TECHTALK
This article originally appeared in SEP 15 edition of techtalk. Please visit www.scottishwidows.co.uk/techtalk for the latest issue.
AUTOMATIC ENROLMENT
– SCHEME CERTIFICATION
Thomas Coughlan
Automatic enrolment rules revolve around pension contributions linked to the ‘qualifying
earnings’ (QE) band. For the 2015/2016 tax year this is aligned with the lower and upper
earnings national insurance thresholds, although this could change in years to come.
Few schemes work this way today, so is there another option?
Fortunately, the answer is yes. An employer can certify that a workplace pension scheme
meets the standard required, even if it uses a different definition of pensionable pay.
With the help of some questions and answers we can build a picture of what certification
involves and its practical application.
For professional adviser use only, not to be relied upon by any other person.
WHEN WOULD CERTIFICATION BE USED?
Employers would use certification when pension contributions
are based on a definition of earnings that is different to the
QE band and/or when total earnings tend to fluctuate. For
2015/2016 the QE band starts at £5,824 per annum and
ends at £42,385. From 1 October 2018, the minimum total
contribution on earnings within this band is 8% of which
the employer must contribute at least 3%. Employers won’t
need to think about certification when pension contributions
exactly match or exceed this basis. Leading up to October
2018, the minimum contribution levels will be phased in as
described later in this article.
WHAT ARE THE POSSIBLE ALTERNATIVE
BASES UNDER CERTIFICATION?
A scheme can be a Qualifying Scheme under the automatic
enrolment legislation if it satisfies one or more of the following
sets, formerly known as tiers:
Earnings definition
Set 1
Set 2
Minimum
Minimum
employer
total
contribution contribution
(%)
(%)
Pensionable pay at
least equal to basic
pay
4
Pensionable pay at
least equal to basic
pay and at least 85%
of total earnings
across the scheme
3
Set 3 Pensionable pay
equal to total
earnings
9
• statutory payments like sick pay or maternity pay, delivered
through payroll
• anything else deemed to fall within section 13(3) of the
Pensions Act 2008.
Pensionable pay:
• means the amount on which pension contributions are
based
• must be at least equal to basic pay, which includes earnings
before deductions, holiday pay and statutory payments
• under set 1 and potentially set 2 can exclude shift allowances
and fluctuating amounts such as overtime, commission
and bonuses.
Some employers may need legal advice on whether certain
items of remuneration fall within the definition of earnings
or pensionable pay.
WHY WOULD EMPLOYERS USE
CERTIFICATION?
Employers may prefer to use a different definition of pensionable
pay for a variety of reasons. These could include:
• to ease member communication and understanding
• to avoid changing existing pension scheme rules and/or
contracts of employment
8
• to simplify the calculation of pensionable pay and pension
contributions in any given pay reference period
• to make budgeting and accounting for pension contributions
easier when earnings fluctuate
• to simplify scheme administration.
3
7
COULD CERTIFICATION HELP EMPLOYERS
TO SAVE MONEY?
For existing schemes and members, the process of checking
that pensionable pay at least equals 85% of total earnings
required under Set 2 will normally involve checking earnings
over the year immediately preceding the certificate’s effective
date. But for new staff, employers can use projected future
earnings over the period of the certificate.
Using certification could result in some members receiving
lower pension contributions than if QE were used – due to
the various possible member outcomes arising from using
pensionable pay vs. QE.
For each of the sets the first £1 of pay or earnings generates
a pension contribution. Compare this with QE where
contributions only apply when earnings exceed £5,824 per
annum or the monthly/weekly equivalent.
In the tax year 2015/2016, Justin has total earnings of £37,000
including £5,000 car allowance, £2,000 overtime, £10,000
commission and £20,000 basic pay. Justin’s employer aims
to pay the minimum required under the legislation (but isn’t
phasing in contributions prior to October 2018).
There is also a fourth option. Employers using a basis
different to those listed above can, through an examination
of pensionable pay and contribution data for its employees,
certify that the scheme is at least as good as one based on QE.
WHAT ARE QUALIFYING EARNINGS AND
PENSIONABLE PAY?
QE includes:
• salary and allowances
• fluctuating amounts such as overtime, commission and
bonuses
EXAMPLE
Basis
Pensionable
pay
Employee
conts.
Employer
conts.
QE
Total
£31,176
£1,559
£935
£2,494
Set 1
£20,000
£1,000
£800
£1,800
Set 2*
£31,450
£1,573
£944
£2,517
Set 3
£37,000
£1,480
£1,110
£2,590
However, Arni who does the same job didn’t meet his sales
targets and earned no commission.
Employee
conts.
Employer
conts.
£21,176
£1,059
£635
£1,694
Set 1
£20,000
£1,000
£800
£1,800
Set 2*
£22,950
£1,148
£689
£1,837
IS THERE ANOTHER OPTION IF
THE SCHEME CANNOT MEET THE
CERTIFICATION REQUIREMENTS AND
DOESN’T WANT TO FORMALLY ADOPT
THE QE BASIS?
Set 3
£27,000
£1,080
£810
£1,890
• Only by carrying out an individual check for each
Basis
Pensionable
pay
QE
Total
* the employer sets pensionable pay at 85% of total earnings in every pay
reference period.
Because of the fluctuating commission element of total
earnings, the pension provision under Set 1 is lowest for Justin
whereas the QE basis is lower for Arni. Next year of course it
could be different. In many cases the administrative benefits
of certification would outweigh any potential fluctuation in
contributions from year to year. Here it’s probably more
straightforward and cost effective for the employer to use Set 1
for its sales executives; the employer contribution saving for
Justin under Set 1 broadly offsets the extra expense under Set 1
for Arni and the more commission earned, the better (cheaper)
Set 1 will be. In fact, taking everything into consideration, the
relative simplicity and predictability of Set 1 might mean that
the employer can afford to increase its contribution above
the minimum 4%. In addition, this basis may be fairer than
linking long-term pension funding to short-term sales/service
performance and employees will also be clearer about their
pension rights and find it easier to plan.
CAN THE ALTERNATIVE BASES STILL BE
SUBJECT TO A PHASED INTRODUCTION?
employee to ensure that they are entitled to pension
contributions at least as good as the minimum legislative
requirements based on QE.
• This would probably only apply in cases of employers
with just a few employees or for small, distinct employee
groups in a larger employer.
An example might be where the employer has agreed to
contribute to the private personal pension arrangements of
a few existing employees, provided that each can be treated
as a single member Qualifying Scheme.
The employer must do individual checks for each employee
instead of giving a certificate for each scheme.
WHO COMPLETES THE CERTIFICATE?
• The employer is responsible for certifying that a scheme
or sub-section of a scheme meets the alternative quality
requirements.
• In multi-employer schemes, each employer would certify
for their own employees, unless authorised to certify on
behalf of another employer.
• For employers with more than one scheme, a certificate
would potentially be needed for each.
Yes – see below.
Timeline
Set 1
Set 2
Set 3
WHO IS COVERED BY THE CERTIFICATE?
Staging date to
30 Sept. 2017
3%
(2%
employer)
2%
(1%
employer)
2%
(1%
employer)
• At outset the certificate must cover any existing scheme
1 Oct. 2017 to
30 Sept. 2018
6%
(3%
employer)
5%
(2%
employer)
5%
(2%
employer)
1 Oct. 2018
onwards
9%
(4%
employer)
8%
(3%
employer)
7%
(3%
employer)
–– But not certain excluded employees e.g. those
who are identified individually as already
entitled to contributions that otherwise satisfy
the legislative requirement.
CAN AN EMPLOYER CERTIFY PART OF A
SCHEME OR WORKFORCE?
Yes. It’s possible to certify:
• a section or part of a scheme
• different bases for different sections or parts of a scheme
• different sections of the workforce within one or more
sections of the scheme.
members and those employees eligible for automatic
enrolment or eligible to opt in.
• At renewal, the certificate must cover broadly the same
individuals but with the further exception of any who
have opted out or who asked to pay contributions lower
than the minimums prescribed under the legislation.
• Those individuals excluded from the certificate because
they are paying at least the minimum required under the
legislation, or voluntarily paying less, must be identified
by name and job role on the certificate.
WHAT IS THE PROCESS OF
CERTIFICATION?
For example, an employer using workforce segmentation,
involving a GPP and The People’s Pension, could certify the
GPP on one basis and The People’s Pension on another basis;
or it could be that the GPP alone is certified and the other
scheme operates on the standard QE basis.
The certificate must be in place by the time the employer has
a duty to enrol employees. For most existing schemes the
effective date of the certificate will be the employer’s staging
date or such later date as the scheme changes its qualifying
status from one basis to another.
A certificate will be needed for each scheme and/or employee
group using a different basis.
An employer can backdate the effective date of a certificate
by no more than one month.
Amongst other things the certificate must state:
• name of scheme
• if it relates to part of a scheme
• if it relates to all relevant employees or only some
• names and job roles of excluded employees
• the basis being used for certification
• the period of the certificate.
The certificate must be signed by the employer and kept
safely along with any evidence of work carried out to verify
the certification for six years. The Pensions Regulator can
ask to see the certificate on demand. After the certification
period has ended, a copy of the certificate must be supplied
within two months of any request from a relevant employee
or trade union representative.
CAN EMPLOYERS USE POSTPONEMENT (A
WAITING PERIOD) WITH CERTIFICATION?
• Auto-enrolment to a certified Qualifying Scheme can be
postponed for up to three months.
Periodically the Government will review the alternative
bases under certification. The legislation underpinning
certification requires the alternative bases to deliver at
least as good an outcome for 90% of all employees across
the wider population as the QE basis. At review if more than
10% were found to have been worse off, the rules could be
changed or cancelled.
The first review is due in 2017.
SUMMARY
Certification offers a useful alternative for employers
who are looking for a straightforward, cost effective
and sometimes fairer approach to auto-enrolment
compliance and introducing a Qualifying Scheme.
More information on certification and a template
certificate for employers to use can be found on the
DWP website at: https://www.gov.uk/government/
uploads/system/uploads/attachment_data/file/
244960/money-purchase-schemes-guidance.pdf
• But the certificate should be effective from the staging
date so that if any employees choose to opt in during
the postponement period, they will be enrolled into a
qualifying scheme.
HOW LONG DOES A CERTIFICATE LAST?
• A maximum of 18 months or a shorter period at the
discretion of the employer.
• However significant changes at employer or scheme
level mid-certification period, which would obviously
impact on the certification basis, may cause it to end
sooner.
–– Examples of such changes would be alterations
to the scheme contribution rate and/or
employee’s remuneration packages.
WHAT HAPPENS IF IT TURNS OUT THERE
IS A SHORTFALL OF CONTRIBUTIONS
DURING THE PERIOD WHEN THE
CERTIFICATE IS IN FORCE (OTHER THAN
DUE TO SIGNIFICANT CHANGES – SEE
ABOVE)?
• Generally speaking shortfalls don’t have to be rectified.
• If the certificate is to be renewed, the scheme basis may
have to be adjusted going forward.
• However employers have a statutory duty to keep
records, which The Pensions Regulator (TPR) could
choose to review.
• If TPR believes that the scheme was wrongly certified,
the employer may be forced to make good the shortfall.
• Ultimately TPR could take enforcement action against
the employer.
Every care has been taken to ensure that this information is correct and in accordance with our understanding of the law and HM Revenue & Customs practice, which may change.
However, independent confirmation should be obtained before acting or refraining from acting in reliance upon the information given.
Scottish Widows plc. Registered in Scotland No. 199549. Registered Office in the United Kingdom at 69 Morrison Street, Edinburgh EH3 8YF. Telephone: 0131 655 6000.
Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number 191517.