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Make sure your business complies with new auto-enrolment pension rules

Make sure your business complies with new auto-enrolment pension rules

September 10, 2013 by Guest Blogger

Make sure your business complies with new auto-enrolment pension rules/pensionsThe government’s fanfare around auto-enrolment, backed up by the ‘I’m in’ advertising campaign, has generated awareness, but not necessarily a great deal of understanding.

Furthermore, some commentators have noted that the legislation seems heavily weighted against SMEs that don’t have the luxury of financial scale or resource.  It’s little wonder the reforms are generating worry.

With this is mind, here is my starter guide, which outlines employers’ key legal obligations and how to introduce the compulsory pension scheme. It is not comprehensive, merely an introduction – so, seeking tailored professional advice is advised.

What is auto-enrolment?

Successive governments have for some time been worried that many UK workers are not saving enough for their retirement. And so, as part of the Coalition’s “nudge” agenda, the rules are being changed to ensure that certain individuals are automatically enrolled into a pension scheme.

The 2008 and 2011 Pension Acts will gradually come into force to ensure that employers are legally required to pay into certain workers’ pension plans. Individuals can choose to ‘opt out’ but they must do this themselves (an employer cannot do it for them, or encourage them to opt out). The employees will also be ‘re-enrolled’ back into the pension scheme automatically every three years. Significant financial penalties will be levied on businesses for non-compliance.

What does it mean for your business?

There are three definitions you need to understand, because each category of individual will be entitled to different rights:

  1. “Eligible Jobholders” are between 21 and state pension age and earn the equivalent of £9,440 or more a year. Eligible Jobholders must be enrolled in a pension scheme and the employer must pay contributions (see below).
  2. “Non-Eligible Jobholders” are between 16-75 and earning the equivalent of £5,668 a year. They must be told about their rights to enter a pension scheme and, if they choose to join, the employer must pay contributions (see below).
  3. “Entitled Workers” are 16-75 but earning less than the equivalent of £5,668 a year. They must be told about their rights to enter a pension scheme but, if they choose to join, the employee must contribute (although the employer must make these through payroll on the employee’s behalf).

Still with us? Good, because it gets more complicated. Contribution levels are defined by “Qualifying Earnings”, which are the earnings an employee makes between £5,668 and £41,450. Actual contributions are a percentage of the qualifying earnings, with that percentage increasing on a phased basis.

The contributions are not too scary in the first few years, with employer’s minimum contributions set at 1% of qualifying earnings, with employees matching it. Over time, employers will be required to pay up to 3% of qualifying earnings.

And there’s more…

  1. Employers are responsible for continually assessing who is eligible. Which means enrolling and paying is only part of your new obligation. You must also continually assess your workforce and auto-enrol employees as they become eligible.
  2. You are also responsible for assessing the financial and administrative impact of complying on your organisation. Obviously this is not a legal requirement within the remit of auto-enrolment, however, it does carry with it associated legal implications (eg if compliance causes cashflow and late payment issues). Don’t get caught short.
  3. Furthermore, you have a long list of administrative obligations, including keeping records for up to six years, which you must meet. All these duties are time-constrained and you can view a summary on The Pension Regulator’s website.

Finally, you must communicate changes to your employees. This must not be overlooked. More on this below.

Compliance dates

Each employer is allocated a staging date within which they need to be compliant. This is based on the number of employees the business had as at 1 April 2012.

Currently companies who had from 249 down to 50 staff on that date must implement a pension scheme between 1 April 2014 and 1 April 2015; and those with 49 employees or fewer between 1 August 2015 and 1 April 2017.

New employers signing up for PAYE will likely have a staging date in 2017 or 2018, depending on when they hit the PAYE system. It’s worth noting that these dates are subject to postponement, especially if we don’t see signs of economic recovery.  You can get more information on your staging date from the Pensions Regulator, here: http://www.thepensionsregulator.gov.uk/employers/staging-date-timeline.aspx

We would advise though that you start preparing 12 months ahead of your staging period – purely to get a handle on the financial and administrative implications. If you’re brave, you can bring your staging date forward provided you give the Pension Regulator at least a month’s notice. Equally in some limited circumstances you may even be able to postpone a staging date.

In either case we’d strongly suggest you check with an experienced advisor or go directly to the Pensions Regulator before assuming anything.

Communication is a must

Employees’ reactions to auto-enrolment may differ wildly. Younger staff members may be fearful of contributing to a pension, despite the long-term gain. Communicate with all staff as early as possible and keep them regularly updated. By outlining how the changes will affect them, you prevent confusion and potential fall-out.

If you have implemented a clear communications plan, you are halfway through the communications tick-list, but your obligations don’t stop there (as if you hadn’t already guessed). Broadly speaking, you have a month from your company’s staging date (or for new employees, it will be a month from their individual start date) within which to tell a new employee that they have been auto-enrolled (if an Eligible Jobholder) or to inform them (if a Non-Eligible Jobholder) of the existence of a scheme.

Any employer found to be flouting the new pension laws or encouraging employees to ‘opt out’ will face fines. This includes trying to recruit people who are more likely to opt-out, even if they’re recruited before your staging date.

Which provider should you use?

You can decide. The Government has set up the National Employment Savings Trust (NEST), which any employer can use to meet the new pension responsibilities if they don’t already have a scheme.

However, there are a lot of alternatives to NEST, some of which may provide a better service for your needs. With staging a few months away for most, it might be worth seeing how bigger companies deal with the pitfalls of the new legislation and then make a choice once the market develops.

In conclusion

The government has called this period of auto-enrolment the biggest change to pensions in 100 years. It’s no understatement, with the overhaul required, but there’s no need to panic – there is time to get your house in order.

But don’t underestimate the work involved. Not only do you need to assess the financial contribution, but also ensure your company is financially and administratively prepared, and that you communicate the changes to your staff and ensure you’re constantly assessing staff. Start early and you’ll be fine.

Blog provided by Richard Turner from Brilliant Law

Further reading 

Comments

For example, I have four staff, working 8-hour days on minimum wage, so with 9 bank holidays and 20 days leave and no weekends they work 232 days / year = £11711

I am going to have to either a) reduce their hours to 6 per day, or b) cut their days to 187 (effectively making them work a 4-day week plus a few compulsory days unpaid leave at e.g. Christmas) to bring their salary down to a) £8784 or b) £9439

In order to get the work done, I will employ another person on a 4-day week or 6-hour day, paying them under £9440 as well

I prefer the 6-hour day option, as I want my staff there every day

If any of them do opt in, is it true that I am not allowed to even show them projected employment costs for the next year, two years, three years, to show that not only there will be no pay rises or bonuses for those three years, but in fact the business may well fold if burdened with another 1% (and rising) cost on top?

You've raised some interesting questions there, which I think highlight the burden this new legislation could be for small businesses. Changing hours of work, or days per week for employees is, in effect, changing their contract - see this section of the Law Donut. 

Also, I forgot to ask, it is intended that the £9440 threshold will rise annually in line with CPI or RPI?

If I reduce the salary of all my staff over 21 to below the £9440 threshold (reducing their hours as necessary to comply with the Minimum Wage), and no one choses to opt in to the scheme, do I still need to set one up?

What happens if someone's base salary is below £9440 but one year they work overtime which takes them above, and next year they are back below £9440?

Who keeps track of the numbers people 'let go' before the enrolment due date, in order to ensure that no employees qualify for auto enrolment?

I already refuse to employ people 'with insufficient experience' - e.g. under 40 - to avoid all sorts of problems, now I'm going to have to reduce their wages as well? Seems an odd way to get the country out of a recession, but forcing employers to sack people or cut their wages

Hi Rory, Sean Hick here, Employment Executive at Brilliant Law.

It is best to deal with your first two questions at the same time, simply because the answer to both unfortunately is yes. The duty is absolute.  There is no way to dodge it and no consideration is given for the financial circumstances of the firm, even when an employer is on the brink of closure.  You also cannot take into account the performance of an individual employee when deciding whether or not to enrol them onto a pension scheme.

The one thing you can do is to ensure your employees are aware of the implications (in a factual and non-biased way) and let them make the decision.  But remember, you cannot offer an inducement to your employees to opt out of auto-enrolment. 

In answer to your third scenario -  there are three options:

 

1.       Hold the 'bonus' back. This will in the short term save the company some money and won’t give your employee the expectation of a bonus in the future when auto-enrolment comes in.

2.       Pay the bonus in this year and then not next year, instead giving the auto-enrolment.  The issues here are relatively complex so here’s the witch’s warning:

If you have a history of giving out bonuses then your employee can potentially look at deeming a contractual right to that bonus.  Deeming rights by custom and practice is not a hard and fast rule.  If you suddenly stop giving the bonus because you have had to start the auto-enrolment you could find yourself open to claims of unlawful deductions from wages in the Employment Tribunal or breach of contract in the Courts which can be much more expensive than doubling up on the payments. 

3.       Start the auto-enrolment early – provided your employee cannot deem a contractual right to the bonus from your previous actions this might be the safest route to take.  Your employee gets a perk albeit one they can’t benefit from for several years - or possibly decades - and you will be seen more favourably by your staff.

That’s a very helpful summary of the upcoming changes, thank you Richard.

But could you explain to our readers what might happen in these three small business scenarios:

1.       A business is losing money and risks going under. Given the auto-enrolment deadline, must it still increase its payroll costs by the 1% contribution if no one opts out, and increase the likelihood of collapse?

2.       A business has an employee who is performing poorly and is completely undeserving of a 1% pay rise that year. Must the business nevertheless add a 1% pension contribution to this person’s pay if he/she does not opt out?

3.       A business wants to give pay rises the year before the auto-enrolment start date, and expects to have no additional cash when it reaches the date itself. Rather than starting auto-enrolment early, could it make those earlier pay rises in the form of bonuses, so that it can then switch to paying employer’s pension contributions without having to find more funding?

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