Automatic enrolment planning FINANCIAL PLANNING DECEMBER 2015

CONTENTS SLIDES 3-6 WHAT IS AUTOMATIC ENROLMENT SLIDES 7-9 AUTOMATIC ENROLMENT PLANNING SLIDES PREPARATION SLIDES MOVING ON – EXISTING SCHEMES 2

What is Automatic enrolment Following declining rates of retirement saving, the government introduced a requirement for employers to put employees into a scheme without their consent – automatic enrolment When? – determined by number of employees in largest PAYE scheme as at ; takes place at a defined ‘staging date’ from Oct 2012 to Apr 2017 ‘New’ employers staging date between May 2017 and February 2018 The Pensions Regulator (TPR) will write to employer 12 months before Staging Date Who? – All staff working in the UK aged 22+ to State Pension Age earning over £10,000 (2015/16) but others may be able to elect to join Minimum Contributions based on “Qualifying Earnings” between £5,824 - £42,385 a year (2015/2016)

What is Automatic enrolment Minimum contributions paid by employer and possibly employee; PeriodMinimum EmployerMinimum Total Staging Date to %2% to %5% Onwards3%8% Example 26 year old employee on £20,000 a year Minimum employer contribution now (£20,000-£5,824) x 1% = £ based on annual earnings Minimum total contribution now (£20,000-£5,824) x 2% = £ Therefore employee could be required to pay the additional £ or the employer could offer to pay some portion of it

What is Automatic enrolment Employees can opt-out but must be re-enrolled every 3 years Employers will be required to keep records of processes and contributions for up to 6 years New rules introduced from regarding discrimination against employees who are scheme members or who intend to join schemes

What is Automatic enrolment The Pensions Regulator pension reform page “Detailed Guidance” Rules published by The Pensions Regulator – Scottish Widows Financial Planning team planning/nest-automatic-enrolment planning/nest-automatic-enrolment Includes a range of ‘bite-sized’ factsheets

Automatic enrolment planning Planning can begin 7

The Plan Identify areas where clarification is required & data prepared Time required to do this ahead of Staging Date (This presentation) 1 Year before Staging Date Formal government Notification of Staging Date

The Plan Staging Date Auto enrol staff and Declaration of Compliance Review Check suitability of Solution in future years

Automatic enrolment planning Planning can begin 10

Preparation Identify “Workers”

Identify issues around defining ‘workers’ Most staff will be straightforward but problem areas need addressing; Overseas staff working in the UK UK staff working abroad Agency staff Casuals “ Zero Hours ” Contracts Volunteers receiving benefits Secondees Carers/Nannies Consultants Independent Contractors

Why is this important? Need to establish who employer is responsible for: May need time to resolve issues (possibly legally) Ensure clarity is established for the future i.e. the situation is clear & recorded for new employees Possible effects on recruitment of staff in future and in particular the cost thereof Will Contracts of Employment need to be modified?

Where to find help Scottish Widows Automatic Enrolment Fact Sheet 7: Workers The Pensions Regulator – Detailed Guidance Module 1: Employer duties and defining the workforce

Preparation Identify workers Identify ‘legal’ employer

Identify employer Should be straightforward but could be complicated by: “Groups” of companies Subsidiary/Associate firms Why do employers need to do this now? Could take time to be resolved Ensure clarity going forward (particularly in the case of take- overs/mergers/sales) Ensure each legal identity of employer is aware of requirements

Preparation Identify workers Identify ‘legal’ employer Identify PAYE Schemes in force

Identify PAYE schemes Should be straightforward but could be complicated by: Industry-wide/multiple employer arrangements “Workers” not in PAYE scheme Why do employers need to do this now? Staging Date will be determined by Employees per PAYE scheme as at – HMRC will assume it’s as per their returns – might not be! Resolve issues & ensure clarity going forward Small employers (<50 workers) in a big PAYE scheme may wish to defer staging date

Where to find help Scottish Widows Automatic Enrolment Fact Sheet 6: Groups of employers/company structure The Pensions Regulator – Detailed Guidance Module 2: Getting ready

Preparation Identify workers Identify ‘legal’ employer Identify PAYE Schemes in force Identify “Worker” categories

Worker categories Eligible Jobholders Non Eligible Jobholders Workers Entitled Workers Jobholders

Worker contribution rules “Worker”AgeAnnual Earnings Eligible Jobholder 22-State Pension Age> £10,000 (2015/16) Non Eligible Jobholder 16 to 74 £5,824 to £10,000 (2015/16) Non Eligible Jobholder 16 to 21 & SPA-74> £10,000 (2015/16) Entitled Worker 16 to 74< £5,824 (2015/16)

Worker contribution rules “Worker”Employer ContributionQualification Eligible Jobholder YesMust be Auto enrolled Non Eligible Jobholder YesIf they volunteer to join (‘opt in’) Entitled Worker No Employer has to provide access to a scheme but no compulsory employer contribution

Exceptions to employer duties Condition for exception to applyOptional dutyNo duty Notice to terminate employmentAuto-enrol / re-enrol Pensions with tax protected statusAuto enrol/re-enrol Ceased active membership QWPS > 12 months before AE dateAuto enrol Ceased active membership QWPS < 12 months before AE dateAuto enrol/re-enrol Winding up lump sum paid > 12 months before AE date, ceased employment & re-employed by same employer Auto enrol Winding up lump sum paid < 12 months before AE date, ceased employment & re-employed by same employer Auto enrol/re-enrol

Possible problems HR data of sufficient quality to meet requirements Can be complex and records may not include; Age/date of birth State Pension Age Ability to identify “Gross earnings in Pay Reference Period” to meet requirements Most automatic systems will require all HR & Payroll records to be centrally held on one computer for all data required Employees with highly fluctuating earnings will cause issues

Why do employers need to do this now? Will enable the first accurate assessment of the costs involved to be made: May impact on future business contracts & prices Bear in mind for future pay settlements Area is complex. Important for employers to understand to be able to grasp the potential admin issues for the future. Will help in planning: Future HR systems/procedures Payroll enhancements which could help process May affect future recruitment of staff Identify issues with current record keeping and give time to resolve

Where to find help Scottish Widows Automatic Enrolment Fact Sheet 9: Assessing Workers The Pensions Regulator – Detailed Guidance Module 3: Assessing the workforce

Postponement Employers may consider using ‘postponement’ Postponement allows an employer to delay automatic enrolment duties by up to 3 months May be useful for cases involving short-term employees, fluctuating earnings, aligning with pay reference periods Or for introducing salary exchange or contractual enrolment arrangements Jobholders can opt in during postponement

Where to find help Scottish Widows Automatic Enrolment Fact Sheet 3: Postponement The Pensions Regulator – Detailed Guidance Module 3a: Postponement

Preparation Identify workers Identify ‘legal’ employer Identify PAYE Schemes in force Identify “Worker” categories Choosing an automatic enrolment scheme

What scheme can be used for Automatic enrolment Employer must choose a suitable scheme for their employees: Could be existing scheme as long as it meets certain criteria – “Qualifying Scheme” Government have set up “National Employment Savings Trust” aka NEST with public service obligation to take any and all auto enrolment scenarios if employers wish. Contribution cap applies until April 2017 – for 2015/2016 maximum total contribution per member £4,700 (increased annually) No transfers in or out before April 2017 There are other “mass market” solutions on offer e.g. The People’s Pension or NOW: Pensions. Employers have to provide declaration of compliance to TPR to demonstrate how they’ve met automatic enrolment requirements, provide scheme info etc within 5 months of staging.

What scheme can be used for Automatic enrolment Employer must choose suitable scheme for their employees Employer doesn’t have to choose just one – can mix and match for their needs and those of employees This is often called ‘segmentation’ May be driven by a range of criteria e.g. job, grade, contributions, charges or other employer/employee defined criteria Must not be discriminatory on grounds of age, sex etc In practice, employer will need to be able to justify decision; MEMBER OUTCOME will be key measure

What scheme can be used for Automatic enrolment Employer must choose suitable scheme for their employees Scheme contributions can be based on 8% of ‘qualifying earnings’ - £5,824 - £42,385 a year (2015/16) Or employers can certify that scheme meets one of the alternative bases to qualify. NB : these are the minimum contributions from 6 April The required contributions are lower during the phasing in stages. Pensionable Pay Definition Minimum Employer % Minimum Total % Set 1Basic Pay49 Set 2 Pensionable pay > 85% of Total Pay 38 Set 3Total Earnings37

Where to find help Scottish Widows Automatic Enrolment Fact Sheet 4: Alternative contribution bases Scottish Widows Automatic Enrolment Fact Sheet 5: Using salary exchange with automatic enrolment The Pensions Regulator – Detailed Guidance Module 4: Pension schemes DWP – Automatic enrolment: guidance on certifying money purchase schemes

The automatic enrolment process Mandatory time limits – six weeks joining ‘window’ Disclosure of information About being enrolled to a pension scheme Rights to opt out and opt in Agreements in place between employer, provider and jobholder Calculation and payment of contributions

Where to find help The Pensions Regulator – Detailed Guidance Module 5: Automatic enrolment

Opt ins and contractual enrolment Non-eligible jobholders have opt in rights Entitled workers have a right to join Derived from information given at staging date or date of joining (if later) Contractual enrolment Enrolment to a qualifying scheme under contract of employment Or any other method of being joined to a qualifying scheme outside the automatic enrolment provisions under Pensions Act 2008 No AE opt out rights but can leave under scheme rules

Where to find help Scottish Widows Automatic Enrolment Fact Sheet 8: Opting in and joining The Pensions Regulator – Detailed Guidance Module 6: Opting in, joining and contractual enrolment

Opt outs Jobholders have opt out rights The opt out period is one month from the later of membership starting and receiving enrolment information Need to complete opt out notice (sent by pension scheme) Process refunds – scheme to employer, employer to jobholder Strict refund deadlines apply to employer, even where funds not yet received back from scheme

Opt outs No right to refund outside one month except under occupational scheme rules Jobholders can opt to pay lower than minimum contributions if employer agrees Eligible jobholders who opt out, cease active membership or pay below minimum contributions have to be re-enrolled every three years (but see slide 24) Need to keep records of opt outs

Where to find help Scottish Widows Automatic Enrolment Fact Sheet 2: Opting out Scottish Widows Automatic Enrolment Fact Sheet 10: Cyclical Re- enrolment The Pensions Regulator – Detailed Guidance Module 7: Opting out The Pensions Regulator – Detailed Guidance Module 11: Automatic Re-enrolment

Preparation Identify workers Identify ‘legal’ employer Identify PAYE Schemes in force Identify “Worker” categories Choosing an automatic enrolment scheme Safeguarding Individuals

What are ‘safeguarding rules’? Employer must not take any action to induce members to opt out of scheme or discriminate against staff who are scheme members This includes; Altering any existing “Qualifying Scheme” that makes it unable to “Qualify” (without making alternative provision). Screen job applicants on their intention/non intention of joining the pension scheme including; Questions at interview Questions on application forms Conditional job offers Seeking information from Referees on past scheme membership Dismiss or treat unfairly employee on grounds of scheme membership (including refusal to promote on grounds of scheme membership)

Why consider this now? There will be legal sanctions for doing this incorrectly – could cause problems at industrial tribunals too. Employers should: Review recruitment procedures/forms to ensure compliance Ensure all management involved in recruitment/promotional activities are aware of the requirements

Where to find help The Pensions Regulator – Detailed Guidance Module 8: Safeguarding individuals

Preparation Identify workers Identify ‘legal’ employer Identify PAYE Schemes in force Identify “Worker” categories Choosing an automatic enrolment scheme Safeguarding Individuals Record keeping

New legal requirements on record keeping covering compliance with automatic enrolment duties Available to TPR on demand Records cover individual jobholders and workers and the pension scheme(s) used Must be kept for six years Employers should ensure they have robust record keeping procedures Many pension providers will provide software to help employers meet the requirements

Where to find help Scottish Widows Automatic Enrolment Fact Sheet 13: Record keeping requirements The Pensions Regulator – Detailed Guidance Module 9: Keeping records

Preparation Identify workers Identify ‘legal’ employer Identify PAYE Schemes in force Identify “Worker” categories Choosing an automatic enrolment scheme Safeguarding Individuals Record keeping General business considerations

General business implications/things to watch out for Take-overs/mergers Could affect Staging Date, bringing it forward with resulting staff cost implications Increasing/decreasing employee hours May have disproportionate staff cost implications if moving “Worker Category” Cutting back staff – need to bear in mind increase in HR/Payroll duties on the horizon Those with Enhanced or Fixed Protection - employer duty to auto enrol now optional - must make employer aware if hold. If employer chooses to auto enrol all eligible jobholders, opting is only way to retain protection

Moving on Effect on existing scheme going forward 51

Existing scheme implications Likely that all existing scheme members at very least will continue as at present. But scheme will need to “Qualify” and will therefore need to address; - Contribution levels (particularly minimum amounts to meet requirements). - Provider/employer and provider/jobholder agreements (unless trust based scheme) - Default funds must be covered by 0.75% charge cap Salary definitions may need altering Key area; any definition less than “P60 Earnings” care will need to make sure minimum contributions are paid Introduce better governance of scheme particularly in the areas of: record keeping, asset protection & reviews Measure of suitability of employer choice must be MEMBER OUTCOME

Existing scheme implications Other “Existing Scheme” areas which may need addressing: Eligibility rules (dependent on the solution adopted) Introduce Salary Exchange to mitigate increase in costs Promote scheme to staff now to avoid perception of staff that employer is just being forced into doing it and/or cut down work at Staging Date Review contribution levels to maintain competitive recruitment edge (if all employers offer the same “NEST” contributions do you need to increase contributions to maintain goal of being an attractive employment prospect?) Tidying-up other schemes which will not be used as ongoing vehicles to: Reduce net increase in admin caused by auto enrolment Reduce employer liabilities Give some clarity going forward

Existing scheme implications Non qualifying schemes and individual arrangements can continue but employee must be auto enrolled into an automatic enrolment scheme to fulfil the employers statutory duties. And the employee may not choose to opt out! Individual arrangements can be made “Qualifying” but bearing in mind formal declaration of compliance, contractual and governance issues, may not be an attractive option Planning in advance may help employers to streamline and rationalise complex existing arrangements Employee consultation is strongly recommended before implementing any changes to existing schemes (compulsory for 50+ employees) Employee cooperation and agreement to fair and reasonable change for the benefit of all, must be the objective of employers and advisers

Automatic enrolment planning Need to start planning now to avoid issues in the future 55

Every care has been taken to ensure that this information is correct and in accordance with our understanding of the law and HMRC practice, which may change. However, independent confirmation should be obtained before acting or refraining from acting in reliance upon the information given. Scottish Widows Limited. Registered in England and Wales No Registered Office in the United Kingdom at 25 Gresham Street, London EC2V 7HN. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number FP0382