What is Pension Auto-Enrolment and what must I do about it?

What Is Pension Auto-EnrollmentA new law now in place means that soon every UK employer must provide a workplace pension scheme into which their employees will be automatically enrolled.

Employees can opt out if they wish, but all employers will be legally required to have a suitable pension scheme in place and to offer it to their employees.

EMPLOYERS CANNOT OPT OUT.  This applies to all UK employers, even if you have only one employee and that is yourself.  Auto-enrolment is mandatory and the government will impose punitive penalties on employers that fail to comply with the legislation.

Hopefully these opening lines have grabbed your attention sufficiently for you to read the remainder of this article in which we explore some of the details and consequences of this legislation.

Pension Auto-enrolment has come about due to concerns about the affordability of the state pension in the future, concerns about people’s savings for old age and public trust issues with regard to the pensions industry.

Every employer must have a pension into which employees can be automatically enrolled and that satisfies the ‘qualifying scheme’ criteria.  This is known as Pension Automatic Enrolment or Pension Auto-enrolment.

Employees that are eligible for this scheme are those who:

  • are aged between 22 and State Pension Age
  • earn more than £9,440 per year (2013/14 limit, this amount will change)
  • work in the UK

The concept of auto-enrolment may sound straightforward enough, but there are complexities that must be addressed by employer and employee alike.  Larger businesses have been moving across to pension auto-enrolment schemes since 1 April 2012 but most small businesses are expected to provide it to their employees that meet the criteria during the 2014/15 and 2015/16 financial years.

The scheme is designed to ease employers and employees into the concept.  At first, a minimum of two per cent (2%) of qualifying earnings must be contributed, of which a minimum of one per cent (1%) must come from the employer. That rises over time to eight per cent (8%) by 2018, of which the employer must contribute a minimum of three per cent (3%).

Businesses therefore need to put in place the structures, processes and accounting/payroll software that can help manage the pension auto-enrolment process in an effective and compliant manner, while employees must make themselves aware of the pension options available to them along with any risk or consequence of not agreeing to the auto-enrolment process.

As an Employer, what should I do?

  • Contact The Pensions Regulator (TPR) to confirm when your business will be expected to join the pension auto-enrolment scheme.  This is known as your staging date.
  • Appoint a person within your organisation who will be the designated contact with TPR.
  • Contact your payroll provider and find out how they will deal with pension auto-enrolment of your business.  Key questions to ask include:
    • What are you doing for auto-enrolment?
    • What additional support will you provide?
    • When will any necessary amendments to the accounting/payroll software be ready?
  • Ensure that you are offering your employees a qualifying pension scheme. Employers must have joined a qualifying pension scheme in advance of auto-enrolment of their employees. Employers who are not suitably set up by the target date set by TPR could be fined.
  • Auto-enrolment requires someone to take responsibility for the scheme within a business, so as to oversee the process.  Formally appoint that person.
  • Develop an auto-enrolment introduction process. Make sure that every necessary step of introducing auto-enrolment will be followed in the correct order, and that qualifying employees are communicated with at the right junctures and with the correct, complete information.
  • Know the cost to both yourself and your employee. The amount of money to be paid by a worker, and their employer, will be calculated as a percentage of their “qualifying earnings” or, in other terms, gross earnings of more than £5,715 and up to a maximum of £38,185. For example, for a person who earns £19,000 a year, the percentages would be calculated on the difference between £5,715 and £19,000, which is £13,285.

What happens if Employers get Pension Auto-Enrolment wrong?

Employers will have the responsibility for ensuring that they have a compliant scheme in place and making sure the correct employee and employer contributions are made every pay period.

If an employer has been found to be running a scheme that is non-compliant, then they face the risk of daily penalties from £50 per day for small employers (less than 5 employees), to £10,000 per day for large employers (more than 500 employees) until compliance it met.

As an Employee, what do I need to know?

  • Ask your employer when they will be introducing the Pension Auto-Enrolment scheme.
  • Find out which pension scheme your employer will be offering.
  • Talk to a financial advisor about your pension options, especially if you are already part of a pension scheme or multiple schemes.
  • Decide if you want to opt out of your employer’s auto-enrolment scheme.  You will have to do this every three years of employment or when you join a new employer if you want to remain outside of the scheme.
  • If you decide to join your employer’s scheme, make sure that you complete all the necessary paperwork correctly and that you notify your financial advisor and accountant.

Where can I get more information about Pension Auto-Enrolment?

For more information about Pension Auto Enrolment, visit The Pension Regulator website:http://www.thepensionsregulator.gov.uk/

If you are an employer and you haven’t already done this, we recommend that you start the process very soon.