Most auto-enrolment pension schemes will be defined contribution schemes, rather than defined benefit. The Pension Regulator has set minimum contribution levels for these schemes, both the total contribution and the employer’s contribution.
Auto-Enrolment Schemes based upon Qualifying Earnings.
Many auto-enrolment schemes will be based upon qualifying earnings. Qualifying earnings is a band of payments that is set by the Department of Work and Pensions, currently based upon National Insurance bands. The National Insurance bands used are the lower earnings limit (LEL) and upper earnings limit (UEL).
For the 2016/17 tax year qualifying earnings are between –
Pensionable Pay for Auto-Enrolment
You do not have to use qualifying earnings for calculating pension contributions, and existing schemes are very unlikely to be using this method. Existing schemes will be using the concept of ‘Pensionable Pay’. The Pension Regulator has minimum contribution limits, and you will have to certify that your scheme meets the requirements.
One option for using pensionable pay is for the employer to certify their scheme meets one of three sets of requirements:
Set 1 A total minimum contribution of at least 9% of pensionable pay (at least 4% of which must be the employer’s contribution), or
Set 2 A total minimum contribution of at least 8% of pensionable pay (at least 3% of which must be the employer’s contribution), provided that pensionable pay constitutes at least 85% of earnings (the ratio of pensionable pay to earnings can be calculated as an average at scheme level), or
Set 3 A total minimum contribution of at least 7% of earnings (at least 3% of which must be the employer’s contribution) provided that all earnings are pensionable.
For sets 1 & 2 pensionable pay must equate to basic pay, where basic pay is the gross earnings but may disregard certain elements of pay. Elements such as bonuses, commissions and overtime could be disregarding for the definition of basic pay.
If a scheme is to be based on pensionable pay the employer has one month from the effective date this starts to carry out the necessary checks and calculations, and then sign the certificate. The maximum certified period is 18 months, and a new certificate would need to be issued within one month of the end of this period.
If you are considering self-certification it is best to seek advice, and we would be very happy to assist with the figures needed for the calculations.
If you want to find out more you can visit The Pension Regulator or your scheme provider. Financial advisors will also be able to help. We suspect The Pension Regulator does intend employers that are choosing their own scheme, to select a self-certification option.