Pensions - automatic enrolment
The government is placing greater responsibility and sometimes higher costs on employers. Employers are required to provide their employees with pension provisions. If you are an employer, we can help and advise you on your auto-enrolment responsibilities.
Automatic enrolment places duties on employers to automatically enrol 'workers' into a work-based pension scheme. The primary duties are:
- assessing the types of workers in the business
- providing a qualifying automatic enrolment pension scheme for the relevant workers
- writing to most of their workers explaining what automatic enrolment into a workplace pension means for them
- automatically enrolling all 'eligible jobholders' into the scheme and paying employer contributions
- completing the declaration of compliance and keeping records.
Assessing the types of workers in the business
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 analysing its workforce. A company which only employs salaried staff will have an easier task.
A 'worker' is:
- an employee or
- A person with a contract to provide work or services personally is not undertaking the work as part of their own business.
The second category is defined similarly 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:
- aged between 22 years and the State Pension Age
- earning over the minimum earnings threshold (currently £10,000)
- working or ordinarily working in the UK
- not already in a qualifying pension scheme.
Most workers will be eligible jobholders unless the employer already has a qualifying pension scheme. For these workers, 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. 'Entitled workers' are entitled to join the scheme, butthe employer is not requireder to make employer contributions with respect to these workers.
The categorization of workers can be complex in some circumstances. You can contact us if you need assistance.
In December 2017, following a review of the auto-enrolment system by the Department for Work and Pensions, the government proposed to change the 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 plans to implement the proposals in the mid-2020s.
Employers can comply with their obligations by using an existing qualifying pension scheme, setting up a new scheme, or using the government's low-cost scheme, the National Employment Savings Trust (NEST).
The pension scheme chosen must 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:
- prevent the employer from making the required arrangements to automatically enrol, opt in or re-enrol a 'jobholder'
- require the jobholder to express a choice in relation to any matter, or to provide any information in order to remain an active member of the pension scheme.
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.
The law came into force for very large employers in 2012 and has been rolled out with staggered implementation dates or 'staging dates' regarding the number of employees.
From October 2017, all new employers will have automatic enrolment duties from the date they employ their first member of staff.
Contributions are due from the first day of employment, but automatic enrolment can be postponed for up to three months for some or all employees. This may, for example, be used to avoid the calculation of contributions on part-period earnings.
An employer can find out more about their duties at www.thepensionsregulator.gov.uk.
Employers must write to all workers (except those under 16 or 75 and over) explaining what automatic workplace pension enrollment 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. However, the letter must not 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 must contribute to the pension scheme for eligible jobholders.
All businesses now need to contribute at least 3% of the 'qualifying pensionable earnings' for eligible jobholders. Employees must also pay a contribution if the employer does not meet the total minimum contribution.
Period Employer minimum total minimum contribution
6 April 2019 onwards 3% 8%
Earnings cover cash elements of pay, including overtime and bonuses (gross), but minimum contributions are not calculated on all earnings. Contributions will be payable on earnings between the lower and higher thresholds of £6,240 and £50,270 for 2022/23 (£6,240 and £50,270 for 2021/22). The earnings between these amounts are called qualifying earnings. The government reviews the thresholds each tax year.
If we do your payroll, we can help you make these calculations and tell you the deductions from pay and the pension scheme payments required.
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:
- confirm the correct auto enrolment procedures have been followed and
- provide various pieces of information, such as the number of eligible jobholders enrolled.
Employers continue to have ongoing duties in respect of auto-enrolment.
Re-enrolment
Employers must legally re-enrol certain employees 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 must also complete the re-declaration 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:
Choose a re-enrolment date.
There is a six-month window from which to choose a date for re-enrolment. This can be either three months before or after the third anniversary of the original staging date. There is no option to postpone the re-enrolment date.
Reassess the workforce
The employer will only need to assess employees who were previously auto-enrolled and have subsequently either asked to leave (opted out) of the pension scheme, left the pension scheme after the end of the opt-out period, or stopped or reduced their pension contributions to the below the minimum level (and who meet the age and earnings criteria to be re-enrolled). Once the assessment is complete, employers should re-enrol eligible staff into a qualifying pension and start making contributions within six weeks of their re-enrolment date.
Write to those who have been re-enrolled
The employer must write to each employee who has been re-enrolled in the pension scheme within six weeks of the re-enrolment date. Template letters are available on the TPR website.
Complete the re-declaration of compliance.
The employer must complete and submit the re-declaration of compliance with TPR to let them know that they have met their legal duties. This should be done within five months of the staging date's third anniversary. An employer must do this even if they have yet to re-enroll any staff into the pension scheme.
Remember, re-enrolment and re-declaration are legal requirements, 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 can utilise a range of powers 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:
- avoid or resolve potential disputes with employees
- help check or reconcile contributions made to the pension scheme.
TPR guidance is available for employers to help them comply with their automatic enrolment duties: www.thepensionsregulator.gov.uk/en/employers.
Employers can follow a step-by-step process to comply with their duties using the duties checker and the guidance. 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 also proposes removing the lower threshold for qualifying pensionable earnings. Under the plans, employers and employees contributing to pensions via automatic enrolment would contribute from £1 of earnings rather than the lower threshold.
The government plans to implement the proposals in the mid-2020s.
As you can see, pension automatic enrolment is complex. Please get in touch with us at WIM. We can help you manage automatic enrolment and comply with the requirements. We can assist both SMEs and large corporates in pension compliance.