This guide is for financial advisers only. It mustn’t be distributed to, or relied on by, customers. It is based on our understanding of legislation as at May 2023.
Employers have a duty to automatically enrol eligible jobholders who aren’t already active members of a qualifying scheme into a suitable pension scheme – known as an automatic enrolment scheme.
They also have a duty to automatically re-enrol jobholders in various circumstances into such a scheme, or enrol a jobholder who has chosen to opt in to such a scheme.
Here we set out the requirements a UK scheme will have to meet to be a UK automatic enrolment scheme (or a UK qualifying scheme) in relation to a jobholder.
A registered pension scheme will meet the conditions to be an automatic enrolment scheme in relation to a jobholder if:
- the scheme is a qualifying scheme (see ‘Definition of a qualifying scheme’), and
- the provisions of the scheme don’t:
- prevent the employer from making arrangements for the automatic enrolment/automatic re-enrolment/opting in of a jobholder with effect from the relevant date
- require the jobholder to make choices about anything or have to provide any information to remain an active member
- allow any amount to be deducted from a jobholder’s pension pot or from payments, including contributions, to the scheme by or in respect of the member, or the value of their pension rights to be reduced by any amount, if that amount is to be paid to a third party (anyone other than the member, trustee or provider) under an agreement between the employer and the third party. This would cover consultancy charges. This only applies to money purchase schemes that are being used as qualifying schemes.
This means, for example, that a jobholder can’t be required to fill in an application form to be enrolled as an active member, and there must be a default investment fund (‘the default option’) available.
The employer must be satisfied that the existing scheme meets the criteria to be an automatic enrolment scheme/qualifying scheme before they can use it.
Occupational pension schemes
For occupational schemes that lack a suitable amendment power, the trustees will be able to amend their scheme rules, with the employer’s consent, if necessary, so the scheme meets the automatic enrolment scheme conditions (including, for money purchase schemes, the minimum contributions requirements).
Where there is more than one employer in relation to the scheme, the trustees will need either the consent of a person nominated by all the employers to act as their representative or the consent of all employers.
Regulations may exclude certain types of occupational pension schemes from having the power to amend in this way.
In relation to the UK, a qualifying scheme is:
- a tax registered occupational pension scheme (as defined in section 1(1) of the Pension Schemes Act 1993), or
- a personal pension scheme registered under the Finance Act 2004,
which, while the jobholder is an active member, meets the quality requirement in relation to the jobholder. The quality requirement differs for different scheme types and depends on whether the scheme is using the quality requirement as set down in the Pensions Act 2008, or one of the alternative quality requirements (known as certification).
Whether or not a scheme is a qualifying scheme is determined in relation to each member separately, so a scheme could be a qualifying scheme for some members but not for others.
Eligible jobholders who are already active members of a qualifying scheme don’t have to be automatically enrolled or automatically re-enrolled.
As well as a ban on consultancy charges (see ‘Definition of an automatic enrolment scheme?’[APS – link this to the section earlier in the guide with this heading]), separate rules also restrict or ban certain charges on qualifying schemes which are money purchase schemes (although exemptions apply). There is a charge cap for default investment funds and differential charging is not allowed i.e. you can’t charge someone who is not actively making contributions a higher amount than someone who is.
Not adhering to these separate rules does not mean that the scheme would not be a qualifying/auto –enrolment scheme but could lead to enforcement action by the Pensions Regulator or FCA.
UK Personal pension scheme – where the quality requirement is used
The scheme must provide only money purchase benefits, and there must be an agreement between the provider and the employer under which the employer must pay the minimum contributions of 3% of a jobholder’s qualifying earnings in the relevant pay reference period.
UK Personal pension scheme – where an alternative quality requirement is used (i.e. certification)
The scheme must provide only money purchase benefits, and there must be an agreement between the provider and the employer under which the employer must pay minimum contributions of:
UK Occupational defined benefit pension scheme - where the quality requirement is met
The scheme must satisfy the ‘test scheme standard’ in relation to the jobholder. To satisfy the test scheme standard for a jobholder, the pensions to be provided for ‘relevant members’ (considered as a whole) of the scheme must be broadly equivalent to, or better than, the pensions which would be provided under a test scheme.
UK occupational defined benefit pension scheme - where an alternative requirement is used
The scheme must meet either:
For a scheme that doesn’t provide survivor pension benefits, the respective contribution rate is reduced by 1%.
Certain ‘average salary benefit’ schemes may be prevented from being a qualifying scheme if they don’t meet certain additional conditions. With average salary benefits, the rate or amount of benefits is calculated by reference to the average salary over the period of service on which the benefits are based. See paragraphs 81 and 82 of TPR’s detailed guidance note 4 for more information.
There are three earnings definitions in use for determining whether the quality test or an alternative requirement is met – qualifying earnings, pensionable earnings and basic pay.
Earnings means the sums of any of the following payable to a person in connection with their employment:
- salary, wages, commission, bonuses and overtime
- statutory sick pay, statutory maternity pay, ordinary statutory paternity pay, additional statutory paternity pay, and statutory adoption pay
Earnings do not include benefits in kind.
Qualifying earnings means the band of gross earnings payable to the person from the employment that are above a prescribed lower level and up to and including a higher prescribed level. The 2023/24 tax year levels are £6,240 and £50,270 respectively.
Pensionable earnings means the gross earnings on which contributions are payable to a money purchase occupational or personal pension scheme by the employer or the jobholder.
Basic pay means the gross earnings of the jobholder from their employment, disregarding the gross amount of:
- any commission, bonuses, overtime or similar payments
- any shift premium pay, and
- any reasonable allowance with respect to –
- any duty of the jobholder, such as a duty in connection with the role of fire or bomb warden, that is ancillary to the main duties of the jobholder’s employment
- the cost of relocation of the jobholder to a different place of work
- in a case not covered by sub-paragraph 2), the purchase, lease or maintenance of a vehicle
- in a case not covered by sub-paragraph 2) or 3), the purchase, lease or maintenance of an item
- in a case not covered by sub-paragraph 2), 3) or 4), the delivery of a service to the jobholder.
For the quality requirement and the alternative quality requirements, the employer can choose to use one of the following definitions of pay reference period:
- A period of 12 months aligned to the employer’s duties start date (this is the definition of pay reference period that has applied since 1 July 2012). Employers who had a staging date can choose to change to one of the other definitions of pay reference period if scheme rules or other governing documentation allows. You can find out more in this guidance from TPR.
- a period equal in length to the interval between the usual payments of a jobholder’s wages or salary (assuming their scheme provider allows)
- a period over which the normal wage or salary is paid, aligned with the relevant tax period (assuming their scheme provider allows)
See Pay reference periods for more information.