United Kingdom: Auto-Enrolment of Employees into U.K. Pension Schemes
Starting from October 2012, employers must automatically enrol employees who work or ordinarily work in the U.K. into a pension scheme, with a minimum level of contributions.1 The scheme may be either the employer’s own “qualifying scheme” or the U.K. government’s new National Employment Savings Trust (NEST). As the U.K. government enters the final phase of putting the legislation into place, this newsletter sets out a brief summary of the new requirements and how they might impact employers with internationally mobile employees.
Who Is Affected?
The auto-enrolment requirements will apply to individuals between age 22 and state pension age who work, or ordinarily work, in the U.K. and receive U.K. earnings of at least £7,336 (2010/11 figures).
Because all those who work or ordinarily work in the U.K. are affected, employers need to consider the impact on any internationally mobile employees. Non-U.K. residents who are working temporarily in the U.K. may have to be auto-enrolled, as may U.K. residents who are working abroad – where they are considered to be “ordinarily” working in the United Kingdom.
To establish if expatriate workers are considered to be “ordinarily working” in the U.K. for the purposes of auto-enrolment, employers need to consider all the relevant factors of the employment relationship. For example, a worker who is employed by a British employer and is posted abroad for the purposes of, or a representative of, a business conducted in the U.K. may be considered ordinarily working in the United Kingdom. But the position may not be obvious in all cases and may require specific legal advice.
What Are the Requirements and When Will They Apply?
Employers must automatically enrol affected employees into a U.K. pension scheme, with a minimum level of contributions. The auto-enrolment and minimum contribution requirements will be phased in from October 2012, starting with larger employers first. All employers – including new employers set up from March 2012 – will be subject to automatic enrolment by October 2016.
October 2016 is not the end of the implementation process. For employers using NEST or their own qualifying money purchase scheme for automatic enrolment, minimum contributions will be phased-in over three stages:
The full level of minimum contributions (8 percent of “qualifying earnings,” of which at least 3 percent must be payable by the employer) will apply from October 2017.
Qualifying earnings is the band of earnings between a lower limit of £5,715 and an upper limit of £38,185 in 2010/11 earnings terms.
For employers operating a qualifying defined benefits scheme, automatic enrolment will not apply until October 2016. However, on reaching their staging date, such employers will have to allow eligible employees to opt-into the scheme. There is no phasing of the level of benefits.
The intention of auto-enrolment is to boost significantly the coverage of private pension provision in the U.K., so the government has made the scheme entry process as swift as possible and also made the opt-out process potentially cumbersome for many taxpayers.
Employers will be able to operate a three-month waiting period, after which they will have one month to automatically enrol eligible employees. During this time, the employer will have to provide information to both the pension scheme (about the employee) and the employee (about auto-enrolment). Contributions must be calculated from the first day of eligibility. Once automatically enrolled, an employee will have one month to opt-out by requesting an opt-out notice from the scheme (not the employer) which must be completed and returned to the employer. The employer must then notify the scheme, and must refund all member contributions within one month.
Employees who opt-out must be automatically re-enrolled at three year intervals.
Employers’ Alternative Qualifying Schemes
For an employer to avoid having to auto-enrol employees into the NEST scheme, it will have to auto-enrol employees into a scheme that meets specific quality requirements. For defined benefits schemes, this means the scheme must be either contracted-out of the State Second Pension, or meet a “test scheme” standard. For money purchase schemes, it means at least matching the minimum contributions payable under NEST.
If non-U.K. employees working in the U.K. are retained in an overseas pension scheme, this will be sufficient as long as the overseas scheme meets certain criteria, as well as the minimum standards outlined above.
KPMG Note: What Are the Implications?
For all U.K. employers, implementing a successful automatic enrolment strategy is likely to involve balancing a complex range of financial, HR, IT, and administrative considerations.
As a starting point, most employers’ decisions will be influenced strongly by what pension provision they already have in place. Does the existing scheme already meet the “qualifying scheme” conditions? If not, can it be easily amended? How many workers are already scheme members and how many will have to be enrolled from the employer’s staging date?
This strategy must extend to considering the position of internationally mobile employees.