Adviser > News > November 2010 > Auto-enrolment and Employer Certification
Auto-enrolment and Employer Certification
Find out from our Business Development Manager, Jamie Clark, how employers can meet the minimum Qualifying Workplace Pension Scheme criteria.
Jamie Clark
Background
From 2012, employers will be required to automatically enrol eligible employees into a workplace pension scheme and pay contributions on their behalf. As well as this and many other new duties under the Pensions Act 2008, employers will also have to certify that their scheme meets the minimum Qualifying Workplace Pension Scheme (QWPS) criteria.
Qualifying Earnings (QEs)
For defined contribution schemes, the original certification Regulations were based on minimum contributions calculated by reference to QEs.
Qualifying Earnings are defined as those that fall in the £5,715 to £38,185 band (in 2010/2011 terms) and include the following:
- Salary
- Wages
- Overtime
- Bonuses
- Commissions
- Statutory sick pay
- Statutory maternity pay
- Statutory paternity pay
- Statutory adoption pay
This was seen as complex and unworkable, especially as most employers pay pension contributions from the first pound of earnings which don't necessarily include elements of pay within the definition of QEs. So the Department for Work and Pensions (DWP) has been working with providers, employer groups and other key stakeholders to come up with alternatives.
Recommendations from the review group
In October 2010, a group set up to review auto-enrolment published their recommendations to DWP. These recommendations included proposals for simplified employer self-certification procedures.
If these recommendations are taken forward by the DWP as expected, there will be four ways to certify that schemes meet the QWPS contribution requirements.
It's proposed that the pay and contribution data used to determine certification will be based on one year's past data and be valid for the following year. We expect certification to be available for employers setting up new schemes as well as for existing schemes. From the end of the phasing period, the recommendations are that employers may:
Pensionable pay
The definition of pensionable pay is set by the employer as the amount of pay on which pension contributions are based. It must be at least basic pay.
Option 1 – 9%
Certify that contributions amount to at least 9% of pensionable pay (i.e. the pay that pension contributions are based on) in total. At least 4% must be payable by the employer.
For example:
- A company that pays basic pay plus sales-based commission can certify that their scheme meets the QWPS contribution requirement on this basis if the contributions for each eligible employee are based on 9% of basic pay, 4% employer, 5% (gross) employee.
- In this case, the qualifying earnings band between £5,715 and £38,185 (in 2010/2011 terms) and any commissions payable can be ignored.
Option 2 – 8%
Certify that contributions amount to at least 8% of pensionable pay, as long as pensionable pay amounts to at least 85% of total pay on aggregate across the eligible employees. At least 3% must be payable by the employer.
For example:
- A company that pays basic pay plus sales-based commission can certify that their scheme meets the QWPS contribution requirement on this basis if the contributions for each eligible employee are based on 8% of basic pay, 3% employer, 5% (gross) employee as long as any sales-based commission makes up no more than 15% of total pay.
- The 15% figure can be taken as an aggregate across the eligible employees.
- The qualifying earnings band between £5,715 and £38,185 (in 2010/2011 terms) and any commissions, as long as they do not on aggregate exceed 15% of total pay, can be ignored.
Option 3 – 7%
Certify that contributions amount to at least 7% pensionable pay, as long as 100% of pay is pensionable.
For example:
- A company that pays basic pay plus sales-based commission can certify that their scheme meets the QWPS contribution standard on this basis if the contributions for each eligible employee are based on 7% of total pay (basic plus commissions), 3% employer, 4% (gross) employee.
- Again, the qualifying earnings band between £5,715 and £38,185 (in 2010/2011 terms) can be ignored as long as all commissions are taken into account for the contribution percentages.
Option 4 – 8% of Qualifying Earnings
If employers cannot certify that their scheme meets the QWPS requirements under options 1-3 above, then they would have to check that contributions for each eligible employee are at least 8% of QEs, 3% employer, 5% (gross) employee.
The band of QEs between £5,715 and £38,185 (in 2010/2011 terms) and all types of earnings within the definition of QEs would have to be included.
Interaction with phasing of contributions
The DWP have yet to confirm the exact details of how (or if) the certification rules will be adapted to take into account the phasing of the minimum contribution requirements from 2012 to 2017. If the above certification rules are brought in to the phasing periods, we would expect these to apply on a similar basis.
For example:
Option 1 – 9%
Certify that contributions amount to at least 9% of pensionable pay in total. At least 4% must be payable by the employer.
Phasing period 1 October 2012 – September 2016 |
Phasing period 2 October 2016 – September 2017 |
Steady state From October 2017 |
||||||
Employer |
Employee |
Total |
Employer |
Employee |
Total |
Employer |
Employee |
Total |
1% |
1% |
2% |
2% |
3% |
5% |
4% |
5% |
9% |
Option 2 – 8%
Certify that contributions amount to at least 8% of pensionable pay, as long as pensionable pay amounts to at least 85% of total pay on aggregate across the eligible employees. At least 3% must be payable by the employer.
Phasing period 1 October 2012 – September 2016 |
Phasing period 2 October 2016 – September 2017 |
Steady state From October 2017 |
||||||
Employer |
Employee |
Total |
Employer |
Employee |
Total |
Employer |
Employee |
Total |
1% |
1% |
2% |
2% |
3% |
5% |
3% |
5% |
8% |
Option 3 – 7%
Certify that contributions amount to at least 7% of pensionable pay, as long as 100% of pay is pensionable.
Phasing period 1 October 2012 – September 2016 |
Phasing period 2 October 2016 – September 2017 |
Steady state From October 2017 |
||||||
Employer |
Employee |
Total |
Employer |
Employee |
Total |
Employer |
Employee |
Total |
1% |
1% |
2% |
2% |
1% |
3% |
3% |
4% |
7% |
Next Steps
We expect these certification options to be taken forward by DWP and drafts of the legislation and regulations to be published over the next 12 months.
Please note that the information provided above is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice.
Source:
Making auto-enrolment work, A review for the Department for Work and Pensions, October 2010.
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