Auto-Enrolment and NEST

The Pensions Act 2008 introduced a requirement for employers to offer their workers a pension arrangement – with compulsory contributions – with effect from 2012.  The actual date the requirement comes into effect varies by employer, with generally larger employers having to comply earlier.  However, the principle for all employers is that they will have to enrol their workers into a qualifying pension arrangement and contribute 3% of each worker’s earnings into that arrangement, unless the worker opts out.  There will be a new national pension scheme called NEST (the National Employment Savings Trust) that may be used for this purpose, although an alternative arrangement may be used if it meets certain criteria.  The Pensions Regulator will be responsible for ensuring compliance with the new regime.

This new system was devised by the previous Labour administration, although it attracted a high level of cross-party support.  However, the new Government commissioned a review of the proposals prior to committing itself to its inheritance. The review produced the following decisions:

a)    every employer – however small – will be required to auto-enrol all workers earning above the Personal Allowance (£7,475 in 2011/12) into a qualifying pension arrangement (workers earning below this amount but above the National Insurance threshold may opt in if they wish);

b)    auto-enrolment must take place within 3 months of the worker commencing employment (workers may opt into the arrangement earlier if they so choose);

c)    contributions will be payable on earnings between the National Insurance earnings threshold (£5,715 in 2010/11) and the Upper Earnings Limit and must total at least 8% of earnings between those limits, of which the employer must pay at least 3%;

d)    workers who opt out must be re-enrolled every three years, although the review recommends that this be allowed within a 6-month window rather than on the exact anniversary of opting out;

e)    the cap on contributions to NEST, of about £4,300 pa in 2011 terms, will remain until 2017 but will then be reviewed;

f)     initially it will not be possible for individuals to transfer their funds out of, or transfer other pension entitlements into, NEST.  However, this should also be reviewed in 2017.

The review has recognized that many employers already operate pension schemes with a definition of pensionable pay that is different from that described in (c) above.  In order to ease administration for such employers, the review recommended that employers be able to certify that they meet the minimum requirement if their arrangement includes:

• contributions of at least 9% of pensionable pay (including at least 4% from the employer),
• contributions of at least 8% of pensionable pay (including at least 3% from the employer) provided that total pensionable pay equates to at least 85% of the total payroll or
• contributions of at least 7% of pensionable pay (including at least 3% from the employer) if the total payroll is pensionable.

The requirements apply to all employers who employ at least one individual under a contract of employment.  The workers entitled to be enrolled are all those aged at least 22 but under State Pension Age, working in the UK.  Workers aged between 16 and 21 will be able to opt in and become entitled to employer contributions if they earn above the earnings threshold for National Insurance.

Costs to employers will comprise two elements:

• the mandatory contributions toward the pensions of those workers who do not opt out and
• the costs of administering the pension arrangement.

The former costs may be seen as part of workers’ remuneration package and, in practice, we expect that most employers will adjust workers’ salary, or other benefits, to offset the cost of contributions.  Administration costs, however, will represent an additional burden.  For smaller employers with no previous experience of pension provision, the costs of researching and setting up a new pension scheme and making changes to their payroll systems will be relatively high.

Although the new requirements come into force in 2012, only the largest employers will be required to auto-enrol workers then.  Each employer will have a “staging date”, determined primarily by its payroll size, which is the date its duties under the new legislation will start.  The following table is a summary of the staging dates; a more detailed version is available on the Pensions Regulator’s website at http://www.thepensionsregulator.gov.uk/pensions-reform/duty-dates-timeline.aspx.