Pension reform FAQs for employers

What is pension reform?

What are our new pension duties?

Your new pension duties are quite far-reaching, but you will definitely need to:

  • Include your eligible UK employees in a qualifying workplace pension scheme (QWPS)
  • Make payments to the scheme (or schemes) for your employees

These changes affect every employer – big and small.

What does our business have to do?

Before your staging date, you’ll need to have systems and procedures in place to comply with your new duties. In particular, you will have to include your eligible employees in a qualifying workplace pension scheme (QWPS), and make payments for them.

You may want to start planning ahead as soon as you can for any extra costs.  Also, if you already have a pension scheme, you may want to review it as soon as you can.

Standard Life can help you meet your duties in a way that reduces your administrative burden, minimises the changes you must make and provides a better enrolment experience for your employees.

View Pension reform - a checklist for employers (PDF, 1.1MB) to find out the key tasks you must carry out to fulfil your new duties and where Standard Life can help.

Can we still use our existing pension scheme?

You can use your existing pension scheme as a QWPS as long as it meets the quality standards. But it might not be suitable for new members if it doesn’t allow joining by auto-enrolment and include a suitable default fund. If you have a number of pension schemes, or closed legacy schemes, you might want to take this opportunity to rationalise them even if they meet the standard. See the section 'What is a qualifying workplace pension scheme (QWPS)?'

Standard Life has developed auto-enrolment solutions across the majority of our corporate pensions.

Note to existing Standard Life clients

We’ll be in contact with you or your corporate consultant well in advance of your staging date to discuss how Standard Life can support you with your new duties.  If you need further information in the meantime, please speak to your corporate consultant. If you don’t have one, please speak to your Standard Life contact or contact us.

What is the staging date?

It's the scheduled date for the start of your new pension duties. There are a number of key staging dates between 2012 and 2018, and your date depends on the size of your company. Staging began in October 2012 for the largest companies and will be rolled out over the following years for all other companies. If you don't know your staging date, see The Pension Regulator’s website.
You can bring forward your staging date by giving The Pensions Regulator at least one month's notice or use a waiting period to delay some of your staging date duties by up to three months. This provides some flexibility to choose a date that better suits the needs of your business. For more information please see 'How can I make the rules work for my business?'

Which employees should we include?

You’ll need to automatically enrol employees who:

  • Are not already in a qualifying workplace pension scheme (QWPS)
  • Are at least 22 years old
  • Have not yet reached state pension age
  • Earn more than the earnings trigger in the relevant pay reference period
  • Work or ordinarily work in the UK

You must provide information to, and let some other employees join your scheme. But you only have to make payments for them if they have qualifying earnings.

For more information please see 'Who is eligible?'

If an employee doesn't want to be a member of your QWPS they can decide to opt out, but you must automatically enrol them first.

What is auto-enrolment?

If eligible employees aren’t already in a qualifying workplace pension scheme (QWPS), you must automatically include them in one without asking them to give any information or make any choices. This is known as auto-enrolment. If you use auto-enrolment, you can’t ask employees to:

  • Apply to join
  • Choose how much to pay in
  • Decide where to invest their payments

You can apply a waiting period to delay your auto-enrolment duty by up to three months. This gives you more time to join employees to your scheme using your usual method such as contract of employment, application or flexible benefits election. It also means you can use the same approach for all your employees, not just eligible employees. Please see 'How can I make the rules work for me?' for more information.

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What is a qualifying workplace pension scheme (QWPS)?

What is a qualifying workplace pension scheme (QWPS)?

A QWPS is a pension scheme that meets the Government's quality standards - in particular, the minimum payment levels. And if it's going to accept new members, it must:

  • allow joining by automatic enrolment
  • have an appropriate default fund

Find out more about qualifying pension schemes.

What are the minimum contributions for a qualifying workplace pension scheme (QWPS)?

The minimum payments that you have to make to a QWPS depend on the pensionable earnings definition you use. They’re being phased in, so the full rates won’t apply until October 2018. The minimum payments are:

Option 1 – At least basic pay is pensionable

Phasing period Minimum employer payment Minimum total payment
Staging date - Sept 2017 2% 3%
Oct 2017 - Sept 2018 3% 6%
Oct 2018 onwards 4% 9%


Option 2 – Qualifying earnings (or at least 85% of total pay) is pensionable

Phasing period Minimum employer payment Minimum total payment
Staging date - Sept 2017 1% 2%
Oct 2017 - Sept 2018 2% 5%
Sept 2018 - onward 3% 8%

Option 3 – Total pay is pensionable

Phasing period Minimum employer payment Minimum total payment
Staging date - Sept 2017 1% 2%
Oct 2017 - Sept 2018 2% 5%
Sept 2018 - onward 3% 7%

Remember you can make more than the minimum payments and don't need to use phasing.

Do I have to base my pension payments on qualifying earnings?

No, you can choose a definition of pensionable pay that fits your business, such as basic pay or total pay. And you can use different pay definitions for different groups of employees, for example one for managers and another for hourly paid workers.

However, you need to make sure that the payments meet the quality standard. There are four different minimum quality standards, based on different pensionable pay definitions, giving you flexibility to choose a qualifying basis you can easily check against.  Please see 'What are qualifying earnings?' for more information.

What is the default fund?

Eligible employees must be automatically included in a qualifying workplace pension scheme (QWPS) without having to make any choices. This means any QWPS that is open to new members must have a default fund for those employees who don’t want to choose one. The default fund should:

  • Take an investment approach and level of risk consistent with the broad needs of those likely to be defaulted into it
  • Offer reasonable value for money for the services provided

You should consider asset diversification, the level of risks within the funds and the type of assets held as employees approach retirement. The default fund must have a robust governance framework and be reviewed regularly.

Standard Life has a range of risk-based funds designed for this purpose. See our corporate investment proposition for more information.

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Who is eligible?

Are all of my employees eligible for a pension?

Your UK employees aged between 16 and 75 are eligible for your pension scheme. But different employee groups have different pension rights, so it’s important that you assess your employees to work out which group they fall into. Our eligibility assessment tool can help you with this.

Eligible jobholders − you need to automatically enrol these employees into a qualifying workplace pension scheme (QWPS) if they aren’t already in one.

Non-eligible jobholders − aren’t eligible for auto-enrolment. But they can join your QWPS if they want to. And, if they do, you’ll have to pay into it for them.

Entitled workers − are ‘entitled’ to join your pension scheme. But it doesn’t have to be your QWPS and you don’t have to pay into it for them.

   Age 
Earnings in pay reference period 16-21 22 - SPA SPA-74
No qualifying earnings   Entitled worker  
Qualifying earnings, but below earnings trigger   Non-eligible jobholder  
Above earnings trigger Non-eligible jobholder Eligible jobholder Non-eligible jobholder

SPA means the employee’s state pension age. Please see 'What are qualifying earnings?' for more information.

You can choose to go beyond these minimum requirements and offer the same pension to all your employees regardless of age and earnings. This also has the benefit of reducing your administrative effort in assessing those not in the QWPS every pay reference period.

What are qualifying earnings?

Qualifying earnings are an employee's gross earnings in the qualifying earnings band for any pay reference period. For tax year 2014/15, the qualifying earnings band is:

2014/15 Weekly Monthly Yearly
Lower limit £111 £481 £5,772
Upper limit £805 £3,488 £41,865

Gross earnings from an employment include:

  • Salary or wages
  • Overtime, bonuses or commission
  • Statutory pay for sickness, maternity, paternity or adoption leave

Where someone has more than one employment, their qualifying earnings are calculated separately for each one. Your duties are based solely on what you pay your employees and you don’t have to take account of earnings from other employments.

What is the earnings trigger?

This is the income level that triggers an employee’s auto-enrolment rights. For tax year 2013/14, the earnings trigger is:

2013/14 Weekly Monthly Yearly
Earnings trigger
£182 £787 £9,440

 

What is the opt out period?

When an employee is automatically enrolled (or re-enrolled) into, or chooses to join, your QWPS, they have one month to opt out. This is known as the opt out period.

You must tell your employees about this right to opt out and how they can do it, however you can't encourage anyone to opt out.

If an employee gives you a valid opt out notice during this period, you must refund them any pension contributions taken from their pay within one month of receiving the valid opt out notice.

If the payroll arrangements have closed before you receive the notice, you should refund the pension contributions by the last day of the next applicable pay reference period. This means that you should pay the refund in the next available payroll run after receipt of the opt out notice.

Employees can still leave the scheme after the opt out period has closed, but they will not get their money back.

How does opting in work?

Employees who earn less than the earnings trigger, or are aged between 16 and 21 or state pension age and up to 74, don’t have to be automatically enrolled in a qualifying workplace pension scheme (QWPS). However, if they have qualifying earnings in a pay reference period, they can opt into your QWPS voluntarily. And, if they do, you’ll have to pay into it for them.

You must tell these employees (known as non-eligible jobholders) about this right and how to opt in if they want to.

Eligible job-holders who aren’t in your QWPS, perhaps because they opted out, can also opt in. But you don’t have to let them back in within a year of opting out.

What is my pay reference period?

Your pay reference period is the period used to assess your employees’ pension eligibility. It depends on how often you pay your employees and reflects their normal pay pattern and the period they are paid for. For example:

  • For weekly paid employees the pay reference period is one week. And if they’re paid on a Friday for that week’s work, it runs weekly from Saturday to Friday
  • For employees paid monthly the pay reference period is one month. If they’re paid on the 15th for the work done in the previous calendar month, the pay reference period is that calendar month. But if the payment on the 15th had covered work done up to the 14th, each pay reference period would run from the 15th of one month to the 14th of the next

The same principles apply for other pay frequencies.

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How can I make the rules work for my business?

Do I have to use auto-enrolment to join my employees to my pension scheme?

You must automatically enrol eligible employees into a qualifying workplace pension scheme (QWPS) if they aren't already in one. But there is flexibility in the rules that means you can use other joining methods, for example contract of employment.

What is a waiting period?

Rather than meeting all your pension duties immediately on your staging date or when an employee first becomes eligible, you can apply a waiting period of up to three months.

Different waiting periods can be applied to different categories of employees or even different individuals. You could apply different waiting periods to managers and other employees, or use them so that employees only join your pension on one day a month.

This gives you flexibility and helps you fit your new duties around your way of working.

Why use a waiting period?

Using a waiting period of up to three months before enrolling employees to your pension scheme can help make your pension process fit your way of working. For example, waiting periods can be used to:

  • stagger the enrolment of a large workforce
  • align pension joining dates, and/or the opt out period, with your payroll process
  • operate your usual pension joining process
  • avoid joining temporary or lower paid employees

Our pension reform pathfinder can show you the benefits of using a waiting period and help choose one that fits in with your payroll process.

How do I apply a waiting period?

Where you apply a waiting period of up to three months before an employee joins your pension scheme, you must tell them by giving them notice within one month of their original eligibility date. The notice must also tell them that they can join sooner if they want to.

More information on notices can be found on The Pensions Regulator's website.

What is the deferral date?

The deferral date is the last day of the waiting period. It is the date when you must assess the employee(s) that you've applied a waiting period to, and automatically join them if they're eligible.

Can using a waiting period help align my pension joining process with my payroll process?

Using a waiting period can help join up your pension joining process with your payroll process. This can streamline administration and help reduce costs.

  • Keep it simple: Your staging date will be the first date of a month and going forward employees can become eligible for pension at any time. You can use a waiting period to make sure you only join employees to your pension scheme once a month on a date that fits in with your payroll cycle. This can make the task more manageable and avoid issues like making part-month pension payments
  • Avoid earnings estimates: Aligning joining dates with payroll dates also avoids having to estimate earnings for the pay reference period or assess new employees on a part month's earnings

Although you can't use a waiting period at your triennial re-enrolment date, you do have the flexibility to choose a date up to three months either side of your scheduled date. This gives similar flexibility to align your triennial re-enrolment date with your payroll cycle or flexible benefits window

Our pension reform pathfinder can show you the benefits of using a waiting period and help choose one that fits in with your payroll process.

How can I avoid joining temporary or lower paid employees to my pension scheme?

You can apply a waiting period of up to three months before joining employees to your pension scheme. This can help you avoid automatically joining temporary staff on short-term contracts, saving you unnecessary administration and cost.

A waiting period can also help if a low paid employee's earnings 'spike' over the earnings trigger in a particular pay reference period, for example, as the result of an annual bonus or seasonal overtime. You can apply a waiting period to delay automatically joining them for up to three months. You only need to enrol them if their earnings are still over the earnings trigger at the end of this waiting period. So you can generally use the flexibility of applying a waiting period to avoid automatically joining employees whose normal earnings are below the trigger.

This can be done repeatedly, if the employee's earnings spike again in future. For example:

Jenny works part-time and normally earns £400 a month. However, over Christmas she works extra hours and earns £800 which she is paid in January

The £800 she earns is over the monthly earnings trigger, so Jenny appears to be eligible for auto-enrolment

Jenny's employer decides to apply a waiting period before enrolling her.  This means that:

  • Jenny must be assessed again at the end of the waiting period
  • Unless her earnings in that pay reference period are over the monthly earnings trigger she can't be automatically joined
  • Jenny can opt in during the waiting period if she wants to
  • A waiting period can be repeated if Jenny’s earnings 'spike' again in future

Note that Jenny’s employer still has to tell her that she's eligible, but in a waiting period, with the right to opt in.

I pay contributions by fixed direct debit - what should I consider when setting contribution levels?

If you expect earnings to fluctuate throughout the year, you should set minimum contributions high enough to ensure they meet the statutory minimum levels.

For example

  • Scheme renewal date is 1st April
  • Contribution levels are set at 1st April and cannot normally be changed until the following 1st April
  • Employee earnings are expected to increase by 10% over the year, however contributions do not increase in line with their increased earnings as they are fixed at 1st April
  • This results in contributions being less than the statutory minimum
  • In this example, if you set contributions at 110% of the statutory minimum levels then you would meet your contribution obligations.

The challenge is predicting earnings increases to allow you to set a sufficient level of contributions, so you should consider building in some margin.

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What else do I need to know about pension reform?

What is NEST? (National Employment Savings Trust)

NEST is a occupational pension scheme set up by law to provide a basic pension plan which every employer can use to meet, or help meet, their obligations.

Visit the NEST website for more information.

Can we use individual plans, such as SIPP, Personal Pension Plan or Stakeholder Plan, to meet our duties?

Yes, an individual plan can be used as a qualifying workplace pension scheme (QWPS) as long as the payment levels meet or exceed the quality standards and these are being paid via the employer – by payroll deduction or salary exchange. This means existing individual plans can continue to be used to meet your duties. However, they won’t normally allow joining by auto-enrolment. You may have to use a waiting period to allow you to use another joining method (such as contract of employment or application) if you want to use an individual plan as your QWPS for a new employee.

Can salary exchange be used under pension reform?

Yes, salary exchange (also known as salary sacrifice) could help meet some of the mandatory pension costs, reducing the financial burden for you and your employees. However, the employee needs to agree to salary exchange and it's largely governed by employment law. In general, here's what most employers will need to do:

  • For new employees - employment contracts need to say that when employees join the qualifying pension scheme, contributions will be made on a salary exchange basis. The new employee then decides whether or not to accept the contract.
  • For existing employees - you need to exchange letters to amend existing contracts of employment. An employee who disagrees with the amendment will have to be joined on a salary deduction basis.

Using joining methods such as contract of employment, could make it easier to apply salary exchange for pension contributions. Our pension reform cost calculator can help illustrate the savings from using salary exchange for pension contributions

Find out more about salary exchange.

What are enhanced, fixed protection 2012 and fixed protection 2014?

These are transitional protections against the tax charge for taking pension benefits in excess of the lifetime allowance. These protections are lost if further payments are made into the scheme. An employee's financial adviser will be able to confirm if they have this protection in place.

  • Enhanced protection - This protection allowed individuals who had built up pension rights before 6 April 2006 to avoid the lifetime allowance charge. They had to apply for this before 6 April 2009.
  • Fixed protection 2012 - This protection allowed individuals to maintain a personal lifetime allowance of £1.8 million after the standard allowance reduced to £1.5 million on 6 April 2012. They had to apply for this before 6 April 2012.
  • Fixed protection 2014 - This protection allowed individuals to maintain a personal lifetime allowance of £1.5 million after the standard allowance reduced to £1.25 million on 6 April 2014. They had to apply for this before 6 April 2014.

There are also two other types of protection called primary protection and individual protection.

Primary protection

Primary protection allowed individuals who had built up pension benefits before 6 April 2006 to maintain a personal lifetime allowance based on how much their benefits exceeded the standard lifetime allowance. They had to apply for this before 6 April 2009.

Individual protection

Individual protection allows individuals to maintain a personal lifetime allowance based on how much their benefits are worth as of 5 April 2014.  They have to apply for this before 6 April 2017.

Can employees with enhanced or one of the versions of fixed protection ask to be excluded from being automatically joined to the pension?

No, if they are eligible, you need to automatically join them. If they want to keep their enhancedfixed protection 2012 or fixed protection 2014, they will need to opt out within the opt out period. But employees with primary protection or individual protection can be joined without affecting that protection.

Remember that it's the employees' responsibility to opt out to ensure they retain their protection - not the employer's.

Are there any penalties for breaking the rules?

Yes. You face heavy fines if you:

  • Don’t make the required pension provision for your employees
  • Are late making pension payments
  • Encourage employees not to join, or leave your pension scheme

And the directors or partners can be jailed if an employer wilfully neglects their pension duties.

How do I calculate the average pensionable earnings?

1.  First, work out how many of your workers are not in a qualifying QWPS pension scheme and are eligible

2.  Run a report from your HR or payroll system that gives you the total pensionable earnings for all eligible workers. Here is a reminder of the pensionable earnings definitions:

Basic pay Basic pay is the basic wage that an employee earns and doesn't take into account any additional benefits, bonuses, commission or overtime.
Total pay If you use total pay then 100% of an employee's earnings would be pensionable. This includes commission, bonuses, overtime, and any statutory leave pay.
At least 85% of total pay The amount of pensionable earnings for each employee is at least 85% of their total pay.
Qualifying earnings Qualifying earnings are a band of earnings between £5,772 and £41,865.

The upper and lower limits are currently the same as the National Insurance Contribution (NIC) upper and lower limits. These are the figures for 2014/15 and are expected to change each year (although they may not change in line with NIC limits).

They include: salary, wages, commission, bonuses, overtime, statutory sick pay, statutory maternity, paternity and adoption pay.

So, if an employee receives qualifying earnings of £45,000, the amount of pensionable earnings would be £36,093 (£41,865 less £5,772).

If an employee receives qualifying earnings of £25,000, the amount of pensionable earnings would be £19,228 (£25,000 less £5,772).

 

3.  To get the average pensionable earnings, divide the total pensionable earnings of everyone who is eligible by the total number of eligible workers

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The information on this site is for financial planning professionals, pension trustees and individuals responsible for decision-making on corporate schemes, and must not be relied on by anyone else. If this doesn't apply to you, go to our main website for information about our products and services.