David Harrowven explains the complex legislation surrounding automatic enrolment
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Until 2012, there was no requirement for employers to provide a pension scheme for their employees or to make pension contributions on their behalf. But this is changing, and even employers with just one or two employees will find themselves subject to the workplace pension scheme requirements which operate on the basis of automatic enrolment. There are an estimated 800,000 employers with fewer than five employees, and most have no experience of dealing with pensions. The automatic enrolment requirements therefore raise a whole new set of issues for many employers.
This is a complex area of legislation, and the detailed guidance notes issued by The Pensions Regulator run to more than 500 pages. It is therefore only possible to provide a summary of the most important aspects, with the focus on smaller employers who do not currently provide a pension scheme for their employees. The figures used are those for 2015-16.
Each employer is allocated a staging date from when they are required to comply with the automatic enrolment requirements, with dates being based on the number of employees in the employer’s PAYE scheme as at 1 April 2012. Employers with more than 50 employees have already automatically enrolled their workers, and employers with fewer than 50 employees will be required to do so by 1 April 2017 at the latest. However, any new employers commencing after 1 April 2012 will have a staging date between 1 May 2017 and 1 February 2018.
Staging dates can be checked at The Pensions Regulator website.
An employer might want to bring their staging date forward so that it is aligned with, for example, their financial year. There is reasonable scope to do this.
An employer with one or more workers has automatic enrolment obligations. The term ‘worker’ covers more than just employees because it includes people who contract to perform work or services personally – where they cannot send a substitute or sub-contract the work. People undertaking work on a self-employed basis are not included as workers, but the guidance points out that employers cannot rely solely on a person’s tax status because a person treated as self-employed for tax purposes will nevertheless be treated as a worker under the workplace pension regulations if they are working under a personal services contract. The definition may also include agency workers. In order to include all workers of any nationality working in the UK (and also those that spend some time working overseas), the requirements apply to workers working or ordinarily working in the UK.
Having established the number of workers, workers are then classified into three different categories. The employer’s duties are different in each case.
Eligible jobholders – These workers are eligible for automatic enrolment, and are those workers aged between 22 and the state pension age who earn more than £833 per month (£10,000 annually). The reason for setting the minimum automatic enrolment age at 22 is because of the significant job-churn amongst those under 22, especially students.
Non-eligible jobholders – These workers are not eligible for automatic enrolment, but can choose to opt in. This category effectively includes all workers aged between 16 and 75 who earn more than the NIC lower earnings threshold of £486 per month (£5,824 annually) but who are not eligible jobholders.
Entitled workers – These workers are entitled to join a pension scheme, and are those workers aged between 16 and 75 who earn below the lower earnings threshold.
Each employer with one or more worker has to register with The Pensions Regulator in order to show how they have complied with their duties. Registration is normally done online.
In order to include as many people as possible, and also to maximise pension saving, the definition of earnings is based on total pay. As well as salary and wages, it also includes commission, bonuses, overtime and statutory sick, maternity, shared parental and adoption pay.
Automatic enrolment and opting out
An employer has to automatically enrol eligible jobholders into a pension scheme without the worker having to take any action. Therefore, the employer is responsible for supplying the pension scheme with all relevant personal information about the worker. The employer must inform workers that they have been enrolled, what this means for them, and their right to opt out.
Workers have to be enrolled from their automatic enrolment date. This is the first date the worker meets all the criteria to be an eligible jobholder – for example, the employer’s staging date, the date an employee joins or an employee’s 22nd birthday. The employer then has a six-week window during which automatic enrolment must be completed.
Employers are allowed to impose a waiting period (called postponement) of up to three months before having to apply the automatic enrolment procedures. This waiting period removes the duty to enroll very short time employees, such as seasonal staff employed over Christmas, and allows employers to align automatic enrolment with other processes such as payroll. However, jobholders are still able to opt-in during the waiting period in order to speed up their pension saving.
Although it is compulsory for the employer to automatically enrol eligible jobholders, it is not compulsory for the jobholder to remain a member of the pension scheme. Jobholders have a one-month window in which they can opt out of membership by giving an opt-out notice to the employer. The worker is then treated as if they had never been a member of the pension scheme, and any pension contributions already made by the worker are refunded. In order to prevent jobholders feeling pressurised to opt-out, opt-out notices are generally only available from the pension scheme provider – not from the employer.
Even after a jobholder has opted out, an employer still has responsibilities towards that jobholder because eligible jobholders must normally be automatically re-enrolled every three years (there is some flexibility over the exact timing). The reason for this three-yearly ‘review’ is to ensure that jobholders whose circumstances change do not remain outside of the pensions net as a result of inertia.
It is not possible to opt-out after the opt-out period has ended, but a jobholder can choose to cease active scheme membership at any time. In some circumstances pension contributions are refunded, but normally contributions will remain in the jobholder’s pension pot.
Employers that currently do not have pension provision for their employees will need to have an automatic enrolment scheme in place into which eligible jobholders can be enrolled. There are essentially three alternatives:
- Provide an occupational pension scheme - which can be either defined contribution or defined benefit.
- Use a personal pension scheme.
- Use the National Employment Savings Trust (NEST). This is a low cost scheme that has been established by the Government to ensure that all employers have access to a pension provider. Many smaller employers and lower earners would otherwise have difficulty finding a pension provider because their business would be unprofitable for the pensions market. NEST must accept any employer that applies. The 2015-16 annual limit for pension contributions into NEST is £4,700, with this limit being imposed in the interests of NEST remaining focussed on its target market. However, the limit is to be removed from April 2017.
Unless a defined benefit occupational pension scheme is used, the minimum total pension scheme contributions must be at least 8% of a jobholder’s earnings, of which the employer’s contributions must be at least 3%. Contributions are only payable on earnings between the NIC lower and upper earnings limits of £5,824 and £42,385. The upper threshold means that pension costs are restricted for employers that have high earning employees. Employee pension contributions qualify for income tax relief, so, for an employee paying tax at the basic rate, the 8% of pension scheme contributions will typically be made up as follows:
- Employer 3%
- Employee 4%
- Tax relief 1% (5% at 20%)
To ease the costs for both employers and employees, the contribution limits are being phased in with the minimum total contributions just 2% (with employer contributions of at least 1%) until 30 September 2017. Full contributions will be payable from 1 October 2018 onwards.
There is no requirement to automatically enroll non-eligible jobholders, but they have the right to opt in to the employer’s automatic enrolment pension scheme. This is done by the jobholder giving an opt-in notice to the employer, and there is no deadline for doing this. The employer must then effectively treat the non-eligible jobholder exactly the same as an eligible jobholder, and is required to make the minimum required pension scheme contributions on the jobholder’s behalf – the jobholder will of course have earnings in excess of the NIC lower earnings limit.
An entitled worker has the right to require their employer to arrange membership of a pension scheme for them. This is done by the worker giving a joining notice to the employer, and again there is no deadline for doing this. The scheme chosen by the employer does not have to be the employer’s automatic enrolment scheme, or even a qualifying scheme. The employer is not required to make any contributions on behalf of the worker – they simply make the arrangements on their behalf. The employer is of course subsequently responsible for deducting the worker’s contributions from their remuneration and paying these across to the pension scheme.
For various reasons, the directors of owner-managed companies with no other employees may not wish to automatically enrol. They might, for example, already have alternative retirement investments in place such as ISA savings or rental properties.
There is no need to comply with the regulations where a sole director is the only person in a company. However, there is no such exception for, say, a company with a husband and wife as directors unless they are simply non-executive directors not working under a contract of service. It might be possible to keep earnings below the automatic enrolment limit by withdrawing profits as dividends, and of course directors could simply opt out. However, certain automatic enrolment requirements will still need to be followed.
Employers will receive a letter from The Pensions Regulator ahead of their staging date. However, all employers are advised to immediately establish their staging date because automatic enrolment has a twofold cost – the cost of employer contributions and the cost of compliance. Even though a staging date might be some time away, these costs will impact on an employer’s current employment decisions. The biggest impact will be for owner-managed companies taking on their first employee, and employers should be budgeting for the additional costs that will be involved. A decision regarding the pension scheme to be used should be made approximately six months prior to the staging date.