By Ben Sier, Lubbock Fine Wealth Management LLP
There is a not so secret government plan to get Britain saving en masse for retirement; have you heard about auto-enrolment (AE) legislation? The adverts suggest “We’re all in it together”.
However, let's be very clear; the reality is the government has charged employers with a number of key responsibilities. That is to say, choosing a suitable workplace pension with appropriate default fund, facilitating payment of contributions and all the initial and ongoing administration, to name but a few. This is the polar opposite of the previous position.
By making it compulsory for an employer to contribute (if the employee also contributes) this represents an additional cost to the employer. The worker is allowed to ‘opt out’ of (i.e. leave) the pension scheme at any time but this must be an employee decision and the employer needs to be very careful to not be seen to have any influence on this decision.
Employers have specific AE duties to meet by their ‘Staging Date’ (when duties begin).
AE sounds like pension compulsion, right? No, not quite. Those enrolled can leave the workplace pension but so far the numbers leaving are lower than expected. This means employers must budget for new pension and administration costs.
AE is a risk for the smaller employer as the duties are enforced by fines from the pension regulator (TPR) and, as a show of intent, it has already issued plenty.
The significant administration involved is often misunderstood until it’s too late, so an employer can end up paying the premium price to comply. AE is a genuine business risk that needs to be carefully mitigated through planning.
Added into the pensions mix, pensions generally are en vogue again. George Osborne has quietly introduced probably the most radical piece of pensions’ legislation for years. From April 2015, those with personal pension monies will have full, unrestricted access to their pot from the age of 55.
AE is concerned with ‘workers’. In essence, it is referring to employees, including workers with a contract to perform services personally.
Employers need to enroll certain ‘eligible’ workers (those from aged 22 to state pension age and earning over £10,000 a year) into a workplace pension.
Both the employer and employee are required to pay a minimum 8% pension contribution (3% and 5% respectively) of ‘qualifying earnings’ into an AE ‘qualifying’ pension by October 2018.
Qualifying earnings include all cash elements of pay, including bonuses and overtime. The percentage is payable on the earnings from £5,824 to £41,865 in 2015/16.
AE legislation allows an employer to phase in the pension contributions; currently the percentage is 2% for employer and employee respectively (1% and 1%).
Other workers such as ‘non-eligible’ workers (earning between £5,824 and £10,000 and aged 16 to 74 OR earning above £10,000 and aged 16 to 21 / state pension age to 74) have the right to opt in (i.e. to join the pension) and then the employer must pay pension contributions.
‘Entitled workers’ (those aged 16 to 74 and earning up to £5,824 a year) are permitted to join an employer pension but there is no requirement for an employer to pay contributions.
Those automatically enrolled may opt out of the pension (i.e. leave) but if the worker remains with the employer, then that employer is obliged to re-enrol the worker broadly every three years in line with the staging date.
AE places certain duties on an employer which include:
- Confirming their staging date
- Assessing the types of worker for AE purposes within the organisation
- Communicating the changes to all affected
- Providing access to an AE pension; meeting the AE pension qualifying criteria
- Automatically enrolling all ‘eligible workers’ into the pension
- Paying pension contributions
- Carrying out AE and administering all aspects of the pension
- Registering with The Pensions Regulator (TPR)
- Keeping records
Once up and running, the employer is responsible for ensuring it remains up to date with legislation and continues to comply.
Considerations for SME employers
‘Fail to plan or plan to fail’ is an overused expression, but 100% true in the case of AE planning.
Start now (!)
Experience suggests that planning a year in advance allows for a much smoother AE journey.
Developing an initial AE project plan involves gathering core data, and becoming familiar with the basics. AE involves a healthy degree of administration due to the onerous mandatory recordkeeping and communication requirements.
Choosing an appropriate pension is a bit of a maze, but it is crucial to never assume all pension providers will welcome an employer with open arms. It is widely accepted that some providers are selective, but the government-backed pension, ‘National Employers Saving Trust’ (NEST), must accept all employer applications.
It is important to adhere to safety measures built into the AE legislation. If an employer deliberately or inadvertently influences an employee to opt out of the pension, this could lead to The Pensions Regulator fining the employer. Therefore, communicating AE effectively will definitely save time and cost for an employer.
The employer is responsible for completing a declaration of AE compliance, maintaining records and fulfilling its responsibilities.
For further information about our auto-enrolment services, please contact me directly on firstname.lastname@example.org or 020 7490 766. I oversee the dedicated auto-enrolment service at Lubbock Fine Wealth Management LLP.
Lubbock Fine Wealth Management LLP is an appointed representative of Financial Limited, which is authorised and regulated by the Financial Conduct Authority (FCA) No: 424497. Registered in England and Wales, Company Number: OC310826. Registered Address: Paternoster House, 65 St Paul's Churchyard, London EC4M 8AB.
Auto-enrolment is regulated by the Pensions Regulator.