Pensions update: Top tips on auto-enrolment

What you need to know about the auto-enrolment reforms being introduced 1 October 2012

Are any of your employees:

1. 22 years or older?
2. Under state pension age?
3. Working in Great Britain? and
4. Earning more than the income tax personal allowance (currently £7,475) ?

If so, you will have to auto-enrol each and every one of those “Eligible Workers” into a qualifying pension scheme when your auto-enrolment duty begins on 1 October 2012.

What is auto-enrolment?

Auto-enrolment is a new requirement for all employers to enrol their Eligible Workers into a qualifying pension scheme, meaning that all Eligible Workers will begin to contribute to their pension.

Why is auto-enrolment being brought in?

Millions of people in the UK are not saving enough money to have an adequate income when they come to retire. Coupled with increased life expectancy and an aging population, the pension deficit is becoming an ever increasing problem in the UK. Auto-enrolment is a government initiative to tackle this issue by ensuring that workers take up the pension benefits offered by employers, which many currently fail to take advantage of.

What will pension contributions be, once employees are auto-enrolled?

The amount of money to be paid by a worker, and their employer, will be calculated as a percentage of their “qualifying earnings” namely, gross earnings more than £5,715 up to a maximum of £38,185. So for example, for a person who earns £19,000 a year, the percentages would be calculated from the difference between £5,715 and £19,000, which is £13,285.

Contributions will be phased in from October 2012 as set out below:

• Between October 2012 and September 2016 a total minimum of 2% of qualifying earnings must be contributed to each Eligible Worker’s pension scheme, with a sum equal to at least 1% contributed by the employer;
• Between October 2016 and September 2017 a total minimum of 5% of qualifying earnings must be contributed, with a sum equal to at least 2% contributed by the employer; and finally
• From October 2017 a total minimum of 8% of qualifying earnings must be contributed, with a sum equal to at least 3% contributed by the employer.

How and when will auto-enrolment be introduced?

Individual employers’ duties are scheduled to be phased in over the four years following 1 October 2012, depending on the size of employer. The largest employers are due to start auto-enrolment from October 2012. To see the full schedule of phasing in, and how it will apply to your business, click here.

When must you tell your employees?

Each of the phases mentioned above has a “staging date”; namely the date upon which the process of auto-enrolment will begin.  On the staging date, employers must communicate in writing to their staff if they will be auto-enrolled, or not, and their rights as to the opt-out provisions outlined below.

Is there a provision to opt out of auto-enrolment?

Should Eligible Workers not wish to participate in auto-enrolment, they can inform their employers of this decision. If they do so within the formal opt-out period of one month after auto-enrolment begins, they may receive a refund of any contributions that have already been taken as a result of their auto-enrolment. However, if workers decide to opt out after this period, they will not receive such refunds.

Workers who have opted out can choose to opt back in again at any point. Employers will also have a duty to automatically enrol Eligible Workers back into the scheme every three years.

What qualifies as a qualifying pension scheme?

Pension schemes chosen for the purpose of auto-enrolment must fulfil certain qualifying criteria, which differ according to the type of scheme chosen. Detailed guidance has been published by the Pensions Regulator in order to assist employers in complying with these requirements. An example of a qualifying scheme is NEST (the National Employment Savings Trust), which has been designed to offer simple, low-cost pension services to any employer who should wish to use it.

Employer registration:

When the employer has completed the auto-enrolment of their Eligible Workers, they will then have to register with the Pensions Regulator. This is to ensure that employers have complied with their duties in relation to auto-enrolment. Large employers who do not comply will face penalties of up to £10,000 a day, and criminal penalties may even be imposed on those who “wilfully” evade their duty.

Top tips to successfully prepare for auto-enrolment:

1. Find out what proportion of your staff auto-enrolment will apply to:

• This will require some analysis of your workforce’s age, and salaries.
• Ensure you have a full list of the employees who will be eligible to draw a state pension, so that you can make alternative provisions for them.

2. Find out when you need to begin enrolment: what timescale will apply to your business?

• The Pensions Regulator will write to all employers around 12 months prior to their individual staging date: watch out for your letter!
• Remember that you will need to prepare written notifications to be sent to your staff informing them of the changes, whether they are eligible to be auto-enrolled and their right to opt-out.

3. Find out what your contributions will be:

• Your business may need to undertake financial planning to make allowances in future budgets for the extra expense that the new pension contributions will incur.
• Remember that your contributions will be “phased in”; be aware of how much you will have to contribute in each of the four years over which auto-enrolment is introduced.

4. Investigate pension schemes: does your current scheme meet the qualifying criteria?

• If you do not currently offer a pension scheme to your employees, your first step must be to look into registering with a qualifying scheme, such as NEST.
• If you have a pension scheme, examine it thoroughly to ensure it meets the criteria.
• Seek advice as to your compliance: the complexity of pension schemes should not be underestimated!