What is Pensions Automatic Enrolment?
Pensions Automatic Enrolment will have an effect on any business in the UK that employs workers, whether it’s just 1 worker or 1000 workers. It started back in July 2012 and, is being phased in depending on the size of the employer.
All eligible workers (known as “eligible jobholders”) will need to be auto-enrolled into a suitable workplace pension scheme, with a mandatory minimum contribution being paid by the employer (workers may also have to make a contribution).
Forward planning is essential to ensure that any changes required to existing systems are identified and, that all parties (including HR and payroll) fully understand what will be required of them. Employers need to understand their duties associated with these new laws, as they could be potentially time consuming, complex to manage and, costly to administer.
Compliance requirements for the employer:
- Assess the eligibility of all its workers
- Ensure that the pension scheme(s) comply with the new regulations
- Manage the enrolment process for its workforce
- Manage and update the opting in/out of its workers
- Declare to the Pensions Regulator that they have complied
- Manage the pension contributions
- Ensure that inducements to opt-out are not offered
- Provide regular updates/employee communications
- Re-enrol opted-out workers approximately every 3 years
- Keep accurate records of all the above
Failure to comply = the Pensions Regulator will issue statutory notices, followed by a fixed penalty notice (a £400 fine), and finally, daily fines (the amount increasing with the size of the workforce).
Why is this happening?
- Lack of retirement saving
- Dependency on state funded retirement
- Cost – this is a measure to encourage private saving (complementing those other measures which the UK Government is making to both the State Pension and State Pension Age – to make such State Pensions affordable/sustainable/simpler in the long-term)
Know your staging date
A company’s staging date is based on the size of its PAYE scheme (as at 1st April 2012).
For PAYE schemes of less than 30, the staging dates for those companies will occur between 1st June 2015 and 1st April 2017.
“New” companies will be issued with staging dates between 1st May 2017 and 1st February 2018.
Contribution Rates – qualifying earnings and, other approaches to pensionable pay
Qualifying Earnings as Pensionable Pay include salary, wages, commission, bonuses, overtime, and statutory payments delivered through payroll. Qualifying Earnings are the band of earnings between £5,824 and £42,385 (2015/16 tax-year.
The minimum employer contributions are as follows:
- October 2012 – September 2017: Employer 1%, Employee 1% (total contribution = 2%)
- October 2017 – September 2018: Employer 2%, Employee 3% (total contribution = 5%)
- From October 2018 onwards: Employer 3%, Employee 5% (total contribution = 8%)
As an alternative to using the Qualifying Earnings definition, an employer can choose to use Certification – basic pay “sets 1 & 2” and, pensionable earnings “set 3” (this is usually the same as “qualifying earnings” but with no lower band offset). For example, an employer can use one certification basis for one group of workers, with a different certification basis for other workers.
Project planning is key (the timescale required could be up to 6 months)
- Delivery – Choose pension arrangement(s), decide/revise pension strategy
- Compliance – Understand the detail, address statutory timelines and, plan for the declaration of compliance to the Pensions Regulator
- Budgets – Choose the contribution design/level(s), allow for project implementation costs
- Processes – Consider payroll impact and timelines, contribution collection/opt-out refunds/reconciliation, HR processes
- IT – Check data quality/tools, system requirements, test file upload method/timelines
- Communicate – Raise worker awareness, consider statutory notices requires, develop Q&A packs
Assessment of the workforce (categorising the workers)
A worker who is aged between 22 & state pension age, and has qualifying earnings above the earnings trigger for auto-enrolment (this is £10,000 for the 2015-16 tax-year).
Employers need to auto-enrol these employees in a Qualifying Workplace Pension Scheme (QWPS) if they aren’t already in one.
A worker who is aged between 16 & 21, or state pension age & 74, and has qualifying earnings above the earnings trigger for auto-enrolment.
Alternatively, a worker who is aged between 16 & 74, and has qualifying earnings below the earnings trigger for auto-enrolment.
Workers falling into these non-eligible jobholder definitions aren’t eligible for auto-enrolment. However, they can choose to join a QWPS, and receive employer payments.
A worker between the ages of 16 – 74 and, and doesn’t have qualifying earnings (below £5,824 for the 2015/16 tax-year).
These employees are entitled to join a pension scheme, but employer payments are optional.
QWPS (Qualifying Workplace Pension Scheme)
The employer is required to auto-enrol all eligible jobholders into a suitable QWPS. If an existing pension scheme can accept new members, the employer will need to decide if it is to be used as a qualifying scheme for auto-enrolment purposes.
What makes a scheme suitable for auto-enrolment?
- Can a worker be auto-enrolled with no action required of them?
- Can a worker opt into it?
- Does the scheme have a “default” investment option?
- Does it have an opt-out facility?
- Will it accept the employer’s required minimum contributions?
- Does the scheme meet the new standards for charges borne by members?
The key principles for successful communication include:
- Informing all workers
- The right information at the right time
- Written communication (on an individual basis) of any/all changes, and how the changes affect them
- No inducements or advice from the employer
- Ensuring workers feel in control
- Making it clear to the workers what they will personally get out of being a member of the QWPS
- Tailoring the information for each worker group
- Presenting information in language that’s simple/easy to understand
- Repeating information consistently across different channels
- Allowing opportunities for conversations/Q&A
- Ensuring all the relevant parties in the business understand what role they will be expected to play, and that they have the necessary information to fulfil that role
Auto-enrolment dates and postponement
An employer can postpone the date at which he must auto-enrol a worker by up to 3 months. Without postponement, auto-enrolment dates will be the first date at which the worker meets the tests to be an eligible jobholder, starting from the staging date.
Once the employer has passed his staging date, if there is no postponement, new auto-enrolments of workers must happen in subsequent pay periods when:
- A new worker joins and immediately meets the earnings/age criteria for auto-enrolment
- An young existing worker on their 22nd birthday
- An existing worker whose earnings now meet the required level for auto-enrolment
Where postponement is used, the original auto-enrolment dates are deferred by the chosen period (up to 3 months). Auto-enrolment must then happen at the end of the postponement period, if the worker is then an eligible jobholder. Postponement must follow the appropriate process, including communication to the worker.
A worker may choose to opt-in before the end of the postponement period and, if their earnings are sufficient they will be entitled to receive an employer contribution. Therefore, postponement doesn’t defer all employer duties at the staging date – it only defers auto-enrolment (the employer must still have a suitable QWPS already in place).
Declaration of compliance to the Pensions Regulator
Employers must tell the Pensions Regulator how they have complied with their automatic enrolment duties by providing certain information – the declaration/registration is an online process using the Government Gateway User ID/letter code assigned to the employer by the Pensions Regulator and their PAYE reference.
The deadline is 5 months after the staging date.
Monitoring the workforce every pay period
The following will need to be monitored and acted upon:
- New auto-enrolments
- Assessing new workers/ giving them relevant communications
- Wage increases
- 22nd birthdays
- Potential postponements
- Temporary leave of absences
Employers must retain any opt-in, joining or opt-out notices received from their workers as this is proof that they have exercised these rights. All records must be kept for at least six years (except for four years in the case of opt-out notices).
Membership data must also be kept (name/National Insurance number/date of birth), together with earnings/contribution data. For those who are auto-enrolled, auto-enrolment dates must be kept. The date of starting active membership is also required for those workers entitled only to join the QWPS.
Records of postponement communications to workers also needs to be kept.
Employers must also keep details about their pension scheme(s), namely the employer pension scheme reference and name/address of the pension provider.
If an alternative approach is used for contribution design other than the qualifying earnings standard (where Set 1, 2 or 3 is used), the certificate needed and relevant supporting papers must also be kept by the employer.
Employers must keep all records in a legible format so that the Pensions Regulator can understand them, if they ask to see them.
It remains the employer’s legal responsibility to follow these rules even where the pension administration is outsourced to a third party.
If you require any further assistance on Auto Enrolment please contact Graham John at email@example.com.