The obligation to enrol employees into a ‘qualifying scheme’ applies (unless an exception applies) to employers with one worker as much as it does to those with 200,000. Thankfully, the Government has realised that it would be difficult for a very small company to offer the same pension arrangement as a multinational corporation. Consequently, a ‘qualifying scheme’ can be any one of a host of different types as long as it meets the general minimum standards and requirements. Employers planning to use their existing pension scheme as their auto-enrolment ‘qualifying scheme’ need to take particular care to check that their scheme meets the minimum criteria.
The process for assessing whether or not a pension scheme is a ‘qualifying scheme’ is a bit too long for a single blog post (if you don’t believe me, all 35 pages of the Pensions Regulator’s guidance on the point can be found here!) but the fundamental point is that the pension arrangement must provide a minimum level of benefits. For defined contribution schemes this is broadly a minimum contribution level. The assessment test for defined benefit schemes is (predictably) considerably more complicated and is summarised below.
As a guide to the types of pension arrangements we have seen employers use as a ‘qualifying scheme’, we have set out here some of the most common auto enrolment vehicles:
Defined Contribution ‘Qualifying Schemes’
Trust-based scheme – This is the traditional scheme where employers and employees make contributions into a fund which is then administered by trustees. Employees will eventually receive a pension (or buy an annuity) based on the ‘pot’ of money they have accumulated from those employer and employee contributions and investment returns. Under a trust-based scheme, the trustees have to exercise a high standard of care towards the members of the scheme and the employer is ultimately liable for the cost of the trust (although it is the members who bear the risk of poor investment performance).
Group Personal Pension Plan (or “GPP”) – This is an increasingly common form of pension provision under which an employee has a contract with a third party (usually an insurer) to be part of the pension scheme. Again, employers and employees pay contributions into a ‘pot’ out of which is then used to buy an annuity. There are no trustees in a GPP.
Master Trust – Master Trusts are essentially trust-based schemes but involving multiple employers (who are not associated with each other). Like an individual trust based scheme, the trustees of a Master Trust have to exercise a high standard of care towards the scheme’s members.
NEST – This is a Master Trust which has been set up by the Government specifically to help ensure that employers can comply with their auto-enrolment obligations. Unlike pension arrangements provided in the private sector, NEST has a public service obligation to accept all employers who want to use it as their automatic enrolment scheme provider.
Defined Benefit ‘Qualifying Schemes’
These schemes are usually trust-based, and include final salary type pension commitments. Like defined contribution trust-based schemes, defined benefits schemes have trustees, yet the employer meets the scheme’s ultimate cost. However, these schemes provide benefits, not based on contributions paid in, but a calculation based on a person’s salary and how long he has worked for the employer.
A defined benefit scheme can only be a ‘qualifying scheme’ if it is contracted out of the state pension scheme or meets a hypothetical test known as the ‘test scheme standard’ (the pension scheme must provide pensions the same as or better than this benchmark). Broadly, this means that the scheme must provide that benefits are payable from the State retirement age and that for every year an employee works, at least 1/120 of his salary, including bonuses and commission, is added to their pension (…I told you it was complicated!).
As you can see, choosing an auto-enrolment scheme is almost as difficult (but not quite as enjoyable) as choosing your next holiday. Almost.