The 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:
- “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).
- “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).
- “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…
- 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.
- 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.
- 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.
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/en/employers
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.
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