With people living longer and concerns about the numbers not thought to be saving enough for their retirement the government has introduced Automatic Enrolment to help encourage employees to tackle these issues. In accordance with the Pensions Act 2008, between now and 2018 all UK employers will have to have a qualifying workplace pension scheme in place and be enrolling their workers. Large and medium sized employers (with more than 50 staff) have already started. In fact to date around 60,000 employers have successfully ‘staged’ which accounts for only 3%.
Auto Enrolment requires employers to enrol ‘eligible workers’ onto a workplace pension scheme. Pretty much every employer is affected whether you employ one or one thousand employees. The new regulations will be enforced by the Pensions Regulator, which will also provide employers with help and guidance to ensure that they meet their legal duties. Failure to comply can result in financial penalties.
As the name suggests, qualifying employees are automatically enrolled however they can choose to opt-out. So far the opt-out rate is around 8%, which is much lower than initially predicted. Employers must not encourage their employees to opt out. Whilst it is an automatic process for employees it does put the onus on employers to provide a qualifying pension scheme and gives them more work to do. The new regulations come with more than 30 mandatory duties, which are time-consuming and complex to run.
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What is a qualifying workplace pension scheme?
You must choose a pension scheme with certain features which will allow you to fulfil your Auto-Enrolment duties, which include:
- Having a default investment option
- Able to be used for automatically enrolling eligible jobholders, but also allow non-eligible workers to opt in and entitled workers to join
- Comply with the government’s charge cap
Does my current pension scheme qualify?
If your current pension scheme meets set criteria you may continue using it for the purposes of complying with Auto Enrolment. Pension eligibility criteria is complex and beyond the scope of this post.
The eligibility criteria for automatic enrolment differs for different types of pension schemes e.g. defined contributions (DC) or Defined Benefit (DB). Click here for more information on pension fund eligibility criteria.
When is the deadline date?
The deadline for Auto Enrolment is known as your staging date. This is assigned to your PAYE number and the Pensions Regulator will write to you giving you plenty of notice.
You can find out your staging date here. You will need your PAYE reference number.
With 100,000 employers staging in the first 3 months of 2016 and an average of around 45,000 employers per month thereafter, there is an expected capacity crunch looming and so it is advisable to start making plans as soon as possible. In Q3 of 2017 349,000 employers will reach their staging date. The Pensions Regulator is predicting demand will outstrip supply by 100:1, which is likely to be reflected in the costs of finding and setting up a scheme. There is no reason not to act now to guarantee having a scheme in place and avoid the unnecessary stress and predicted inflated costs.
Eligibility is based on an employee’s age and earnings. Those aged between 22 and the current state pension age 66 years who earn at least £192 per week or £833 per month gross must be automatically enrolled. Those younger than 22 or older than 66 have a right to opt-in to an eligible pension scheme but it is not automatic. Those earning less than these figures, which will be reviewed annually, also have a right to opt-in.
Beneath we include a graphical illustration of auto-enrolment’s eligibility rules:
Eligible Jobholders (aged between 22 and state pension age) – automatically enrolled
Non-eligible Jobholders – have the right to opt in and receive employer contributions
Entitled Workers – can join but not entitled to employer contributions
Obligation to write to all affected staff
The law requires you to write to staff affected within six weeks of your staging date:
- You must write to staff who are being automatically enrolled explaining what you have done and providing details of the pension scheme you have chosen for them, their right to opt-out and that money will be deducted from their wages and transferred into their pension
- You must write to staff who have a right to opt-in to an automatic enrolment pension scheme explaining how automatic enrolment applies to them
- You must write to staff who have a right to join a pension scheme explaining how automatic enrolment applies to them
Your right to delay automatic enrolment
You may postpone the commencement of automatic enrolment by up to three months following your staging date. You must write to each affected employee explaining your decision to do so.
Minimum pension contributions
The minimum amount of money the employee and employer must contribute is outlined in the table below. These are based on what is known as ‘qualifying earnings.’ This earnings band will be reviewed each year however for the 2015/16 tax year it is everything over £5,824 up to £42,385. The minimum contribution rate only applies to qualifying earnings so any outside of the banding does not apply.
Click here to view the employer’s ‘contributions calculator’ hosted on the Pensions Regulator’s website.
Duty to keep records
You must keep records to show that you have complied with Auto Enrolment. The law requires employers to retain documents relating to auto-enrolment for a period no less than six years. Opt-out notices received from employees must be retained for a period no less than four years.
Employers must keep records about workers, such as names, National Insurance details, earnings and contributions as well as details of the scheme such as the reference number, the name and address of the scheme. The qualifying scheme must keep separate records about the members.
Declaration of compliance
Once staff are enrolled into a workplace pension scheme you must complete an online ‘declaration of compliance’. The declaration demonstrates to the regulator how you’ve complied with your legal duties relating to Auto Enrolment. This declaration must be submitted no later than five months following your staging date.
Click here to read the declaration of compliance checklist.
Click here to complete your declaration online.
Penalties for non-compliance
Penalties for non-compliance start at £400. Further non-compliance carries a sliding scale of daily financial penalties. The level of daily penalty you receive for non-compliance depends on the number of people you employ:
- Up to 4 employees – £50 per day
- 5 to 49 employees – £500 per day
- 50 to 249 employees – £2,500 per day
- 250 to 499 employees – £5,000 per day
- Over 500 employees – £10,000 per day
In addition to the above, The Pensions Regulator may also issue a civil penalty when contributions are not paid of up to £5,000 for individuals and £50,000 for organisations.
Getting Expert Help
Due to the number of employers who will be staging from January 2016 professional advisors and pension providers will be inundated with enquires relating to Auto Enrolment, meaning you may struggle to find a scheme and meet the six week deadline following your staging date. In order to avoid undue stress and the risk of penalties and inflated charges we suggest you start making plans as soon as possible.
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