What is Pensions Automatic Enrolment?
Pensions Automatic Enrolment has been introduced by the government as a way of addressing the problem of the large number of people in the UK who have made no pension provision.
Automatic Enrolment will, as the name suggests, automatically enrol employees who either haven’t bothered with or haven’t currently got the option of enrolling onto an employer’s pension scheme. For employers it brings with it the burden of:
- Increased costs
- More administrative obligations
- Deadlines to meet
- The threat of penalties for non-compliance
During 2014/15 there are 30,000 employers due to fall under the auto enrolment regulations and this rises to 153,000 in 2015/16 and 617,000 in 2016/17. Providers and advisors will come under increasing pressure to cope with the demand and so your sanity and survival during this period may depend on you taking early action.
Pensions Automatic Enrolment will affect most business by April 2017, with many being affected much sooner. It will bring increased burdens so early preparation is essential. This Pensions Auto Enrolment Survival Guide is designed you a head start if you find yourself needing to get up to speed.
When will it affect my business or organisation?
You need to understand what the Staging Date of your business or organisation will be, which will dictate when Pensions Automatic Enrolment will start and then be preparing to meet your obligations at least 6-12 months prior to that date.
Larger and mid-sized businesses are already staged but the timescales for other businesses are:
- Smaller employers (30-49) – 1st Aug 2015-1st Oct 2015
- Remaining employers (29 or less employees) – 1st Jan 2016-1st Apr 2017
Some very small businesses are also being included throughout those periods.
To see what the Staging Date of your business or organisation will be you should use the staging date calculator from The Pensions Regulator.
Auto Enrolment can voluntarily be started earlier than the Staging Date or postponement can be used to delay things for up to 3 months from the Staging Date. However, postponement doesn’t delay your obligations and you still need to have everything in place by the appointed date.
What pension arrangements do I need to have in place?
The government have provided the NEST pension scheme as the default option to use. However, you have an obligation to make the most appropriate arrangements for your staff and ideally this should be done in conjunction with a review from a pension’s specialist.
Although large pension providers such as Aviva are only tending to provide schemes for large companies, there are specialist providers that are taking on all-comers at the small business level. An example of this is Smart Pension, which is a qualifying scheme.
You will need to carry out a Worker Assessment and Earnings Assessment before your Staging Date so that you understand which of your employees are included in the arrangements and which are not.
A properly established workplace pension scheme can be mutually beneficial for both you the employer and your employees. It is an opportunity to use pension provision as part of a strong benefits package for your employees and prospective employees. This should lead to loyalty and longevity of staff.
To make the implementation and operation of your chosen pension scheme a straightforward exercise you will need an administration solution that is designed to integrate with your payroll processes.
What do I need to be telling my staff?
Your employees need to be kept informed of the changes that will be taking place and be given the option to opt out of the arrangements.
The Pensions Regulator provides guidance on what communication needs to be given to staff in order to advise them of the changes and of their options. That guidance can be viewed at http://www.thepensionsregulator.gov.uk/ employers/writing-to-staff-about-automatic-enrolment
Once you reach your Staging Date, have the necessary pension arrangements in place and you have staff to automatically enrol, you must send their details to your pension provider to ensure active membership. You must then write to those enrolled staff to tell them they’ve been automatically enrolled and that they have a right to opt out of the arrangements.
You will also need to do this every time a staff member becomes eligible for automatic enrolment for the first time, or with any new starters who are eligible to be enrolled.
What pension contributions will have to be paid?
Pensions Automatic Enrolment brings with it minimum contribution levels for both the employer contributions and employee/employer total contributions unless employees choose to opt out. As an employer you need to be aware of the additional costs that may arise. These can be seen in the table of percentage contribution rates below:
| Minimum Contribution Levels | Employer | Total |
|---|---|---|
| Staging date to 30/9/2017 | 1% | 2% |
| 1/10/2017 to 30/9/2018 | 2% | 5% |
| 1/10/2018 onwards | 3% | 8% |
Although the administrative aspects of Pensions Automatic Enrolment are burdensome, employers should not lose sight of the fact that from Staging Date they will have to contribute at least 1% of enrolled employees’ gross earnings into a pension scheme for them.
Can ‘salary sacrifice’ arrangements be used to lessen the costs?
Auto enrolment pension contributions can be made as straight deductions from employees pay. On the other hand by using a relatively simple Salary Sacrifice arrangement those costs can be reduced by effectively reducing tax and National Insurance on adjusted pay.
Salary Sacrifice is a contractual agreement between the employee and the employer by which the employee agrees to forego salary in return for pension contributions by the employer (the amount sacrificed is paid into a pension scheme by the employer in respect of the employee). The key point is that the cost benefits are gained by a reduction in salary written into the contract of employment.
When communicating the option of salary sacrifice to an employee, the employer needs to deal with this separately from the automatic enrolment information to avoid giving the impression that enrolment will only take place if the employee agrees to salary sacrifice.
How can I deal with the Auto Enrolment administration?
Pensions Automatic Enrolment administration is tightly linked to payroll processing and so a solution that combines the two will most likely be the most efficient for your business or organisation. Systems that split the payroll and auto enrolment functions are likely to lead to greater cost, greater administrative time, or both.
Typically the combined payroll and administration process will comprise:
- Eligible employees are automatically enrolled into the pension scheme
- ‘Opt-ins’ and ‘opt-outs’ are managed
- Letters are sent to employees explaining the arrangements
- An audit trail of employee communications is maintained
- Employee and employer pension contributions are deducted from enrolled employees based on contribution rates and pay levels
- Payroll records are maintained for each qualifying pension scheme and employee
- Reports of contributions and scheme opt-ins and opt-outs are sent to the pension scheme providers
