In order to assess whether an existing scheme meets the minimum requirements, the employer can check TPR’s Guidance no.4 - Pension schemes. There is extensive information on how to determine whether different types of scheme satisfy the qualifying scheme requirements. Flow charts in appendices to this section show the considerations for an employer in ascertaining whether its scheme meets the criteria.
Employers will be able to certify in advance that their existing schemes meet the minimum quality criteria and whether they can be used to satisfy the auto-enrolment requirements. Broadly, the primary legislation provides that an employer can certify each year that its existing scheme satisfies the quality tests under section 28 of the Pensions Act 2008, which will be implemented under the Pensions Act 2011, and the details of the certification process are to be set out in regulations.
In July 2011, following an informal consultation, the DWP published for formal consultation, draft legislation that provides employers with the flexibility to satisfy one tier from a three-tier test, depending on which suits best with their existing their pay structures. An employer will be able to certify compliance with the certification requirements if it provides contributions on one of the following bases:
- Tier 1 - contributions of at least 9 per cent of pensionable pay (that is, all pay that is treated as pensionable by the scheme), including 4 per cent employer contributions.
- Tier 2 - contributions of at least 8 per cent of pensionable pay (that is, all pay that is treated as pensionable by the scheme), including 3 per cent employer contributions, provided at least 85 per cent of the total pay is pensionable.
- Tier 3 - contributions of at least 7 per cent of pensionable pay (that is, all pay that is treated as pensionable by the scheme), including 3 per cent employer contributions, provided all pay is pensionable.
Following concerns that unscrupulous employers might manipulate this test and define only a small proportion of pay as pensionable, a Government amendment to the Pensions Bill 2011 was introduced at its third reading in the House of Lords. New subsection 28(2A) will provide that quality requirements will be satisfied only where total contributions to an employer’s qualifying scheme will not be less than under the relevant quality requirements for at least 90 per cent of jobholders.
Different tiers can be used for different sections of the employer’s workforce. Self-certification will not be necessary for employers operating defined contribution (or hybrid) schemes that clearly satisfy or exceed the relevant quality requirements.
For the scheme also to be used for auto-enrolment, it should be checked that the scheme rules:
- do not require the member to give consent to join;
- do not require the member to provide any information or make any choices; and
- allow a new starter to join it from the first day of employment (subject to postponement, as explained above).
Where an employer has varied pension provisions for different segments of the workforce, (perhaps, for instance, including employer contributions as low as 2 per cent, or no employer contributions at all) the qualifying scheme test may not be met in relation to many of its employees. The employer may decide to amend the rules of one of its existing schemes where necessary so that they comply, approach one of its existing providers for a new bespoke scheme, or use NEST for auto-enrolment purposes.