Automatic Pension Enrolment

Automatic pension enrolment

The government has announced it is going ahead with its predecessor's plans for automatic pension enrolment following an independent review commissioned after the general election. The review concluded that auto-enrolment should proceed on its original timetable. Its recommendations are summarised below.

What is auto-enrolment?

  • From October 2012, every business in Great Britain will be required to automatically enrol eligible "jobholders" in a pension scheme. A "jobholder" will include permanent, fixed-term and temporary employees, as well as agency workers.
  • Businesses can use their existing occupational or personal pension scheme if it meets statutory quality requirements. Otherwise they will have to enrol jobholders in the National Employment Savings Trust (NEST), a central defined contribution scheme to be set up by the government.
  • A defined contribution scheme (also known as a money purchase scheme) is a pension scheme in which an employer and employee pay fixed contributions. The employee receives a pension or annuity at retirement, the size of which depends on the contributions paid and the investment return on those contributions over the member's working life.
  • Employees may opt-out of either scheme, but only once they have been automatically enrolled.
  • Businesses must pay a minimum level of pension contributions for each employee.
  • The requirement to automatically enrol eligible jobholders will be phased in over a four year staging period from October 2012, with larger businesses required to comply first.
  • Businesses will be required to automatically re-enrol eligible jobholders every three years after they first become subject to the statutory employer duties.

Summary of reviewers' recommendations

No exemption for smaller businesses

Small businesses should not be exempted from the auto-enrolment requirements since this would exclude 1.2 million employees from the reforms and create substantial enforcement problems.

Changes to NEST

  • The annual contribution limit (set at £3,600 in 2005 prices) should be removed once the four-year staging period has been completed.
  • The planned ban of transfers into and out of NEST should be reviewed in 2017. NEST should be able to receive and make transfer payments once auto-enrolment is established.

Raising the income threshold at which individuals are auto-enrolled

  • Jobholders should only be automatically enrolled once they reach the income tax threshold (which will be £7,475 in 2011). This is higher than the currently planned income threshold for auto-enrolment of £5,035. 
  • Contributions will be based on earnings in excess of the National Insurance earnings threshold (£5,715 in today's prices). Employees who have been automatically enrolled will continue to pay contributions until their earnings drop below this level (unless they opt out). 
  • Any employees with earnings between these thresholds will be able to opt in and receive an employer contribution.

No change to the age limits

The age band for eligibility should remain at age 22 to the state pension age. Retaining the state pension age as the upper age limit will give people access to pension saving during their  normal working lives and avoids automatically enrolling people for whom saving is no longer the right option.

Three-month waiting period before an employee is automatically enrolled

A three-month waiting period should be introduced to avoid automatically enrolling employees who leave employment soon after joining (for example, seasonal or temporary workers). This will also allow businesses to align enrolment dates with their own payroll systems.

Introduce a simplified certification process for defined contribution schemes

A defined contribution scheme could be certified as meeting the requirements if it satisfies any one of the following criteria:

  • A minimum 9% contribution of pensionable pay (including a 4% employer contribution).
  • A minimum 8% contribution of pensionable pay (with a 3% employer contribution) provided pensionable pay constitutes at least 85% of the total pay bill.
  • A minimum 7% contribution of pensionable pay (with a 3% employer contribution) provided that the total pay bill is pensionable.

Allow businesses to voluntarily comply as early as July 2012

Businesses that are scheduled to automatically enrol in October and November 2012 should be allowed to automatically enrol ahead of the planned start date of October 2012, and as early as July 2012, if they want to.

If you have any questions about the content of this briefing note, please contact our Employment Law Team.

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