Pensions - Auto Enrolment

The law on workplace pensions has changed. Every employer with at least one member of staff now has new duties, including enrolling those who are eligible into a workplace pension scheme and contributing towards it.

This is called ‘automatic enrolment’ because it is automatic for staff – they don’t have to do anything to be enrolled into a pension scheme, but it is not automatic for employers.

Employers who do not comply will face enforcement action which can include fines and / or prosecution.

Overview

A number of new employer duties have been introduced that will give millions of workers access to pension provision, many for the first time.

 

What an employer needs to do will depend on whether they employ someone the legislation classifies as a ‘worker’.

 

The term ‘worker’ is specific – it does not simply apply to the working population as a whole. There are different categories of worker, determined by a person’s age and how much they earn.

 

A key requirement is to automatically enroll certain workers, known as eligible jobholders, into a pension scheme that meets specific conditions to be an ‘automatic enrolment scheme’. However, automatic enrolment is only one of the duties.

 

For all employers, compliance with the new employer duties and safeguards is compulsory. It is crucial that all employers understand how their workforce is categorised under the new legislation.

 

An employer needs to know: • the criteria that determine whether someone is considered as a ‘worker’ • the criteria that determine what category of ‘worker’ that person is.

 

They also need to be able to apply this in practice to their own workforce so they can be compliant with the new duties.

 

The first step for an employer is to see if they employ anyone classed as a ‘worker’. To do this, they need to understand their contractual relationships.

 

A worker is defined as any individual who:

• works under a contract of employment (an employee), or

• has a contract to perform work or services personally and is not undertaking the work as part of their own business.

 

Anyone who has entered into a contract of this type with an individual is an employer and is required to comply with the new employer duties.

 

This may include agency workers if they have such a contract with either the agent or the principal (the third party to whom the individual is being supplied by the agent). Broadly, agency workers are individuals who are supplied by an agent to work for a third party (the principal) under a contract or arrangement between the agent and the principal, and who are not undertaking the work as part of their own business. For example, a person taken on by a recruitment agency that gives that person a temporary assignment to work for someone else.

 

 In the absence of a worker’s contract between the agency worker and the agent or principal, the agency worker may still be a worker for the purposes of the new duties.

 

The final point to note about the definition of worker in  is that the physical location of the employer is not a determining factor when considering an individual’s status as a worker, e.g. the employer may be based outside the UK.

 

Who needs to enroll - Preliminary Assessment

To check if your client needs to enroll staff into a pension scheme that can be used for automatic enrolment, it’s important your client carries out a preliminary assessment of their staff to work out who to put into the pension scheme. The assessment can either be done manually or automatically using business software and will need to be carried out each time the workforce changes.

 

The table below shows how to assess staff based on their ages and how much they earn.

 

Monthly gross earnings Age Weekly gross earnings
From 16 to 21 From 22 to SPA* From SPA to 74
£486 and below Has a right to join a pension scheme 1 £112 and below
Over £486 up to £833 Has a right to opt in 2 Over £112 up to £192
Over £833 Has a right to
opt in
Must be
enrolled 3
Has a right to
opt in
Over £192

 

Figures correct as of 2015/2016. *SPA = state pension age

1 Has a right to join a pension scheme
If they ask, the employer must provide a pension scheme for them, but the employer doesn’t have to pay contributions into a pension scheme.

2 Has a right to opt in
If they ask to be put into a pension scheme, the employer must put them in a pension scheme that can be used for automatic enrolment and pay regular contributions.

3 Must be enrolled
The employer must put these members of staff into a pension scheme that can be used for automatic enrolment and pay regular contributions. The Employer doesn't need to ask their permission. If a member of staff gives notice, or the employer gives them notice, to leave employment before the employer has completed this process, the employer has a choice whether to enroll them or not.

 

There are no automatic enrolment duties if any of the following apply:

 

  • they are the sole director
  • the only people working for them are a number of directors, none of whom has an employment contract.
  • the only people working for them are a number of directors, only one of whom has an employment contract.

 

Automatic enrolment will apply if more than one director has a contract of employment.


Costs of automatic enrolment

From the staging date, employers will be required to pay regular contributions into their staff pension scheme for staff who have been enrolled or who have opted in. In addition to contribution costs, there are other costs that you need to be aware of.

 

The table below shows the minimum amounts the employer will need to pay:


Date Employer minimum contribution Total minimum contribution
Before *05/04/18 1% 2% (including 1% staff contribution)
*06/04/18 - *05/04/19 2% 5% (including 3% staff contribution)
*06/04/19 onwards 3% 8% (including 5% staff contribution)

The employer can pay more than their minimum contribution (if they want to) and teh staff member must pay the difference to reach the total minimum contribution.

The employer's minimum contributions starts at 1% and will rise to 3% from October 2018 onwards. When employers start paying contributions after their staging date, they'll need to be calculated and deducted via their payroll process.

In addition to contribution costs, there are other costs that you need to be aware of. These include:

  • setting up a pension scheme
  • paying for increased payroll software or outsourcing costs
  • chargeable advice and support - i.e. paying advisors
  • employer's own time in setting up automatic enrolment.