A few years ago employers simply had to provide access to a “Stakeholder Pension scheme” but with no requirement to pay in any contributions – it was no surprise that this was not very effective.
The UK population enjoys continued improved longevity, but also a decreasing ratio of workers to retirees together with a low savings culture is putting more pressure on State Pension provision.
Since many individuals in the UK are employees it was decided best way to tackle this and encourage individuals to take responsibility for their own retirement savings is to enforce pension contributions directly from payroll via the workplace.
From 2012 onwards every employer in the UK has had their own specific deadline (STAGING DATE) to comply with new regulations and must enrol their workers into a qualifying workplace scheme and pay employer contributions into it (as laid out by Pensions Act 2008).
An employer needs to select an appropriate scheme, issue correct employee communications, assess their whole workforce, automatically enrol the correct type of workers taking correct deductions from payroll, facilitate an “opt out” process, keep accurate records and register this all with the Pensions Regulator whose role is to enforce this requirement.
Payroll providers will often help an employer with ongoing administration of pension payments but few will offer support with scheme selection and installation or on the most appropriate basis on how it should all be set up as well as registering the scheme with Pensions Regulator.
This is what I have been helping many employers with so they can focus on running their business.
Table Of Contents
Cost of non-compliance?
The Pension Regulator is tasked with enforcement and does monitor progress. Many fines have already been issued for non-compliance.
A fixed penalty notice of £400 is issued after failure to comply with a statutory notice followed by an escalating penalty notice of daily fines dependent on number of employees in workforce of up to £10,000 per day (£50 per day if 1-4 employees / £500 per day if 50-249 employees).
*To date a total of 2234 fixed penalty notices of £400 each have been issued since July 2012 but interestingly 806 of these were issued from 1/1/2016 – 31/3/2016.
*Source Pension Regulator AE Compliance & Enforcement quarterly bulletin 1/1/2016 – 31/3/2016.
This clearly shows that the larger employers that had earlier staging dates may have had the resources to cope better with the legislation but smaller employers that are now reaching their staging dates are more likely to require a helping hand to help them get things in order – it is clear that company size or lack of internal resources is no excuse for non-compliance with auto enrolment duties as far as the Pension Regulator is concerned.
Assessing the workforce
Under the legislation there are 3 types of worker:
- Eligible jobholder – these must be enrolled (earning above £833 pm and aged 22-state pension age)
- Non eligible jobholder – (either under 22 or above state pension age or earnings below £833pm but over £486pm) may opt in and employer will need to pay in but will not be enrolled.
- Entitled worker – has right to join scheme but employer does not need to pay in (earnings under £486 pm)
In my experience most employers will select this option. Auto enrolment may be postponed by up to 3 months and this can be used from staging date and also to new hires and those existing employees that may become eligible (e.g. on passing a 22nd Birthday).
This helps an employer with costs and helps avoid enrolling short term workers / temps etc. – they will still have the right to opt in if they wish and this information must be included on a letter to them issued within 6 weeks of joining the employer or on becoming eligible if an existing employee.
Due to the right to opt in a scheme needs to be set up and ready from the staging date even if using postponement.
Contributions and “pensionable earnings”
More decisions to be made. The Pension Regulator recognise that different employers will have many different pay structures. Some may offer low basic salaries but pay significant bonuses or overtime, others just having basic pay similar to total earnings etc.
Minimum contribution requirements under auto enrolment rules are based on a band of an employee’s total earnings from £5824 – £43,000 known as “qualifying earnings” but an employer can certify that their scheme meets one of 3 other contribution requirements where full basic pay is used or total earnings without any lower threshold or upper limits.
I help an employer review the earnings profile of their payroll and select the most appropriate basis.
Another important decision for an employer to make. The Government has approved many schemes as suitable for auto enrolment as well as setting up its own National Employment Savings Trust (NEST) which has a public obligation to accept applications from all employers regardless of size. However there are also other schemes that may be more attractive for the employer and employees for a number of reasons.
Due to risk of low take up / high opt outs and low contribution rates many traditional providers are charging ongoing employer administration fees to run schemes and there has recently been a significant increase in new providers entering the market with little or no track record causing concern on their long term viability from the Government’s Pension Minister Ros Altmann and Pensions Regulator.
To help avoid any future problems for an employer and their employees it is important that the scheme selected has some recognised independent credentials.
I am selecting schemes for employers that are from leading auto enrolment pension providers that are members of “Master Trust Assurance Scheme” set up by Pensions Regulator in partnership with the ICAEW (Institute of Chartered Accountants for England and Wales) as well as ones that also have the “Pension Quality Mark” (a measure of quality recognised by the Pensions Industry as well as the Government).