Making auto-enrolment work – the Government’s proposals

The Governement has confirmed today how it intends to introduce the requirement for automatic enrolment of employees into pension schemes.

The previous Government introduced legislation to require all employers to designate a pension scheme into which all their employees between age 22 and state pension age would be automatically enrolled (unless they opted-out). Employers would have to make contributions of 3% of earnings (within a prescribed band) into the scheme. This requirement would start to apply sometime between 2012 and 2016 depending on the size of the employer.

The Coalition Government’s view is that inertia will lead significant numbers of people to remain automatically enrolled in the scheme designated by the employer. Therefore, whilst they have decided to retain the broad framework of the legislation already in place, they commissioned an independent review to look at the scope of auto-enrolment and whether it was necessary to retain the proposed new national pension scheme (NEST). The Government has today published the results of the review and said that they “represent a sensible and balanced package of proposals” and “we will now proceed with the implementation of the reforms on this basis”.

The main conclusions the review reached are:

1. Individuals: Individuals will only be auto-enrolled once they reach the income tax threshold (£7,475 in 2011). For employees who are automatically enrolled, contributions will be based on earnings in excess of the National Insurance earnings threshold (currently £5,715). There is no proposal to change the current age thresholds.
2. Employers: The auto-enrolment requirements will apply to all employers regardless of size and the Government does not propose to introduce any exemptions. It is proposed that the largest employers who will have to begin auto-enrolment in October and November 2012 should be allowed to automatically enrol as early as July 2012, if they wish to do so.
3. Regulation: Employers will be able to operate a 3 month waiting period after employees start employment before having to auto-enrol them. This will ensure that employees with very short service (such as seasonal employees) do not have to be auto-enrolled and avoid the need to administer very small pension pots. Employees will be able to “opt-in” during this period.
4. Qualifying schemes: The Government says that it wants to make it easier for employers to be sure that their existing defined contribution schemes satisfy the relevant requirements even if the contributions under the scheme are not based on total earnings. It is therefore proposing to simplify the requirements so that a scheme could be certified as meeting the requirements if contributions were a minimum of: - 9% of basic pay (including a 4% employer contribution) or - 8% of basic pay (including a 3% employer contribution) provided basic pay constitutes at least 85% of the total pay bill or - 7% of pensionable pay (including a 3% per cent employer contribution), provided that the total pay bill is pensionable.
5. NEST: The Government does not believe that auto-enrolment could proceed on the scale proposed without NEST being available. Therefore, it proposes to retain it together with the limit on contributions (equivalent to £4,300 today). However, it is recommended that the limit on NEST contributions and ban on transfers to or from NEST should be removed in 2017 once all employers have become subject to auto-enrolment.

The review recommends that the Government continues to review whether the existing regulatory regime for the provision of defined contribution workplace pensions remains appropriate after automatic enrolment is introduced. The Government should also ensure there are effective communications to individuals, employers (especially smaller employers) and the pension industry in the lead up to and during the implementation of the reforms.