Automatic enrolment places duties on employers to automatically enrol ‘workers’ into a work based pension scheme. The main duties are:
Whether this is an easy or difficult task depends on the type of business. A business which uses the services of casual workers, very young or very old workers will need to spend some time in analysing its workforce. A business which only employs salaried staff will have an easier task.
A ‘worker’ is:
The second category is defined in the same way as a ‘worker’ in employment law. Such people, although not employees, are entitled to core employment rights such as the National Minimum Wage (NMW). Individuals in this category include some agency workers and some short-term casual workers.
There are three categories of workers: eligible jobholders; non-eligible jobholders; and entitled workers.
An ‘eligible jobholder’ is a worker who is:
Most workers will be eligible jobholders unless the employer already has a qualifying pension scheme. These are the workers for which automatic enrolment will be required.
Other workers (non-eligible jobholders) may have the right to ‘opt in’ (i.e. join a scheme) and should therefore be treated as eligible jobholders. ‘Entitled workers’ are entitled to join the scheme but there is no requirement on the employer to make employer contributions in respect of these workers.
The categorisation of workers can be difficult in some circumstances. Please contact us if you are unsure of how to assess the types of workers you have.
Employers are able to comply with their obligations by using an existing qualifying pension scheme, setting up a new scheme or using the government low cost scheme – the National Employment Savings Trust (NEST).
It is important that the pension scheme chosen will deliver good outcomes for the employee’s retirement savings. This may mean that an employer’s existing scheme may not be appropriate as it may have been designed for the needs of higher paid and more senior employees. This may mean that NEST for example may be an appropriate scheme for employees who are not currently entitled to be a member of an existing employer scheme.
To be a qualifying automatic enrolment scheme, a scheme must meet the qualifying criteria and the automatic enrolment criteria.
The main part of the qualifying criteria requires the pension scheme to meet certain minimum standards, which differ according to the type of pension scheme. Most employers will want to offer a defined contribution pension scheme. The minimum requirements for such schemes are a minimum total contribution based on qualifying earnings, of which a specified amount must come from the employer.
To be an automatic enrolment scheme, the scheme must not contain any provisions that:
The second point above means, for example, that the pension scheme has a default fund into which the pension contributions attributable to the jobholder will be invested. The jobholder should however have a choice of other funds if they want.
We may be able to advise you on an appropriate route to take. Please contact us.
The law came into force for very large employers in 2012 and has been rolled out with staggered implementation dates or ‘staging date’ by reference to the number of employees.
From October 2017, all new employers have automatic enrolment duties from the date they employ their first member of staff.
In principle, contributions will be due from the first day of employment but it is possible to postpone automatic enrolment for some or all employees for a period of up to three months. This may, for example, be used to avoid calculation of contributions on partperiod earnings.
An employer can find out more about their duties at www.thepensionsregulator.gov.uk.
Employers are required to write to all workers (except those aged under 16, or 75 and over) explaining what automatic enrolment into a workplace pension means for them.
There are different information requirements for each category of worker. For an eligible jobholder, the letter must include details of how the employee can opt out of the scheme if they wish. The letter must not, however, encourage the employee to opt out.
The Pensions Regulator (TPR) has developed a set of letter templates to help you when writing to your employees.
As part of the automatic enrolment process, employers will need to make contributions to the pension scheme for eligible jobholders.
All businesses will need to contribute at least 3% on the ‘qualifying pensionable earnings’ for eligible jobholders. There is also a total minimum contribution which will need to be paid by employees if the employer does not meet the total minimum contribution. If the employer only pays the employer’s minimum contribution, the employee’s contribution is 3% of their salary for 2018/19 and 5% for 2019/20.
What are qualifying pensionable earnings?
Earnings cover cash elements of pay including overtime and bonuses (gross) but minimum contributions are not calculated on all the earnings. Contributions will be payable on earnings between the lower and higher thresholds of £8,632 and £50,000 for 2019/20 (£6,032 and £46,350 for 2018/ 19). The earnings between these amounts are called qualifying earnings. The thresholds are reviewed by the government each tax year.
If we do your payroll, we can help you make these calculations and tell you the deductions from pay and the payments required to the pension scheme.
TPR was established to regulate work-based pensions.
An employer must complete the Declaration of Compliance within five months of the staging date (or from taking on their first employee). In essence the Declaration of Compliance process requires the employer to:
Employers continue to have ongoing duties in respect of auto-enrolment.
Employers have a legal duty to re-enrol certain employees back into an automatic pension scheme every three years. The process involves reassessing the workforce and re-enrolling certain employees into their chosen qualifying automatic pension scheme. Employers are also required to complete the redeclaration of compliance with TPR, even if they do not have any staff to re-enrol. Re-enrolment should take place approximately three years after the original staging date.
As part of their re-enrolment responsibilities, employers are required to carry out the following tasks:
Remember, re-enrolment and re-declaration is a legal requirement and failure to comply with the regulations may result in a fine.
Employers who fail to comply with their legal duties may be subject to enforcement action. TPR has a range of powers it can utilise when taking action for non-compliance. This can range from warning letters and statutory notices to financial penalties. Fines range from a £400 fixed penalty, to a varying daily escalating penalty of between £50 and £10,000, depending on the number of employees. In the most extreme cases the Regulator may seek a criminal prosecution.
Finally, an employer must keep records which will enable them to prove that they have complied with their duties. Keeping accurate records also makes good business sense because it can help an employer to:
TPR guidance is available for employers to help them comply with their automatic enrolment duties: www.thepensionsregulator.gov.uk/en/employers.
Using the duties checker and the guidance, employers can follow a step-by-step process to comply with their duties. The guidance also includes links to tools and resources.
Following a review of the auto-enrolment system by the Department for Work and Pensions, the government proposed to change the lower age limit from 22 to 18 (while maintaining the upper age limit at the SPA). Under the proposals, those aged between 18 and the SPA would be automatically enrolled into a workplace pension scheme if they earned above £10,000 per year. Workers aged 16 to 18 and employees over the SPA would remain eligible to opt into their workplace pension scheme.
The government is also proposing to remove the lower threshold for qualifying pensionable earnings. Under the plans, employers and employees contributing to pensions via automatic enrolment would make contributions from £1 of earnings rather than from the lower threshold.
The government plans to implement the proposals in the mid-2020s.
As you can see pensions automatic enrolment is not straightforward. Please do contact us for help and advice. We can help you to manage the road to automatic enrolment and help you to comply with the requirements when you are in automatic enrolment.