Eight pensions basics for those who “need to know”
The pensions auto-enrolment process may be well under way, but there are still a number of reforms due to take place in the near future. How well do you know your obligations as an employer? Take a look at this eight-point checklist.
1. There are different types of workplace pension
There are two types of workplace pension: occupational pensions and contract-based pensions.
Occupational pension schemes are normally set up by employers as trusts, with trustees appointed to oversee them in the interests of the workforce.
Occupational pensions can be defined benefit or defined contribution. With defined-benefit schemes, the pension payable on retirement is dependent on the individual’s salary and the length of time that he or she has made contributions into the scheme. This type of pension may be based on the final salary.
Another form of defined-benefit scheme, the career average revalued earnings (CARE) scheme, is based on an average of salary for a number of years before retirement. CARE schemes are generally cheaper for employers than final-salary schemes.
With defined-contribution occupational schemes, also known as money purchase schemes, contributions are invested into investment funds, and the value of the pension will depend on how much has been paid in, and the performance of those funds over time.
Some occupational schemes are known as “hybrid” schemes, as they have a mix of defined-benefit and defined-contribution pension benefits.
Another type of workplace pension is the contract-based personal pension scheme, which is offered by employers but administered by a pension provider.
Contract-based schemes are provided by financial institutions and are always defined contribution. Individuals buy an annuity on retirement, which then pays out an income.
In April, the coalition Government introduced new flexibilities in how savers can access defined-contribution pension savings.
2. Employers must automatically enrol staff into a workplace pension scheme
The requirement to auto-enrol staff into a pension scheme and make employer contributions on their behalf began to be rolled out from 1 October 2012.
Depending on PAYE scheme size and reference number, employers are given a date, known as the “staging date” by which they must enrol certain workers. Larger employers were the first to auto-enrol, and the full roll-out is due to be complete by early 2018.
Employees who must be automatically enrolled into a qualifying pension scheme are known as “eligible jobholders”. Whether or not an employee is an eligible jobholder will depend on his or her age and earnings.
“Non-eligible jobholders” do not have to be automatically enrolled but they can opt in to pensions saving. If a non-eligible jobholder does opt in, the employer must treat him or her like an eligible job holder. Whether or not an individual is a non-eligible jobholder also depends on age and earnings.
Individuals with earnings at or below the national insurance contribution lower earnings limit do not fall into the eligible jobholder or non-eligible jobholder category.
They can ask to be enrolled into a qualifying pension scheme, with employer contributions made, but the employer is under no legal obligation to agree to it. However, they must be able to join a scheme that is registered with HM Revenue & Customs (HMRC) if they ask to do so.
3. Minimum auto-enrolment requirements apply
For an employer to meet the auto-enrolment requirements, the pension scheme (or schemes) that it chooses must qualify. For example, it must be registered in the UK with HMRC or, if it is an EEA-based scheme, it must be regulated.
Employers must also make a minimum contribution into the scheme. Employer contributions can build up over time to a minimum of 3% from 1 October 2018.
4. Employment safeguards relating to auto-enrolment
All employers, regardless of whether or not they have reached their staging date, are prohibited from offering inducements, such as higher pay or a bonus, to employees to encourage them to opt out of workplace pensions.
Pensions and HR
Employers must also not ask questions or make statements when they are recruiting staff, to suggest that being offered the job is conditional on whether or not the job applicant will opt out.
Organisations must also not dismiss employees, or subject them to a detriment, for asserting the right to auto-enrol.
5. Minimum consultation, information and declaration requirements apply
Most employers must consult with pension scheme members and their representatives about changes to pension provision and provide certain information to scheme members.
Specific information about auto-enrolment rights must also be provided to jobholders and workers within set timescales.
There is also a requirement for employers to make a “declaration of compliance” with their auto-enrolment obligations to the Pensions Regulator within five months of their staging date.
6. Pensions must comply with equal opportunities requirements
It goes without saying that access to a pension scheme and benefits under it must not be based on factors that result in unlawful discrimination.
For example, retirement ages must be the same for men and women, and part-timers must be offered the same access as full-time staff (unless not doing so can be objectively justified). Civil partners must receive the same pension benefits as married couples (subject to certain service limits).
Pensions and HR
There are a number of qualifications and exceptions relating to equality in pension provision, particularly in relation to age discrimination (for example around the use of age criteria in actuarial calculations).
7. There are tax benefits to being in a pension scheme
There are clear tax advantages for employees, as tax relief is available on employees’ pension contributions. There are also tax advantages for employers as employer pension contributions are deducted from profits to provide corporation tax relief.
Depending on the type of scheme, employees may benefit from tax relief by way of the employer deducting pension contributions from pay before it deducts income tax.
Alternatively, the pension provider can claim the tax relief and add this to the employee’s pension savings.
There is no national insurance relief on pension contributions for employees or employers unless the pension is delivered through salary sacrifice arrangements.
There are limits on how much can be saved into the pension pot (both annually and in total) that can qualify for tax relief for the employee.
8. Pension rules are constantly changing
As mentioned above, new rules introduced from 6 April 2015 allow individuals that are aged 55 and over to access their defined-contribution pension savings flexibly. It is still possible to receive a scheme pension or purchase an annuity, as before.
The coalition Government proposed further workplace pensions reforms. For example, it announced its intention to introduce “defined-ambition” shared risk schemes to pool risk between members, with the aim of increased stability around pension income on retirement.
Changes to the state pension will impact on occupational pensions. A single-tier pension will replace the current state pension and state second pension (S2P) for future pensioners, from 6 April 2016. The abolition of S2P will mean that contracting out of S2P for defined-benefit schemes will end on 5 April 2016. This will result in an increase in national insurance contributions for employers and employees as rebated rates of national insurance will no longer exist.
The state pension age is also constantly creeping upwards. Legislation is now in place to raise it to 68 by 2046 and there are proposals to raise it further before then.
Petaurum Solutions’ Comment
A really informative checklist that helps to clarify and complex and changing topic. However, there are lots more questions you may be asking yourself?
- How do I find out my auto-enrolment duties in relation to an employee?
- What are defined-contribution qualifying schemes?
- What is the right contribution level?
- What information must be provided to the Pensions Regulator?
- What is a Declaration of compliance with the Pensions Regulator
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This information is intended as a general overview and discussion of the subjects dealt with. The information provided here was accurate as of the day it was posted; however, the law may have changed since that date. This information is not intended to be, and should not be used as, a substitute for taking legal, HR or benefits advice in any specific situation. Petaurum Solutions is not responsible for any actions taken or not taken on the basis of this information. Please refer to the full terms and conditions on our website.