The latest changes to auto-enrolment legislation

If you read nothing else, read this…

• Auto-enrolment legislation has undergone several changes since it was announced in the Pensions Act 2008.

• The qualifying earnings threshold for staff to be eligible for auto-enrolment has risen from £5,000 to £8,105.

• More flexibility around contribution levels has also been granted for employers operating defined contribution (DC) schemes.

Auto-enrolment regulations have been tweaked since they were first published, so employers need to take extra care to ensure they comply, says Viola Caon

There are now less than two months to go before the pensions auto-enrolment process begins, with larger employers required to comply with the legislation by October. However. a number of tweaks have been made to the legislation since it was first introduced under the Pensions Act 2008.

Timing is probably the biggest change, with employers being given more leeway to prepare and consider their best options, in terms of pension scheme types and contribution rates for them and their workforce.

Logan Anderson, head of customer relations at The Pensions Trust, says: “Only the largest employers will have to start automatically enrolling employees in October 2012. All the others will have time until 2017.”

Employers’ statutory contribution levels, which are being phased in to help organisations manage their costs, have also changed. The original guidelines said employer contributions would begin at 1% in 2012, rise to 2% in October 2016 and reach the maximum 3% by 2017. Anderson says: “Initially, that put a lot of pressure on organisations, so the government decided [maximum] contributions would have to be paid only starting from 2018.”

The revised guidelines have delayed the increase in employers’ contribution levels to 2% until 2017, and the total minimum contribution of 8%, comprising 3% from employers, 4% from staff and 1% in tax relief, will now apply from 2018. These minimum percentages apply to an employee’s earnings over and above a minimum (currently £5,564) and up to a maximum limit (currently £42,475), rather than to their total salary.

Employers can, however, opt to use a different basis on which to make contributions to their defined contribution (DC) schemes, but to do this they must adhere to one of three tiers. Tier one involves a contribution of at least 9% of an employee’s pensionable earnings, of which 4% must come from the employer; while tier two involves a contribution of at least 8% of pensionable earnings, with 3% coming from the employer, provided pensionable pay constitutes at least 85% of the pay bill. Under tier three, which involves a contribution of at least 7% of earnings, of which at least 3% must come from the employer, all pay must be pensionable.

The minimum amount an employee must earn to become eligible for auto-enrolment has been increased from £5,000 to £8,105.

Employers need to know which employees they need to automatically enrol, and this requires classification of staff members. Under the current legislation, there are three classifications: eligible jobholders, who must be automatically enrolled into a qualifying scheme; non-eligible jobholders, who can opt in to a qualifying scheme; and entitled workers, who can require their employer to provide a pension scheme, but the employer is not obliged to contribute to it.

Employers can now stagger this classification process. David James, a pensions solicitor at Sackers, says: “Instead of having just one date on which to assess employees for auto-enrolment, there can be more than one. That can be the employer’s staging date or the day that the employee joins the company. However, the employer can postpone the assessment by up to three months, for which they need to give the employee notice.”

Sign up to our newsletters

Receive news and guidance on a range of HR issues direct to your inbox

This field is for validation purposes and should be left unchanged.

Anderson urges employers to classify employees as soon as possible, not forgetting that three years after their staging date, they must re-enrol all staff who have opted out.

Read Auto-enrolment roundtable reports