David Harrowven looks at the most important aspects of the guidance surrounding the new workplace pension schemes
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Previously, there was no requirement for employers to provide a pension scheme for their employees, or to make pension contributions on their behalf. But between 2012 and 2018 this is all changing, and even employers with just one or two employees will find themselves subject to the new 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 new workplace pension 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 some 200 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 2013-14.
Each employer will be allocated a staging date from when they will be required to comply with the new pension regulations, with dates being based on the number of employees in the employer's PAYE scheme as at 1 April 2012. Staging dates are as follows:
- More than 50 employees - between October 2012 and April 2015.
- 30 to 49 employees - between June 2015 and October 2015.
- Less than 30 employees - between November 2015 and April 2017.
- New employers commencing after 1 April 2012 - between May 2017 and February 2018.
Staging dates can be checked at www.tpr.gov.uk/staging.
Some employers might want to bring their staging date forward so that it is aligned with, for example, their financial year. There is reasonable scope for doing this.
An employer with one or more workers has obligations under the workplace pension regulations. The term 'worker' covers more than just employees as 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 since 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 regulations 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 for each category.
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 the income tax personal allowance of £9,440. 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 £5,668 and 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 that earn below the lower earnings level.
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 therefore also includes commission, bonuses, overtime, statutory sick pay and statutory maternity 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 one-month window in 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 enrol very short time employees, such as seasonal staff employed over Christmas, and allows employers to align the automatic enrolment process 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, since eligible jobholders must 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 will be refunded, but normally contributions remain in the jobholder's pension pot.
Employers that previously did not have pension provision for their employees will now have 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 either be 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 since their business would be unprofitable for the pensions market. NEST must accept any employer that applies. The 2013-14 annual limit for pension contributions into NEST is £4,500, with this limit being imposed in the interests of NEST remaining focussed on its target market.
Unless a defined benefit occupational pension scheme is provided, the minimum total pension scheme contributions must be at least 8 percent of a jobholder's earnings, of which the employer's contributions must be at least 3 percent. Contributions are only payable on earnings between the NIC lower and upper earnings limits of £5,668 and £41,450.
The upper threshold means that pension costs are limited for employers with high earning employees. Employee pension contributions qualify for income tax relief, so for an employee paying tax at the basic rate the 8 percent of pension scheme contributions will typically be made up as follows:
Employer 3 percent
Employee 4 percent
Tax relief 1 percent (5 percent at 20 percent)
To ease the costs for both employers and employees, the contribution limits are being phased in, with the minimum total contributions initially just 2 percent (with employer contributions of at least 1 percent). Full contributions will not be payable until 1 October 2018.
There is no requirement to automatically enrol 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 lower earnings level.
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 - simply make the arrangements on their behalf. Of course the employer is 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 want to comply with the workforce pension regulations. It might be, for example, that the directors 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 exemption 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.
If profits are withdrawn mainly by way of dividends, then it might be possible to ensure that there are no eligible jobholders by keeping earnings below the automatic enrolment limit of £9,440. If this is not feasible then it is of course possible for the directors to opt-out, but it is necessary for the company to follow the automatic enrolment process.
Employers will receive a letter from The Pensions Regulator ahead of their staging date. However, all employer's are advised to immediately establish their staging date, since the workplace pension regulations are going to have a twofold cost - the cost of employer contributions and also the compliance costs.
Even though a staging date might be several years 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. Employers should begin budgeting for the additional costs that will be involved, and give some thought towards their choice of automatic enrolment scheme