Pension Auto-Enrolment – Are you ready?
The biggest shake-up to workplace pensions is currently underway. Life expectancy in the UK is increasing and at the same time people are saving less into a pension.
New regulations now provide duties for employers to automatically enrol workers into a workplace pension scheme and make contributions into it. Employer obligations in relation to this new legislation and the process they should follow are highlighted below.
What employers must do?
Employers are required to automatically enrol workers into a workplace pension who:
- Are not already in a qualifying pension scheme
- Are aged 22 or over
- Are under State Pension age
- Earn more than £9,440 a year (this figure is reviewed every year) and work, or ordinarily work, in the UK.
You must also write to your employees to let them know how they are affected by the legislation. There are some exemptions e.g. military service members and companies which have only one employee where the employee is a Director of the Company.
The Government has set up the National Employment Savings Trust (NEST) into which you may auto enrol your staff. Alternatively, you can use an existing or new scheme as long as it meets the criteria set by the Pension Regulator.
Understand who is covered by auto enrolment
Those who work under a Contract of Employment will be covered e.g. employees who are obligated to do work for you and for whom you are obligated to provide work. Other workers who perform work for you personally and who cannot provide a substitute or sub-contract the work are also covered. This could be people who work for you on an ad hoc basis such as “zero hours” workers. Generally speaking, those workers who work under your control and direction and who are not deemed to be self-employed will be covered by auto enrolment.
If you have agency workers performing work for you, it is likely that the agency paying the worker will be responsible for auto enrolment but it would be wise to review working arrangements and take expert advice where there are any doubts.
Know your staging date
This is the date on which you are required to comply with the legislation. Staging is being phased in over a number of years starting with the largest employers first. Your staging date will depend on the size of your workforce. You can find out this date by keying in your PAYE reference into the staging calculator on www.thepensionsregulator.gov.uk Employers should allow sufficient time to prepare for their staging date and to seek advice from a pensions expert.
Assess the category of each worker
You must assess the category of each employee as of their assessment date. The assessment date will be one of the following:
- The staging date
- The first day that an eligible employee starts working for you
- The date an employee reaches the age of 16 or 22
- The first day of the pay reference period (PRP) for those assessed after the employer’s staging date
- The last day of the postponement period
Based on the worker’s age and their total qualifying earnings when compared with the earnings threshold, your workers will fall into one of the following categories (NB the thresholds quoted below are those published for 2013):
Entitled Worker – those aged between 16 and 74 whose total qualifying earnings are under £5,668 per annum. These workers do not have to be automatically enrolled into a qualifying pension scheme or have contributions made by their employer. However, they can request to join a qualifying scheme.
Non-Eligible Job Holder – those aged between 16 and 74 whose total qualifying earnings are between £5,668 and £9,440, or workers aged between 16 and 21 or between State Pension Age and 74 whose total qualifying earnings are more than £9,440. This category of worker has the right to opt in to NEST/an approved scheme and, if they do so, the employer must make a contribution into the scheme.
Eligible Job Holder – those aged between 22 and State Pension Age whose total qualifying earnings are more than £9,440. The employer must automatically enrol these workers into NEST/an approved scheme and make contributions. Eligible job holders have the right to opt out of the pension scheme. If opting out within one month, any money paid will be refunded. If opting out later, the money will usually stay in the pension scheme until the employee retires. Employers are required to automatically enrol employees who have opted out every three years, assuming they remain eligible for automatic enrolment at that time.
Safeguards are in place to prevent employers from offering incentives to encourage or force employees to opt out, or to treat employees unfavourably for not opting out.
Be aware of how much your pension contributions will cost
For those schemes like NEST which are based on qualifying earnings, the minimum percentage contributions are being phased in between now and 2018. These are as follows:
Current minimum contributions – 2% total contribution, of which 1% must be contributed by the employer. On 1 October 2017, the total contribution will rise to 5% of which 2% will be from the employer. This will rise to a total contribution of 8% on 1 October 2018 when the employer’s contribution must be at least 3%.
To ensure you are fully compliant with the legislation and to avoid any financial penalties for non-compliance, it is important that you plan well in advance for your auto-enrolment duties. Where necessary, you should seek professional advice from a financial adviser to ensure that you make the best possible decisions for your business and workforce.