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.
From the date automatic enrolment duties apply, employers must ensure that the minimum quality requirements are met for their jobholders who are auto enrolled into, opt into or are already active members of, a qualifying scheme. The quality requirements vary for different scheme types and are set out in the Pensions Act 2008.
The quality test for money purchase schemes sets a minimum contribution level that must be paid. The prescribed minimum level is 8% of the jobholder’s qualifying earnings in a relevant pay reference period. Employers are required to pay at least 3% of qualifying earnings with the jobholder making up the difference. Some employers may choose to pay more than 3% thus reducing the amount the jobholder is required to pay.
Qualifying earnings for a 12 month pay reference period are earnings that are more than £6,240 and not more than £50,270 (in 2023/24). Earnings are:
- salary or wages
- overtime payments
- statutory sick pay, statutory maternity pay, ordinary or additional statutory paternity pay and statutory adoption pay
For the purpose of the quality requirement (and the alternative quality requirements – see below) the employer can choose to use one of three different definitions of pay reference period. They are:
- a pay reference period of a year ending the day before an anniversary of the employer’s staging date.
- a pay reference period that’s equal in length to the interval between the usual payment of a jobholder’s wages or salary.
- a pay reference period that is equal in length to the period over which the normal wage or salary is paid, which is then aligned with the relevant tax period.
It’s worth noting that the pay reference period used for assessing the workforce is defined differently. The employer can use either:
- the period by reference to which the worker is paid their regular wage or salary, or
- the pay period over which normal regular wages or salary are paid, which is then aligned to tax periods. This is only possible if the scheme administrator agrees to administer the scheme on this basis.
It’s recognised that, under most money purchase schemes, contributions will not be based on qualifying earnings, but on some other measure of earnings, such as basic pay. Having to check that the contributions to be paid using such other measure at least match 8% of the jobholder’s qualifying earnings could be an onerous task for employers. Consequently, legislation allows the employer to certify that the scheme instead meets one of three alternative quality requirements, as described below, in relation to a jobholder who is an active member of the qualifying scheme.
The scheme can use different sets of alternative quality requirements for different categories of jobholders. If a set is used, it should be reflected in the rules of the occupational pension scheme (or other binding agreement with the employer) or the personal pension agreements between the provider and employer, and where necessary, the provider and jobholder.
The legislation also allows for certification that the quality requirement as set out in the Pensions Act 2008 itself is met. Guidance issued by the Department of Work and Pensions (DWP) suggests this might apply where the scheme doesn’t explicitly provide for the minimum contribution level (8% of qualifying earnings) set out in the Pensions Act 2008, but the employer is satisfied that the contribution requirements of the scheme will equal or exceed that. For example, this might be where the formula used by the employer doesn’t exactly match the quality requirement (and doesn’t fit within one of the three alternative sets of quality requirements) but the employer has reasonable grounds for being satisfied that, in practice, it equates to at least that.
Certification isn’t necessary if the scheme provides for contributions based on 8% of qualifying earnings or a better basis than this (for example 8% of total earnings, including bonuses and overtime) as there’s certainty that the scheme will meet the quality requirement.
The alternative quality requirements are intended to apply to employers who calculate contributions starting from the first £1 of earnings, rather than the minimum threshold of £6,240. Certification (using one of the three alternative sets) can be used for schemes that operate with a cap on the amount of contributions that may be paid by the employer and/or jobholder, provided the cap doesn’t result in payment of contributions below the quality requirement as set out in the Pensions Act 2008.
The contribution levels applying to the alternative quality requirements are:
Alternative quality requirement
Total contribution of at least 9% of the jobholder’s pensionable earnings in the relevant pay reference period (including an employer contribution of at least 4%).
Total contributions of at least 8% of the jobholder’s pensionable earnings in the relevant pay reference period (including an employer contribution of at least 3%).
Total contributions of at least 7% of the jobholder’s earnings in the relevant pay reference period (including an employer contribution of at least 3%.
For this purpose, basic pay must include earnings before deductions, holiday pay and statutory benefits delivered through payroll, such as maternity pay and sick pay. However, it can exclude payments such as bonuses, overtime, certain reasonable allowances (for example, relating to relocation costs, ancillary duties undertaken by the jobholder (such as being a fire warden), or the purchase, lease or maintenance of a vehicle or item – such as clothing allowance or car allowance), and shift premium pay. This is different from the definition of earnings used in qualifying earnings.
John is required to pay 6% of his pensionable earnings (including tax relief) and his employer is required to pay 3% of John’s pensionable earnings to a group personal pension scheme. These contribution rates also apply to the other jobholders in John’s category in the scheme.
John (like others in his category) earns a basic salary, overtime and an annual bonus. Pensionable earnings are based on basic salary and bonus from the first £1, but exclude any overtime.
Total pensionable earnings for all jobholders under the same category as John are £567,000 and total earnings for all such jobholders are £610,000.
The employer could not certify that the scheme meets set 1 of the alternative quality requirements in relation to John, as although John’s pensionable earnings are greater that his basic pay, and the total contributions are 9%, the employer only pays 3% of pensionable earnings instead of the required 4%.
The employer could certify that the scheme meets set 2 of the alternative quality requirements in relation to John. More than 8% of John’s pensionable earnings are required to be paid, and the employer’s share meets the required 3%. Total pensionable earnings are more than 85% of the total earnings (£567,000 / £610,000 x 100% = 92.95%) and John’s pensionable earnings are greater than his basic pay.
The employer couldn’t certify that the scheme meets set 3 of the alternative quality requirements in relation to John, as one of the requirements is that under this set, all earnings must be pensionable, which isn’t the case for John.
The actual process of certification involves completing a certificate. The certificate must be in writing and contain the following information:
- the name of the scheme being certified
- whether the certificate relates to part of the scheme, and if it does, which part
- the employer’s unique reference(s) for the scheme – this depends on the scheme type and could be:
- the occupational pension scheme reference number
- a reference number given by a personal pension provider, or
- the reference given to an employer participating in a multi-employer pension scheme
- whether the certificate relates to all of the jobholders of the employer who are active members of the scheme (or part-scheme)
- whether there’s a contribution cap, and if so, the details
- if the certificate relates to only some of the jobholders of the employer who are active members of the scheme or part-scheme/section of the scheme, the names and roles of the relevant jobholders
- whether the employer has excluded any jobholders who have chosen voluntarily to save below the qualifying level, and their names and job roles
- whether any jobholders have been excluded from the certificate because they will clearly receive contributions of at least the minimum amount, and if so, their names and job roles
- which set of alternative quality requirements is being used to certify
- whether the test is to be applied proportionately because the scheme is a combination hybrid, and the proportion to be satisfied
- the certification period, and
- whether the certificate has been amended, and if so, the period covered by the previous certificate.
The DWP guidance on Certification contains a template (see Annex E in the link below) but the employer can develop their own if all the required information is contained in it.
The certificate is the responsibility of the employer although they can authorise someone else to sign it on their behalf (this would be determined in line with normal company authorisations). The person giving the certificate must have regard to the guidance on certification mentioned above.
A certificate can be in force for any period up to 18 months. The start date of the certificate (the effective date) is the date at which earnings data checks and calculations should be done. The employer has one month from the effective date in which to complete the necessary checks and calculations and sign the certificate. The effective date of the first certificate would normally be the employer’s staging date.
The expiry date of the certificate can normally be changed (provided it doesn’t extend the certification period beyond 18 months), but the revised end date must be after the date on which the amendment is made (in other words, it’s not possible to change an end date retrospectively). The end date should be altered if there is a change in circumstances which means that the employer is of the opinion that the certification test is no longer satisfied (this might be triggered, for example, by a change to the scheme benefit structure, contribution rates, or pay and reward structure). This wouldn’t prevent the employer going through a further certification process to cover a subsequent period.
A certificate can only apply to one scheme, so if an employer operates, say, two schemes and wants to certify both of them, two certificates would have to be given. A group personal pension scheme administered by a single provider – even though it is actually a series of individual contracts between the jobholders and the provider, is treated as a single scheme for the purposes of certification.
Where more than one employer participates in a scheme, each employer who wants to certify the scheme would have to hold a certificate in relation to it. One employer may be able to certify on behalf of another (and in respect of that other employer’s relevant jobholders), provided they are authorised to do so.
When a certificate expires, the employer must assess whether the relevant quality requirement or one set of the alternative quality requirements was met during the period of the previous certificate in relation to the jobholders covered by the certificate. They can’t issue a further certificate until this has been done, and any corrective actions taken for the future (in relation to the new certificate and jobholders covered by it) are considered.
There's no obligation to make up any contribution shortfall (unless the Pensions Regulator determines that the scheme has been mis-certified).
An employer can only certify a scheme (or part of a scheme) if they are certain that the relevant quality requirement will be met in relation to the jobholders being covered by the certificate. Employers who mis-certify their schemes (and who don’t have regard to the guidance on certification) may be in breach of their obligations under the Pensions Act 2008, which could result in compliance action being taken against them by the Pensions Regulator.
A copy of the certificate must be kept for six years after it has expired. It doesn’t have to be submitted to anyone, but the Pensions Regulator can ask for a copy at any time. If asked, an employer must give jobholders and trade unions a copy of the certificate within two months of the request date, but any personal information can be removed from the copy beforehand.