Since 2012 the Government has been phasing in a requirement for employers to automatically enrol their eligible workers into a qualifying pension scheme, with the aim of ensuring that the population proactively plans for retirement.
Larger employers were brought within the requirements first, but employers with fewer than 50 workers are being staged in between 1 June 2015 and 1 April 2017, so smaller companies are now very much affected.
What is happening?
Once an employer is caught by the new requirements, it must have a qualifying pension scheme in place, processes to categorise the workforce and processes to automatically enrol, opt-in and opt-out workers. Mandatory employer and employee contributions are also required for the first time.
The Pensions Regulator (the Regulator) has responsibility for enforcing the automatic enrolment requirements. It provides a lot of useful information on its website about automatic enrolment.
When will the changes affect our business?
Every employer has been given a ‘staging date’, at which point the new requirements apply. The staging date is based on the number of people in an employer’s largest PAYE (Pay As You Earn) scheme. Employers with between 50 and 249 workers were assigned staging dates running from 1 April 2014 to 1 April 2015. Employers with fewer than 50 workers have been given staging dates between 1 June 2015 and 1 April 2017. If a company was set up in business after 1 April 2012, its staging date will be between 1 May 2017 and 1 February 2018.
The Regulator has a section on its website to help you determine the applicable staging date (you will need your PAYE tax reference number in order to confirm your staging date).
Our staging date is approaching. What do we need to do?
The duty to automatically enrol eligible workers (known as ‘eligible jobholders’) into a qualifying pension scheme will apply to your business from its staging date. There are tight timescales within which automatic enrolment must take place, so it is essential to be prepared ahead of time.
Automatic enrolment will involve assessing your workforce, considering your existing pension provision (if any), and deciding what provision is going to be put in place going forward to ensure compliance with the new regime. It will also involve putting in place processes to monitor the workforce, to automatically enrol new eligible joiners and those who ‘opt-in’, to process ‘opt-outs’, and to automatically re-enrol all those who are eligible and do not belong to a scheme every three years. Information must also be provided to the workforce about their new pension provision.
Which of our workers will be entitled to participate?
To be eligible for auto-enrolment, a worker must qualify as a “jobholder”. Jobholders include permanent and temporary employees and agency workers, in both full time and part time positions. In addition, the worker must be between age 22 and state pension age and must earn at least £10,000 per year (in the 2016/17 tax year). It is possible to postpone enrolment for three months, but this can only be done once per jobholder. Workers who do not meet these criteria may be entitled to ‘opt-in’ to the automatic enrolment scheme, or in certain cases into an alternative scheme that does not have employer contributions.
What will the new pension scheme look like?
Eligible jobholders must be automatically enrolled into a scheme that meets certain conditions. Existing eligible jobholders who do not belong to a qualifying pension scheme, and new joiners who are eligible jobholders, must be enrolled into a scheme that:
- contains no barriers to entry, in particular it must not require new joiners to make a choice such as a choice as to which funds their contributions are invested in or provide information in order to become a member; and
- is a qualifying scheme. This covers a variety of criteria, most significantly minimum mandatory contribution levels for employer and worker. Yes, as an employer you will now have to make contributions into the scheme for all eligible jobholders; see below for further details.
The scheme used can be a defined contribution (DC) scheme, and can either be an occupational trust based scheme (typically a ‘master trust’), or a contract based personal pension scheme, often provided by an insurance company. In terms of selecting a scheme, a pensions benefit consultant will be well placed to assist, and can explain the advantages and disadvantages of the various options available. The scheme used can also be a defined benefit (DB) scheme, although it is most likely this type of scheme will only be used where a company already has one in place.
How much do we have to contribute?
The minimum contribution requirements for DC schemes are being introduced gradually, and are set out in the table below. The percentage contributions refer to a percentage of the jobholders ‘qualifying earnings’, which is a specifically defined band of earnings (currently between £5,824 and £43,000).
|Staging date||Employer contribution||Total contribution (including tax relief)|
|Up to 5 April 2018||1%||2%|
|6 April 2018 to 5 April 2019||2%||5%|
|From 6 April 2019||3%||8%|
In practice, it is common for pension contributions to be a percentage of an employee’s basic salary rather than only contributing within the specifically defined band of earnings referred to above. If a metric other than the specific statutory metric is used to calculate the percentage, the employer may need to self-certify that the contributions are sufficient to meet the minimum contributions required.
What happens if we don’t follow the rules, or if we don’t have a qualifying pension in place in time?
Firstly, note that there are strict anti-avoidance provisions under the new regime, and employers may not take any action which is designed to induce workers to opt-out of automatic enrolment. Offering to give a worker extra cash or a higher salary instead of pension contributions, would be prohibited under these regulations.
The Pensions Regulator is policing the new regime. It has the power to issue compliance notices and penalties varying according to the employer’s size. Large employers that do not comply could be liable to escalating penalties of up to £10,000 per day. Criminal penalties could apply in the case of “wilful” failure to comply.
What actions should we take now?
- Confirm your staging date (see above for details of how to do so on the Pensions Regulator website). This will help the company properly plan for the implementation of a compliant pension scheme.
- If you have an existing plan in place, speak to our Pensions Law specialists to find out if it would be a “qualifying scheme” for the purposes of the regulations.
- If you do not have an existing plan in place, contact a well-qualified pension broker or adviser to understand what plans are available and what might make sense for your business. Ensure you know how long the plan will take to implement, and what the ongoing cost of administration will be.
- Depending on the size of your office and your current pension arrangements, the mandatory contributions which employers are required to make could increase the cost of your business. Consider the implications and discuss with others within the company as necessary.
- Provide the relevant information to your employees ahead of your staging date to avoid any compliance issues or fines.