Automatic pension saving for employees

Question.

My staging date for pension auto enrollment is in the next few months. What do I need to do and what impact will this have on my business?

Answer.

To encourage more people to save in pension schemes, the government has placed greater responsibility on employers to provide access to pension provision. Up until 1 October 2012 there was no requirement for an employer to pay employer contributions into a scheme. There was also no requirement for the employee to enter an employer provided scheme. Most employers were however obliged to designate a registered stakeholder scheme that employees could join.

Automatic enrollment places new duties on employers to automatically enroll ‘workers’ into a work based pension scheme. A business which uses the services of casual workers, very young or very old workers will need to spend some time in analysing its workforce. A business which only employs salaried staff will have an easier task.

There are three categories of workers: eligible jobholders; non-eligible jobholders; and entitled workers.

An ‘eligible jobholder’ is a worker who is:

• Aged between 22 years and the State Pension Age
• Earning over the minimum earnings threshold (£10,000 for 2015/16 and 2016/17)
• Working or ordinarily working in the UK
• Not already in a qualifying pension scheme

Most workers will be eligible jobholders unless the employer already has a qualifying pension scheme. These are the workers for which automatic enrollment will be required.

Other workers (non-eligible jobholders) may have the right to either ‘opt in’ (i.e. join a scheme) and therefore to be treated as eligible jobholders. ‘Entitled workers’ are entitled to join the scheme but there is no requirement on the employer to make employer contributions in respect of these workers.

Employers are able to comply with their new obligations by using an existing qualifying pension scheme, setting up a new scheme or using the government low cost scheme – the National Employment Savings Trust (NEST). It is important that the pension scheme chosen will deliver good outcomes for the employee’s retirement savings.

The law came into force for very large employers on 1 October 2012 but fortunately, the automatic enrollment rules have a staggered implementation by reference to the number of employees.

For those with less than 50 employees the earliest start date is 1 June 2015 but the precise date will depend not only on the actual number of employees on 1 April 2012 but also an employer’s PAYE reference number. The earliest date for an employer with up to 30 employees on 1 April 2012 is 1 June 2015 and the latest date is 1 April 2017.

Employers are required to write to all workers (except those aged under 16, or 75 and over) explaining what automatic enrollment into a workplace pension means for them.

As part of the automatic enrollment process, employers will need to make contributions to the pension scheme for eligible jobholders. All businesses will need to contribute at least 3% on the ‘qualifying pensionable earnings’ for eligible jobholders. However, to help employers adjust, compulsory contributions will be phased in, starting at 1% before eventually rising to 3%. There will also be a total minimum contribution which will need to be paid by employees if the employer does not meet the total minimum contributions. If the employer only pays the employer’s minimum contribution, employees’ contributions will start at 1% of their salary, before eventually rising to 4%. An additional 1% in the form of tax relief will mean that there is a minimum 8% contribution rate.

Earnings cover cash elements of pay including overtime and bonuses (gross) but minimum contributions are not calculated on all the earnings. Contributions will be payable on earnings between the lower threshold of £5,824 and the higher threshold of £43,000 for 2016/17. The earnings between these amounts are called qualifying earnings. The thresholds are reviewed by the government each tax year.

If we do your payroll services, we can help you make these calculations and tell you the deductions from pay and the payments required to the pension scheme.

The Pensions Regulator was established to regulate work-based pensions and an employer must complete the declaration of compliance within five months of the staging date. In essence the declaration of compliance process requires the employer to:

• Confirm the correct auto enrollment procedures have been followed
• Provide various pieces of information such as the number of eligible jobholders enrolled

Finally, an employer must keep records which will enable them to prove that they have complied with their duties. Keeping accurate records also makes good business sense because it can help an employer to:

• Avoid or resolve potential disputes with employees
• Help check or reconcile contributions made to the pension scheme

The advice above is specific to the facts surrounding the questions posed. Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.