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- Employers cannot agree to provide alternative benefits on the understanding an employee opts out of a pension scheme.
- Qualifying earnings include various components of pay, including salary, wages, commission and bonuses.
- Employers must ensure they identify workers correctly under auto-enrolment.
Ian Curry, associate, Wragge & Co
Q: I work for a large employer and have just completed a project to assess whether our existing pension provision was fit for purpose for workplace pension reform. Our review showed our pension schemes are not ready for auto-enrolment. What can I do to develop our schemes cost-effectively while ensuring they remain competitive for our hardworking employees?
A: Employers should determine whether their current arrangements are qualifying schemes. These must meet qualifying criteria and the minimum requirements. A UK scheme will meet the criteria if it is an occupational or personal pension plan, and is tax registered.
For a pension plan to meet minimum requirements, it must offer contributions that equal or exceed minimum benchmarks. These vary depending on the type of scheme: defined contribution or defined benefit, for example.
If the existing arrangements meet the minimum requirements, the employer will not have to do anything else for existing members; they are already members of a qualifying scheme. The employer will also have to have an auto-enrolment scheme for new hires and existing jobholders who are not members of a qualifying scheme.
Jacqui Piper, pensions specialist, Shoosmiths
Q: Within the context of auto-enrolment, can I agree not to offer pension benefits if an employee requests another type of benefit instead?
A: Employers must auto-enrol all eligible employees, but if they offer flexible benefits arrangements, staff can choose the level of pension provision they want. However, if employees elect to reduce their entitlement below the minimum required by auto-enrolment, they would have to opt out.
The employer cannot agree with an individual that they should not be auto-enrolled and they cannot contract out of the auto-enrolment process. However, once enrolled, the employee is free to opt out. If the employer agrees to another type of benefit, that cannot be provided on the understanding the employee opts out of the pension scheme because this is likely to be an inducement, which is not permitted.
If a flex package is offered, the employer must still auto-enrol the employee into the scheme, with contributions at or above the minimum levels required by the regulations.
Richard Lee, partner, Wragge & Co
Q: I work for a large employer and am embarking on a project to assess and streamline workers and payroll items for auto-enrolment. How do I determine which elements of employees’ pay are classified as ‘qualifying earnings’?
A: An employer will be required to automatically enrol workers who are classifed as ‘eligible jobholders’ and who are not already enrolled into a ‘qualifying scheme’. Eligible jobholders are workers (who must meet the test of working or ordinarily working in the UK) aged at least 22 and under state pension age, and who earn qualifying earnings above £8,105.
Qualifying earnings are used to determine: who is eligible for automatic-enrolment; and to work out the minimum levels of contributions for jobholders who are enrolled into pension savings.
Qualifying earnings are the gross earnings payable to a worker over a period of 12 months and which are between the qualifying earnings threshold and the upper contribution limit (between £5,564 and £42,475 in 2012/13). What constitutes qualifying earnings is broadly defined and includes various pay components, such as salary, wages, commission, bonuses, overtime and statutory payments, such as statutory sick pay or statutory maternity pay.
Caoimhe O’Neill, partner, pensions, Charles Russell
Q: We have consultants who are not on the payroll as employees, so I presume that we do not need to consider them for auto-enrolment for pensions?
A: No, not necessarily. Auto-enrolment applies to eligible jobholders and this encompasses workers, not just employees.
How do you determine if your consultants are workers? The definition of a worker is an individual who works under a contract of employment (an employee), or who has a contract to perform work or services personally (and cannot send a substitute) and is not doing the work as part of their own business.
Generally, self-employed contractors do not work under a contract of employment. However, they could meet the second criterion and be classifi ed as a worker if they agree to perform work or services personally.
Indications of a personal contract would be where the employer has: expected the individuals to perform the work personally; provided equipment, tools or uniform, benefits such as sick pay, notice or expenses; exerted considerable control over them, for example by setting their hours of work, asking them to report to a manager or paying a fixed monthly wage; or agreed that their work is not a contract for services between the employer and the consultant’s own business.
Darren Becker, pensions lawyer, LexisPSL
Q: What are the main advantages of implementing a salary sacrifice arrangement for pension contributions?
A: Salary sacrifice involves the employee sacrificing some of their cash remuneration in return for a non-cash benefit. The advantage for employer and employee is that they can save on national insurance contributions (NICs) because NICs are payable by them on salary but not on employer contributions to a pension scheme.
As the potential saving for employers depends on the number of employees participating in the salary sacrifice arrangement, the benefit of the arrangement to an employer may be limited if there is a low take-up rate among the workforce.
HM Revenue and Customs recently revised its guidance to clarify that salary sacrifice can be implemented in conjunction with the new employer duty to auto-enrol employees into a qualifying pension scheme. However, employers must still avoid certain pitfalls when using salary sacrifice. For example, they must ensure that enrolment into the pension scheme is not dependent on whether or not employees agree to participate in a salary sacrifice arrangement.
Helen Phillips, pensions lawyer, LexisPSL
Q: What uncertainties are there surrounding the definition of ‘worker’ for the purpose of the auto-enrolment regime?
A: The auto-enrolment regime, which came into force on 1 October 2012 and is being introduced in stages, recognises various categories of worker and treats each category differently. Employers will therefore need to ensure they identify their workers correctly.
In some cases, this will be fairly straightforward. The Pensions Act 2008, section 88, defines workers as individuals who have entered into, or work under, a ‘worker’s contract’, in essence an employment contract or service agreement (other than a customer service agreement).
This covers employees and, in the circumstances specified in section 89, agency workers. As far as office-holders are concerned, section 90 clarifies that company directors or secretaries are not workers unless they, and at least one other person in the business, are employed under an employment contract. Also, it seems sufficiently clear from the statutory definition that volunteers are unlikely to be workers unless they are remunerated.
But here the clarity ends. While workers genuinely seconded to another entity will, for auto-enrolment purposes, usually be deemed to remain employed by the seconding employer, there may be uncertainties in cases of cross-border secondments because auto-enrolment applies only to workers working or ordinarily working in the UK.
Victoria Moss, trainee solicitor, employment and pensions, Charles Russell
Q: I am an employer with just 100 employees, so does auto-enrolment apply to me and, if yes, how big is the project likely to be for us?’
A: Yes it does. Auto-enrolment applies to all employers, big and small. The good news is that it is being rolled out on a month-by-month basis, and an employer of your size will not have to implement the provisions until 1 May 2014. So, although there is quite a lot of work involved, you have got plenty of time to get ready.
Although you say you only have 100 employees, workers who are too young or earning too little may have a right to opt-in to the scheme as non-eligible jobholders or entitled workers.
Firstly, you need to carry out a workforce assessment to classify your workers and then identify which ones qualify as eligible jobholders, non-eligible jobholders and entitled workers.
You also need to consider any temporary staff. If your employees come and go fairly frequently or you use a probationary period, then you may wish to consider the three-month ‘grace period’ offered by the legislation. This permits you to suspend the auto-enrolment test for the first three months of your workers’ employment.
