any loss occasioned in connection with the content hereof and any such action or inaction. Professional financial advice is necessary for every case.

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Fiducia Wealth Management
Posted in Pensions & Retirement, Company Pensions on 11.01.14