Pensions auto-enrolment: qualifying schemes and eligible workers

This first article in a series on automatic pensions enrolment examines who must be enrolled, the nature of the schemes into which they can be enrolled and who can choose to be enrolled.

On this page:
Auto-enrolment overview
The long and winding road to auto-enrolment
Eligible jobholders
Qualifying defined-contribution schemes
Qualifying defined-benefit schemes.

Key points

  • Automatic enrolment requires all employers to automatically enrol eligible jobholders into a scheme that meets minimum criteria, if they do not already belong to such a scheme. Jobholders may opt out if they wish.
  • Eligible jobholders are those aged at least 22 but under state pension age, normally working in the UK and with annual earnings of at least £8,105.
  • Other workers aged between 16 and 74 can opt in, and will be entitled to an employer contribution if they earn more than £5,564.
  • Defined-contribution (DC) schemes used for auto-enrolment must meet one of a number of minimum contribution conditions.
  • Contracted-out final-salary schemes will be qualifying schemes, but contracted-in final-salary schemes must meet a test standard that involves an accrual rate of at least 1/120th.
  • Career-average schemes must fulfil the same requirements as final-salary schemes, but must also meet additional conditions on the revaluation of accrued benefits.
  • The first steps towards the introduction of auto-enrolment were taken in 2002 when the Government established the Pensions Commission with a remit to reconsider the voluntarist approach to pension scheme membership.

Almost 10 years after the Government set up the Pensions Commission with the remit to examine the "case for moving beyond the current voluntarist approach" to pension scheme membership, auto-enrolment must be operated by the largest employers from 1 October 2012.

This first guidance feature in a series provides an overview of auto-enrolment and looks at who has to be automatically enrolled and the arrangements into which they can be enrolled to meet the legislative requirements. The accompanying box also provides a quick reminder of how auto-enrolment was conceived and implemented.

Auto-enrolment overview

All employers are required to automatically enrol eligible workers into a suitable pension scheme, which can be an occupational scheme, a group personal pension or a National Employment Savings Trust (Nest) arrangement. The scheme must be tax-registered. It can be a different scheme from any to which existing workers belong, but it must not require the worker to make any choices. New workers must also be enrolled on taking up their job or on becoming eligible. The requirement to auto-enrol is being staggered over a period of nearly five years, depending on the number of workers an employer has under its PAYE tax scheme.

The long and winding road to auto-enrolment

  • 17 December 2002: Department for Work and Pensions publishes a Green Paper announcing a Pensions Commission "to keep under review the regime for UK private pensions and long-term savings, and to make recommendations to the secretary of state for work and pensions on whether there is a case for moving beyond the current voluntarist approach".
  • 30 November 2005: in its second and main report, the Pensions Commission, led by Lord Turner, proposes a range of changes including "the automatic enrolment of employees into either a new National Pensions Savings System or into existing company pension schemes, but with the right to opt out, and with a modest level of compulsion on employers to make matching contributions"; it is to apply to those aged 21 or over.
  • 25 May 2006: DWP publishes a White Paper renaming the National Pensions Saving Scheme as "personal accounts", applying auto-enrolment to those aged 22 or over and exempting employers that offer pension provision at least as good as personal accounts.
  • 12 December 2006: DWP publishes a new White Paper on personal accounts setting out more detail on their proposed operation.
  • 26 July 2007: Pensions Act 2007, which establishes the Personal Accounts Delivery Authority, is given royal assent.
  • 26 November 2008: Pensions Act 2008 receives royal assent. It includes detail on the operation of auto-enrolment.
  • 5 July 2010: the Personal Accounts Delivery Authority is formally replaced by the National Employment Savings Trust (Nest) Corporation.
  • 27 October 2010: the Making Automatic Enrolment Work Review, a body set up by the incoming coalition Government, reports and proposes a higher earnings threshold for automatic enrolment and more flexibility for employers.
  • 3 November 2011: Pensions Act 2011 receives royal assent. It implements the changes proposed by the Making Automatic Enrolment Work Review, in particular raising the earnings threshold and easing the qualifying conditions for DC schemes.
  • 28 November 2011: DWP announces relaxations to the timetable for auto-enrolment.
  • 1 July 2012: the earliest date at which certain large employers can begin auto-enrolling staff.
  • 1 October 2012: the largest employers must begin operating auto-enrolment.
  • 1 April 2017: the final date by which existing employers are required to auto-enrol employees.

Workers can opt out once they have been enrolled provided they do so quickly. They will then receive a refund of any member contributions deducted. Those opting out must be re-enrolled automatically roughly every three years if they have not joined in the intervening period. Those who do not have to be auto-enrolled can choose to opt in.

If a defined-contribution (DC) scheme, including Nest, is offered, employers will be required to contribute a minimum amount and that amount is being phased in. Unless the employer pays the total minimum contributions, members will also need to contribute. Where employers are offering a defined-benefit (DB) pension, a minimum standard of benefits must be met.

An employer's existing pension scheme must meet the new legislative requirements, except that it does not need to be able to accept auto-enrolled workers if it is not to be used for auto-enrolment. Members of a scheme that does not meet the minimum requirements must be auto-enrolled into a scheme that does.

As might be expected, there are detailed provisions on the information that prospective members must be given, the opt-out process, the use of waiting periods and re-enrolment, while employers are prohibited from taking any steps to dissuade workers from joining. Future articles will examine all of these issues.

Eligible jobholders

The term "eligible jobholders" is used to describe those who must be auto-enrolled. An eligible jobholder is one who:

  • is an employee or someone who has a contract to provide work or services personally (so it may include agency workers);
  • is aged at least 22 but has not reached state pension age;
  • works, or ordinarily works, in the UK; and
  • has earnings, in the particular job, above an annual earnings trigger, which is £8,105 for 2012/13 (equivalent to the PAYE tax threshold, although it is not guaranteed to be in future).

Workers who are not eligible for automatic enrolment due to their age or earnings can nonetheless opt in and benefit from employer contributions provided they are aged between their 16th and 75th birthdays and have earnings above the bottom of the band of earnings normally used to determine the minimum contributions payable to a qualifying DC scheme (see next section). This figure is £5,564 for 2012/13 (equivalent to the lower earnings limit for national insurance contributions, but again this may not always be the case in future years).

The earnings trigger and the upper and lower figures for qualifying earnings are gross earnings. They include salary, wages, bonuses, commission, overtime, statutory sick pay, and statutory maternity, paternity and adoption pay. It is the amount before tax.

Those aged between 16 and 74 with earnings below £5,564 will also be entitled to join a scheme provided by their employer, but will not have the right to employer contributions and may be enrolled in a different scheme.

Qualifying defined-contribution schemes

For a DC scheme to qualify for use with auto-enrolment, the original requirement was that total contributions must eventually be at least 8%, with the employer contributing at least 3%, of each member's gross earnings between an upper and lower limit. In fact, 8% only applies once the full level of contributions is phased in (lower rates apply initially).

For 2012/13 the upper and lower limits for this band of earnings are £5,564, as noted above, and £42,475, equivalent to the upper earnings limit for national insurance contributions this year. Schemes meeting these requirements will still be qualifying schemes for auto-enrolment purposes, but very few, if any, schemes are likely to qualify in this way.

Many employers do not base pension contributions on gross earnings, often excluding, for example, overtime pay, certain variable allowances, bonuses and commission. On the other hand, all, or almost all, employers paying pension contributions do so on at least the whole of basic pay, and therefore on earnings below £5,564, the lower limit of these band earnings. Consequently, it was widely claimed that many employers were already contributing the required amount for most members in cash terms, but that the scheme would still not qualify as an auto-enrolment scheme.

In order to allow employers to certify that they are using a qualifying scheme some flexibility was introduced, based on a recommendation of the Making Automatic Enrolment Work Review, which was set up by the incoming coalition Government. Regulations now provide that DC schemes will be able to self-certify as qualifying schemes if they meet one of three tests (known as tier 1, 2 and 3):

  1. The total amount of contributions to the arrangement is at least 9% of each jobholder's pensionable earnings, of which at least 4% is paid by the employer, and pensionable earnings are at least equal to basic pay;
  2. The total amount of contributions is at least equal to 8% of each jobholder's pensionable earnings, of which at least 3% is paid by the employer, and the pensionable earnings of each jobholder are at least equal to basic pay and, taking all relevant jobholders together, pensionable earnings are at least equal to 85% of their total earnings; or
  3. Jobholder's gross earnings, of which at least 3% is paid by the employer.

All tests relate to earnings during the certification period, which may be a period of up to 18 months. The Regulations also contain detailed rules regarding the provision of certificates, the keeping of records and the provision of information.

There are some additional requirements in respect of group personal pensions, including the existence of an arrangement for direct payment from the employer to the provider.

Qualifying defined-benefit schemes

The position for DB schemes is rather more straightforward. Most final-salary schemes are contracted out and all such schemes will be qualifying schemes.

Contracted-in final-salary schemes will qualify if they:

  • pay a pension from the age of 65 (currently);
  • have an accrual rate of 1/120th or better;
  • revalue accrued benefits by a specified method; and
  • increase pensions payment in line with the consumer prices index (CPI) capped at 2.5% (in respect of future service after auto-enrolment).

Career-average schemes must meet the same tests, but, in addition, must revalue accrued pensions at least in line with CPI capped at 2.5% and, if such revaluation is discretionary, fund on the basis that it will be applied.

Hybrid pension schemes with elements of DB and DC provision will have to meet either the same, or a modified version of the same, requirements as DB and DC schemes, or a combination of both.