Qualifying and auto-enrolment schemes

These FAQs are for financial advisers only. They mustn’t be distributed to, or relied on by, customers. They are based on our understanding of legislation at the date of publication.

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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.

These FAQs 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:

a) the scheme is a qualifying scheme (see ‘What is a qualifying scheme’), and

b) the provisions of the scheme don’t:

  1. prevent the employer from making arrangements for the automatic enrolment/automatic re-enrolment/opting in of a jobholder with effect from the relevant date
  2. require the jobholder to make choices about anything or have to provide any information to remain an active member
  3. 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 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.

Yes. The employer must be satisfied that it meets the criteria to be an automatic enrolment scheme/qualifying scheme before they can use it.

If necessary, the trustees of an occupational pension scheme, which lacks a suitable amendment power, will be able to amend their scheme rules, with the employer’s consent, 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) an occupational pension scheme (as defined in section 1(1) of the Pension Schemes Act 1993), or

b) 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.

Yes, as well as a ban on consultancy charges (see ‘What is the definition of an automatic enrolment scheme?’), 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. 

The Pensions Regulator’s guidance surrounding the charge controls regarding occupational pension schemes can be found here. FCA guidance surrounding personal pensions can be found here.

What is the quality requirement for a Personal Pension Scheme table.
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.

If there is a shortfall/difference between the employer’s contribution and 8% of qualifying earnings in the relevant period, there must be an agreement between the provider and the jobholder that the jobholder must pay contributions of at least that difference.

This means the employer could choose to pay more than 3% and even the whole 8% (or more), or leave the jobholder to pay at least the difference required to meet the minimum 8% contributions.

There must also be direct payment arrangements between the jobholder and the employer. Further information about direct payment arrangements can be found on page 21 of the Pensions Regulator guidance note 4 here.

Note that what makes the scheme qualifying is the requirement in terms of the agreement(s) that the defined contribution minimum requirements are met. The actual payment of the contribution is a different matter.

Please note that the contributions levels are being phased in – see our FAQs on Qualifying earnings and contributions.
Personal pension scheme – where an alternative quality requirement (i.e. Certification) 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 minimum contributions of:

For set 1 – 4% of a jobholder’s pensionable earnings in the relevant pay reference period, with pensionable earnings being at least equal to basic pay, or
For set 2 – 3% of the jobholder’s pensionable earnings in the relevant pay reference period with pensionable earnings being at least equal to basic pay, and the pensionable earnings of all relevant jobholders constituting at least 85% of the earnings of all those jobholders, or
For set 3 – 3% of the jobholder’s earnings in the relevant pay reference period, providing that all earnings are pensionable.

If there is a shortfall/difference between the employer’s contribution and
For set 1 – 9% of such pensionable earnings in the relevant period, or
For set 2 – 8% of such pensionable earnings in the relevant period, or
For set 3 – 7% of such earnings in the relevant period, there must be an agreement between the provider and the jobholder that the jobholder must pay contributions of at least that difference.

There must also be direct payment arrangements between the jobholder and the employer.

What makes the scheme qualifying is the requirement in terms of the agreement(s) that the defined contribution minimum requirements are met. The actual payment of the contributions is a difference matter.

Please note that contribution levels are being phased in – see our FAQs on Certification and the alternative quality requirements.
What is the quality requirement for an Occupational Money Purchase Scheme table
UK Occupational money purchase pension scheme – where the quality requirement is used A scheme under which the employer must pay the minimum contribution of 3% of the jobholder’s qualifying earnings in the relevant pay reference period, and under which total employer and jobholder contributions must be at least 8% of such qualifying earnings in that period.

This means the employer could choose to pay more than 3% and even the whole 8% (or more), or leave the jobholder to pay at least the difference required to meet the minimum 8% contributions.

Note that what makes the scheme qualifying is the requirement under the provisions of the scheme that the minimum contribution is met. The actual payment of the contributions is a different matter.

Please note that the contributions levels are being phased in – see our FAQs on Qualifying earnings and contributions.
UK Occupational money purchase pension scheme – where an alternative requirement is used A scheme under which the employer must pay minimum contributions of:
Set 1 – 4% of the jobholder’s pensionable earnings in the relevant pay reference period, and under which total employer and jobholder contributions must be at least 9% of such pensionable earnings in that period, with pensionable earnings being at least equal to basic pay,
or
Set 2 – 3% of the jobholder’s pensionable earnings in the relevant pay reference period, and under which the total employer and jobholder contributions must be at least 8% of such pensionable earnings in that period, with pensionable earnings being at least equal to basic pay, and the pensionable earnings of all relevant jobholders constituting at least 85% of the earnings of those jobholders,
or
Set 3 – 3% of the jobholder’s earnings in the relevant pay reference period, and under which the total employer and jobholder contributions must be at least 7% of such earnings in that period, providing that all earnings are pensionable.

The employer could choose to pay more that their minimum required level, and even choose to pay the whole total minimum amount (or more), or leave the jobholder to pay at least the difference required to meet the minimum contribution level.

Note that what makes the scheme qualifying is the requirement under the provisions of the scheme that the defined contribution minimum requirements are met. The actual payment of the contributions is a different matter.

Please note that contribution levels are being phased in – see our FAQs on Certification and the alternative quality requirements.
What is the quality requirement for a defined benefit scheme table
Scheme type Quality test
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.

See page 25 of the link below for information on the test scheme standard: http://www.thepensionsregulator.gov.uk/docs/detailed-guidance-4.pdf

Further detail about the test scheme standard for employers can be found here and for actuaries here.
UK occupational defined benefit pension scheme - where an alternative requirement is used The scheme must meet either:

a. Cost of accruals test
In simple terms, to satisfy the cost of accruals test, the assessed cost (by an actuary) of providing benefits to members must require a contribution rate of at least one of the following:
  • 10% of qualifying earnings
  • 11% of pensionable earnings provided those earnings are at least equal to basic pay
  • 10% of pensionable earnings provided these earnings are at least equal to basic pay and the ratio of pensionable earnings to total pay averages out at least 85% over the scheme as a whole.
  • 9% of pensionable earnings provided all earnings are pensionable
  • 13% of pensionable earnings provided these earnings are at least equivalent to the amount of basic pay that is above the lower earnings limit (£116 p.w. for tax year 2018/19) or the amount of basic state pension (£125.95 p.w. – April 2018).
For a scheme that doesn’t provide survivor pension benefits, the respective contribution rate is reduced by 1%.

b. Money purchase quality requirements
A scheme of a prescribed nature can use the quality requirements for a money purchase scheme (as per Section 20 of the Pensions Scheme Act 2008).

Further information on this and the Cost of accruals test can be found here.

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 page 29 of the link below, for more information:

http://www.thepensionsregulator.gov.uk/docs/detailed-guidance-4.pdf(Opens new window)

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 2018/19 tax year levels are £6,032 and £46,350 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:

a) any commission, bonuses, overtime or similar payments

b) any shift premium pay, and

c) any reasonable allowance with respect to –

  1. 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
  2. the cost of relocation of the jobholder to a different place of work
  3. in a case not covered by sub-paragraph ii), the purchase, lease or maintenance of a vehicle
  4. in a case not covered by sub-paragraph ii) or iii), the purchase, lease or maintenance of an item
  5. in a case not covered by sub-paragraph ii), iii) or iv), the delivery of a service to the jobholder.

For the purpose of the quality requirement and the alternative quality requirements, the employer can choose to use one of the following definitions of pay reference period:

  1. a period of 12 months, starting on the staging date and ending 12 months later. Subsequent pay reference periods start on the anniversary of the employer’s staging date and end 12 months later.
  2. a period equal in length to the interval between the usual payments of a jobholder’s wages or salary (assuming their scheme provider allows)
  3. a period over which the normal wage or salary is paid, aligned with the relevant tax period (assuming their scheme provider allows)

See our Pay reference period FAQs for more information.

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