Auto-Enrolment Is Coming
AS MANY people are aware, most individuals are living longer – which can only be good news, right? Well, it could be, but it will be a lot more pleasant if you have a substantial pension pot that will be able to see you through your extended lifespan!
The Government has been mulling over the problem of a substantial proportion of the population having not made any pension provision whatsoever (or having made minimal pension provision) for when the time comes for them to leave their much-loved employer/current position and turn their attention to their favourite hobbies.
The Government is trying to minimise its outgoings in the future, and has come up with the Automatic Enrolment Regulations in order to encourage employees to pay into a pension pot (an Automatic Enrolment Scheme).
To provide further encouragement to employees, employers are also required to pay a minimum percentage (eventually increasing to 3%) into their employees’ pension pots. These Regulations commence on 1st October 2012 for the largest employers and will be phased in over the next few years for smaller employers. The starting date for each employer is based on the number of their employees as at 5th April 2012 and their PAYE reference number.
Your starting date for the new pension regulations is known as your ‘staging date’ and can be obtained by using the timeline tool available at:
The contributions required under the Regulations will be ‘phased in’ following your staging date, but will eventually rise to a minimum of 8% of qualifying earnings, of which at least 3% must be contributed by the employer. Up to 4% may need to be contributed by the employee, with the remaining 1% contributed by the Government (i.e. 20/80ths of the employee’s contribution – due to the Income Tax relief given at source).
“But I already have a pension scheme for my employees, so these Regulations will not affect me”, I hear you say. The bad news is that you will be affected, particularly if your existing scheme is not a ‘qualifying scheme’ under these Regulations.
So, as an employer, what can be done to smooth the way?
- Find out if any existing pension scheme is a qualifying scheme under these Regulations. (If it is, you will still need to advise your employees of this fact within two months of your staging date.)
- Find out your staging date. You will then know what time-scale you are dealing with. For employers with less than 30 employees, the earliest commencement date will be 1st June 2015, depending on your PAYE reference number.
- Where your staging date is October 2013 or later, it should be possible to request a different commencement date for your scheme, so that it can be aligned with your scheme’s accounting year end.
- Choose a suitable qualifying pension scheme (or the NEST scheme), or amend an existing non-qualifying scheme if appropriate.
- Register your pension scheme with the Pension Regulator, if required.
- Review all of your employees to check whether or not they are eligible to be included in the scheme. Ensure that you identify employees who ‘ordinarily work in the UK’.
- Enrol all of your eligible employees into the pension scheme.
- Advise, in writing, all of your eligible employees of your pension scheme and that they have been automatically enrolled. They should also be advised that they have the right to opt out of the scheme, should they wish.
- Set up a suitable payment mechanism for paying the pension contributions (employee and employer) into the pension scheme.
- Review your recruitment methods to ensure that the information cannot be construed to encourage potential employees to opt out of the pension scheme, or to show that, by opting out, they could benefit in any way.
- Check with your payroll software provider to ensure that the automatic enrolment requirements will be included in the software programme. Alternatively, set up a system where you can assess each employee to ensure automatic enrolment at the correct time.
Who is an eligible employee?
As the scheme title suggests, most employees will qualify and must be automatically enrolled into a scheme.
- At present, an ‘eligible worker’ is an employee aged between 22 years and state pension age who ordinarily works in the UK, and who has qualifying earnings over £8,105 per annum. These employees must be automatically enrolled (but have the right to opt out).
- Other employees, who ordinarily work in the UK; who are aged 16 to 74 and have qualifying earnings of at least £5,564 can ‘opt in’ to a scheme as a ‘non-eligible worker’.
- Employees aged 16 to 74 years, who ordinarily work in the UK, and who have qualifying earnings under £5,564 per annum (an ‘entitled worker’) can request to join the pension scheme.
Employers must allow ‘non-eligible workers’ to join the scheme where they opt in and must make the same contributions as are required for an ‘eligible worker’. They must also allow an ‘entitled worker’ to join the scheme if they so request, but are not required to pay any employer’s contributions on their behalf (unless required under the worker’s contract of employment).
The thresholds stipulated in the Regulations (£8,105, etc) are based on current tax bands and allowances and will be amended as appropriate in future years.
What are qualifying earnings?
Qualifying earnings are those earnings currently between £5,564 and £42,475 per year and can be made up of many components. Amongst others, these earnings also include statutory sick pay and statutory maternity pay.
Qualifying earnings should be straightforward to calculate on a yearly basis when the employee is paid the same amount at regular intervals. However, each new employee will need to be assessed for the correct auto enrolment date, as they may not qualify in respect of their first salary payment. E.g. where an employee is monthly paid but starts in the last week of a month, their earnings for that first month may initially be lower than the automatic enrolment level.
Furthermore, where you have employees with varying earnings, calculations may become more difficult. The basic method is as follows:
- The ‘pay reference period’ (e.g. weekly or monthly) should be ascertained for each employee.
- Quantify the qualifying earnings for each employee for that pay reference period.
- Compare these earnings to both a) the lower earnings limit, and b) the automatic enrolment limit for that pay reference period. (The Department for Work and Pensions has already published a schedule showing the lower earnings limit and automatic enrolment limit for different pay reference periods for 2012/13. The 2013/14 limits will be published around November 2012.)
- This comparison will then determine whether the employee is an ‘eligible worker’, a ‘non-eligible worker’, or an ‘entitled worker’ for that pay reference period and you will need to treat them accordingly.
There are strict time limits for notifying both the pension scheme trustees and the eligible employee within the automatic enrolment scheme. The time limit is normally ONE MONTHfrom the automatic enrolment date (e.g. an employee’s 22nd birthday).
Information to be given to the pension scheme trustees includes: Employee’s full name; address; date of birth; sex; National Insurance Number; date on which the employee’s automatic enrolment starts.
Information to be given to the employee includes various statements relating to the scheme. An example of the information required can be found, together with an appropriate template, at:
Employees Wishing to Opt Out
Both eligible and non-eligible employees (where they are in the scheme) can opt out of the automatic enrolment scheme. If an employee wishes to opt out of the scheme, they must hand a valid ‘opt out’ notice to the employer.
Entitled employees cannot ‘opt out’ of a scheme as such, but can simply cease to be an active member of the scheme on request.
Employees with Their Own Personal Pension
In order to be a qualifying scheme under the auto-enrolment Regulations, both the employee’s and employer’s contributions must be paid over by the employer into the pension scheme. Where this condition is met and where the employer pays a minimum of 3% of the qualifying pay as the employer’s contribution, then such a pension plan could be a qualifying plan. On this basis, auto-enrolment would not be required for that employee.
Multiple Pension Plans
Under the auto-enrolment Regulations it will be possible to set up separate qualifying pension schemes for different categories of employees, if desired.
It is possible for an employer to postpone the commencement of auto-enrolment for up to three months. The three months would apply from the employer’s staging date or, for new employees who are eligible to be enrolled, the date of commencement of the employment.
Housekeepers, Nannies and Gardeners
An important point to note is that individuals who employ a housekeeper, nanny, gardener, etc, will also have to apply the auto-enrolment legislation from their appointed staging date. This should not affect those using an agency where the agency is responsible for paying the employee.
Enhanced Protection and Fixed Protection
Where an individual holds a Protection Certificate from HMRC for their pension fund (normally because the pension fund’s value is between the current maximum lifetime limit of £1.5 million and the previous lifetime limit of £1.8 million), then they should take professional advice over their situation – and be quick about it!
Where such protection has been afforded, then no further benefits or pension provisions can be made into any pension scheme. Therefore, where the individual is auto-enrolled by an employer (either at the employer’s staging date or on commencement of a new employment), then they should opt-out of auto-enrolment, otherwise they lose the protection over their existing pension fund. This could result in a charge of up to £165,000 being applied to the pension fund (£300,000 x 55%). This could be an extremely nasty shock to anyone who is unaware of this point.
In order to opt-out of an auto-enrolment scheme quickly enough to ensure that no contributions are ever deemed to have been made, an employee must notify the employer within one month of their auto-enrolment date!
As from 6th April 2012, the Government will normally allow individuals who have very small individual personal pension funds to commute a maximum of two such funds during their lifetime. A small personal pension fund is one which has a value of £2,000 or less.
Small Pension Pots