The Government's pension reforms are introducing two key changes from 2012. Firstly an employer must automatically enrol most of their staff in a good quality pension scheme. And, if the employee remains a member, the employer has to contribute at least 3% of a certain band of earnings (between £5,035 and £33,540 in 2006/07 earnings terms).
What does automatic enrolment actually mean?
Auto-enrolment means people will be a member of their employer's pension scheme
unless they actively decide to opt-out. So those that do nothing will stay as
members. People who opt-out will also have to be re-enrolled every three years.
Auto-enrolment is likely to increase membership of schemes significantly.
Can I use automatic enrolment before 2012?
Employers operating occupational pension schemes can auto-enrol employees before
2012.
Originally the Government's view was employers wouldn't be able to operate automatic
enrolment in contract-based schemes - such as Group Personal Pensions, Group
Stakeholders and Group Self-Invested Personal Pensions - due to European directives.
The purpose of these directives - the Distance Marketing Directive and Unfair
Commercial Practices Directive - is to protect consumers from being misled into
signing up for financial services contracts without being given the opportunity
to fully consider the contract terms first.
After discussions with EU, the Government believes automatic enrolment in contract-based schemes is consistent with EU law from 2012 onwards. The new interpretation recognises the difference between an employer-sponsored scheme to which the employer contributes ('workplace personal pensions') and individual personal pensions which have no employer involvement.
Discussions are ongoing with Government, and we are hopeful employers will be able to operate automatic enrolment within workplace pensions before 2012, if they wish. In the meantime, Standard Life has several workaround solutions which allow employers to operate a form of automatic enrolment within the current legislation. These include changing contracts of employment and asking potential members to attend a pension seminar. See our auto-enrolment document (link) for further details.
The automatic enrolment process from 2012
The Government has outlined the automatic enrolment process employers will need
to follow from 2012. This is still being consulted on, so the following is subject
to change.
For contract-based schemes, such as Group personal pensions and stakeholder,
new employees will need to be given basic information regarding the pension
scheme within 7 days of starting work. Within a further 7 days the employee
needs to be enrolled into a qualifying scheme. Employers will be able to 'compress'
the 7 day periods, to a minimum of 7 days.
For occupational schemes, including the personal accounts scheme, the scheme
joining and information provision windows run concurrently for 14 days (no split).
Again employers can compress this window, but to a minimum of 1 day.
In both cases, the individual then has 30 days to opt-out. The effective date of joining the pension scheme is backdated to the date of joining employment, and contributions must be deducted from any pay received before the individual opts-out. If the employee opts-out within the 30 day period, then they are treated as if they were never a member. This means all contributions deducted from pay will be refunded. Employers will also receive a refund of any contributions they have made. People will still have the ability to opt-out at a later date, but in those circumstances they will be entitled to pension benefits within the scheme rather than a refund.
Employers may be able to postpone the commencement of automatic enrolment for 90 days. Any qualifying defined benefit scheme can do this. For defined contribution schemes, total contributions must equal 11% of qualifying (band) earnings, with the employer paying at least 6% of qualifying earnings. Employers using the personal accounts scheme will not be able to postpone automatic enrolment. Qualifying earnings are between £5,035 and £33,540 in 2006/07 earnings terms.
Example of auto-enrolment process
Date of starting work OPS - 14 days
Possible postponement period
Basic information about scheme given to member Member must be automatically
enrolled
Opt-out period
90 days PP - 7 days PP - 7 days 30 days
As well as the date an employee starts work, auto-enrolment may be triggered by reaching age 22 or earning above the minimum threshold for the first time (£5,035 per year in 2006/07 earnings terms, although this would be measured each pay period).
This communication is intended for qualified financial advisers only and must
not be relied upon by anyone else. No guarantees are given regarding the effectiveness
of any arrangements entered into on the basis of these comments. This information
is based on Standard Life's current understanding of the Government's pension
reforms due to be introduced in 2012, which are subject to change.
[Important Legal Notice][Cookie Policy][Terms & Conditions]
Please note that adviserzone features UK and offshore products provided by Standard Life Assurance Limited and other subsidiaries of Standard Life plc. Click here for a list of product providers.
Standard Life Assurance Limited (SC286833) is registered in Scotland at Standard
Life House, 30 Lothian Road, Edinburgh EH1 2DH and is authorised and regulated
by the Financial Services Authority. 0131 225 2552. Calls may be recorded/monitored.
© 2010 Standard Life.
