You will have to make a qualifying pension scheme available to all eligible workers (see Who is an eligible worker?). A qualifying scheme can either be a personal account or your own exempt pension scheme, provided it meets certain criteria. So, you will have to provide personal accounts to all eligible workers, other than those who are instead provided with an exempt work-based scheme (see Can we continue with our existing pension arrangements?).
The following section looks at how we expect personal accounts to operate. For clarity, it assumes you do not also have an exempt scheme.
Auto-enrolment from Day 1
From day 1 of employment, you must automatically enrol all eligible workers into a personal account. Without the individual doing anything at all, they and you, their employer, will start to make contributions to a new type of pension scheme, called a personal account. Any worker who objects to this will have to take a conscious decision to opt-out of the scheme (see Can workers opt out?).
Therefore, from the commencement date of the legislation in 2012, all existing workers who meet the criteria must be automatically enrolled into a personal account. From then on, any new worker who meets these criteria must be automatically enrolled from day 1 of their employment with you.
Automatic enrolment from Day 1 is a key feature of personal accounts. The rationale for this is that a worker whose first payslip includes a deduction for personal accounts is more likely to stay within the scheme than one who has become used to greater take home pay.
To be eligible for automatic enrolment, a worker must be aged between 22 and the state pension age and earn more than the prescribed amount. This is currently set at £5,035 per year. The sum will be reviewed annually. The government has indicated that any changes will be in line with the general level of earnings.
Although the exact definition of earnings is still a matter of debate, we expect to see a wide definition. It will not be based on basic pay, but is likely to take into account bonuses, premiums, allowances etc.
How will the £5,035 earnings threshold work in practice?
For some workers, it will be clear from the outset whether they will earn above the current threshold in a year. For others, such as a worker on a zero hours contract or a commission based salary, it may not be. It would not be compatible with the principle of automatic enrolment if a worker had to wait until the end of 12 months to see if he had earned enough to be qualify for automatic enrolment in a personal account.
Therefore, regulations will set out pay reference periods which will be used to calculate whether, if a worker’s earnings for one pay reference period were earned during each pay reference period in a 12 month period, they would be eligible for automatic enrolment into a personal account.
You could find that you have to make payments into a personal account during one pay reference period for a particular worker, but none during the next pay reference period.
Are agency workers included?
Agency workers will be covered by the new legislation. However, the business that is responsible for paying them - normally the agency - will be responsible for administering personal accounts.
What about existing workers who turn 22 whilst in employment?
The government has not yet decided exactly when an existing worker (who meets the earnings criteria) who turns 22 whilst in employment should be automatically enrolled. Will they have to be automatically enrolled on their 22nd birthday, by the next pay date or on specified dates in the year after their birthday? EEF is arguing that the last two options would be the most straightforward for employers.
Once automatically enrolled, the employer must contribute at least 3% of qualifying earnings, whilst workers must make a minimum contribution of 4% of qualifying earnings. The government then provides tax relief equivalent to 1% of qualifying earnings.
Qualifying earnings are defined by reference to an earnings band. This is currently set at earnings between £5,035 and £33,540 per year.
The government intends to phase in the level of employer and worker contributions gradually. In the first year, we expect that the minimum contribution will be at least 2% of qualifying earnings with at least 1% coming from employers. We then anticipate a rise to 5% in the second year with the employer paying at least 2% and to 8% in the third year with the employer paying at least 3%. Tax relief will be built into these contribution rates.
What happens if the worker has more than one employer?
Each employer is treated separately – so you only have to be concerned about what a worker earns from you.
Will you or the worker be able to make extra payments?
Additional voluntary contributions by employers and workers will be encouraged. It is expected that a maximum additional contribution of £3,600 per year will be allowed. This amount will be increased in line with average earnings. There is also a possibility that occasional lump sum contributions will be permitted.
What happens to the money?
As the employer, you will be responsible for collecting workers’ contributions. You will have to pay these to the Personal Accounts Board (see Who will be responsible for the new system?), together with your own contributions. The money will go to the individual worker’s ‘portable pension pot’.
Workers will not have to choose how their fund is invested. There will be a default ‘lifestyle’ fund. The investments chosen will vary according to the age of the worker.
However, there will also be some limited choice available for those individuals who do want some control over how their money is invested.
Individuals will be entitled to opt-out of personal accounts. The details of how this will work have not been finalised, but we expect it to work as follows:
Workers who want to opt out will complete a prescribed form. This will contain clear information about their basic rights, for example that their employer cannot put pressure on them to opt out. The worker will send the form directly to the Personal Accounts Board, which will inform you, the employer, that the worker had opted out. You will have to continue making deductions from the worker’s pay and making your own contributions until you receive this notification.
EEF backs this system because its design reduces the administrative burdens on employers, as well as protecting them from individuals making spurious claims that pressure was put on them to opt out.
When a worker opts out, what happens to their past contributions?
This will depend on when the worker opts out. If a worker opts-out soon after auto-enrolment, then the Government intends that all contributions paid so far will be repaid to the worker and the employer. The time limit for this has not yet been fixed, but will probably be around 30 days.
If a worker opts-out after this initial window, then all past contributions will remain in the individual’s pot.
Can workers opt back in?
Yes, but not more than once every 12 months unless you agree. The process of opting back into personal accounts will be set out in Regulations.
Will we have to automatically re-enrol workers who have opted out?
Yes, if a worker has opted out, you will have to auto-enrol them approximately three years later if they still qualify for enrolment - even if they do not ask you to. If a worker does not want to save in a personal account, once they have been re-enrolled, they will have to take another conscious decision to opt out.
The government has not yet decided how this will work in practice. EEF is arguing that repeat auto-enrolment should be triggered on the first fixed date after the third anniversary of an individual opting out, rather than on the third anniversary itself.
Can an individual who is not eligible for automatic enrolment save in a personal account anyway?
This will be possible, although we do not yet know how the process will work in practice or the circumstances in which an employer will have to make contributions in such cases. This means that, for example, a 19 year old could opt-in to a personal account.
Self-employed individuals will be able to join personal accounts voluntarily, but there will obviously be no matching employer contributions.