Q&A Recent developments with pensions auto-enrolment

June 15, 2012

Dear Auntie

I am the CEO of a medium-sized company, “Up-and-Coming”, which has around 200 employees. I have been reading a lot in the papers recently about the pensions auto-enrolment scheme, but am unsure of how it will impact us, when the scheme will come into force or what duties my company will face. I’m most concerned about the financial costs to the company, as currently only around 40% of my staff actually take advantage of the pension scheme we offer; if that then suddenly doubles that will be a considerable increase!  Also, a lot of our secretaries are agency workers: will the scheme also apply to them?

A very confused

Mr Bigshot

 

Dear Mr Bigshot

You are right to query your duties under Auto-Enrolment now, as we believe this is likely to have a significant impact on companies in the very near future. It is definitely advisable to start planning ahead for your future pensions liabilities over the next few years.

As you will be aware, Auto-Enrolment will require all employers to enrol qualifying members of staff into a qualifying pension scheme. This will mean that all eligible workers will begin to contribute to their pension, as will their employer. There is an option for workers to opt-out of the scheme, but they must be automatically re-enrolled by their employer every 3 years.

When does it come into force?

The scheme is being rolled out in stages over the next 5 years, depending on the size of the employer. An employer’s exact “staging date” will depend on the number of individuals in its PAYE scheme at 1 April 2012.

Large employers of over 250 employees will be the first to have to comply. For the largest, (120,000 or more employees) the scheme will come into force on 1 October 2012. However, in the case of medium-sized employers such as Up-and-Coming, their participation will be phased in over 12 months from 1 April 2014. Finally, small employers of less than 50 individuals will join the scheme between June 2015 and April 2017. 

Should you wish to join the Auto-Enrolment scheme early, it is also possible to bring your staging date forward, perhaps to a time of year which would be more convenient for your company financially.

To look up the exact date that your company will have to comply or for details of your options for early enrolment, visit the Pension Regulator’s website at http://www.thepensionsregulator.gov.uk/staging

Who will it affect?

The duty to auto-enrol will affect all workers who:

-          Are aged between 22 and state-pension age (currently 65);

-          Are ordinarily working in Great Britain; and

-          Are earning in excess of the income tax threshold (currently £8,105).

However, it is likely that the auto-enrolment duty will cover a wide range of workers who may not be automatically thought of as employees.

It is also possible that agency workers will be eligible for auto-enrolment by employers.  This will depend on who is responsible for paying the worker. If that responsibility lies with the employer, it will be their responsibility to auto-enrol. If it is the agency who pays the worker, it is their responsibility.

Recent case law has confirmed that a worker who was not paid via PAYE, and was expressly stated to be a self-employed independent contractor in their contract could still be an employee, if the facts indicated that that was the nature of the relationship in reality.

Employers should therefore analyse their workforce very carefully, particularly in respect of their duties towards casual workers, part-time workers or those who work in a variety of countries. Where there is any question regarding a particular worker, advice should be sought as to eligibility in order to escape the penalties outlined below.  You might also want to review the way your arrangements with agencies work.

What are the penalties for failing to comply?

The Pensions Regulator will have responsibility for enforcing the provisions of auto-enrolment. Letters will be sent out as an initial step to ensure companies are aware of their responsibilities (and have indeed already been sent out to the largest companies that will have to comply first).

There are a number of anti-avoidance safeguards built into the legislation, for example auto-enrolment cannot be contracted out of, and workers cannot be fairly dismissed for a reason relating to auto-enrolment. 

In addition to this, if an employer is found to have breached their duties, the Pensions Regulator will have the power to order penalties against offending companies. For the most serious breaches, these penalties will range from £50 per day until enrolment for employers with one to four workers to £10,000 per day until enrolment for those with 500 or more workers.

Penalties can also be ordered for employers who use prohibited recruitment practices. Such practices include advertising for applicants who would not opt in to the auto-enrolment scheme, asking at the interview stage whether applicants intended to opt-out, or making a job offer conditional on the employee opting out of the scheme. Employers who breach these provisions will be subject to fixed penalties ranging from £1,000 for employers with one to four workers to £5,000 for employers with 250 or more workers.

What action should employers take now?

  1. Thoroughly review your workforce to find out who will be eligible for auto-enrolment, bearing in mind the issues raised above regarding different types of worker.
  2. Visit http://www.thepensionsregulator.gov.uk/staging to ensure you have the correct staging date and can prepare properly for this deadline. The Regulators can provide guidance as to how to comply, and what preparations you need to make.
  3. Look into the logistical requirements of the scheme in terms of amendments to payroll, HR systems and information compliance duties.
  4. Ascertain your future liabilities under auto-enrolment and ensure that they are provided for in your company’s budget for forthcoming years.
  5. Investigate the pension schemes that are eligible under auto-enrolment: is your current scheme the most suitable?

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