Pensions Auto Enrolment
We’re all in, but in what?
You may have seen the adverts in magazines, on advertising hoardings or on television about changes to workplace pensions. Theo Paphitis and others proudly declare that ‘we are all in’, but what does this mean for your business, and what will it cost you?
Part 1: Answers to some key questions
What is auto-enrolment in a nutshell?
The Government wants all of us to save into a pension scheme for our retirement. To achieve this, it decided to make all employers put their workers into a pension scheme and pay contributions to it. This is ‘auto-enrolment’, and it has added a whole new set of jargon to pensions, an area which is already little understood by most people.
If your business has 60 workers or fewer, auto-enrolment will apply to you at some point before 2018.
Does auto-enrolment apply to your type of business?
Pensions auto-enrolment will eventually apply to every business in the country, even those with just one worker. The obligation is being phased in between 2012 and 2018, and the date when it applies to your business is determined by the number of people you had in your payroll on 1 April 2012.
What are your key obligations?
First of all, your business must have a pension scheme which meets certain conditions. You may already have a pension scheme which you can use for auto-enrolment, but many employers do not. There are advisers who can help you choose a scheme, although this advice will have a cost.
Secondly, from the date when auto-enrolment applies to your business you will need to put your workers into the pension scheme automatically if they are over a certain age and salary. They can opt out of the pension scheme if they wish.
Thirdly, you and your workers must pay contributions into the pension scheme.
Why do we refer to ‘workers’ and not ‘employees’?
Auto-enrolment also applies to individuals who are not employees, but in reality work for you as if they were. For example, individuals sometimes work under a ‘consultancy’ contract, or are described as ‘contractors’. If they only work for you and are not allowed to work for anyone else at the same time, auto-enrolment may apply to them.
Agency workers also have to be auto-enrolled into a pension scheme, but in most cases it is the agency which has to auto-enrol the worker and pay contributions. Of course, the agency may pass the cost on to you as the client.
Genuine contractors with their own business who you have paid to do a particular job or role do not have to be auto-enrolled into a pension scheme.
What if your workers will not be interested?
It does not matter. All employers must have a pension scheme and their workers must be put into it. You must not encourage workers to opt-out – you may be fined if you do. Workers who do not opt out of the pension scheme must pay contributions and you must pay contributions as their employer.
Can you ignore temporary/casual/short-term workers?
No. The starting point is that auto-enrolment applies from day one of every worker’s employment, and there is no minimum length of contract. There is an option to postpone auto-enrolment for a particular worker for up to three months, though, which might save you from having to put all your short-term workers into the pension scheme.
Which workers have to be auto-enrolled?
Workers have to be auto-enrolled if they:
- are aged between 22 and their state pension age; and
- earn £192 per week or more (£481 per month, £10,000 per year).
[The figures used here increase every year on 6 April].
The test applies based on the worker’s usual pay period, e.g. weekly paid workers have to be tested each week, salaried workers will be tested on their annual salary.
How much will it cost me?
The first cost is the contributions which businesses have to pay to the pension scheme, which we have summarised below.
The other costs will depend on how you put auto-enrolment into practice.
For example, putting a pension scheme in place does not have to cost the business anything. The costs are usually taken from the workers’ pension pots. Finding a scheme could lead to a cost, though, if you pay an adviser to help you.
Some pension schemes offer to take some or all of the work involved in auto-enrolment off your hands, and there may be a cost to the business for this, either up front or ongoing.
Payroll is important for making auto-enrolment work. There may be additional costs with your payroll provider or in updating your payroll software to allow for auto-enrolment.
What contributions do workers and the business have to pay?
The basic rule is that contributions are only paid on a band of the worker’s pay. That band is currently £111 per week to £805 per week (or £5,772 per year to £41,865 per year).
The worker must currently contribute 1% of pay in that band of earnings.
The business/employer must also currently contribute 1% of pay in that band of earnings.
From 1 October 2017 the contributions increase. The worker must contribute 3% and the business contributes 2%.
From 1 October 2018 the contributions increase again to 5% from the worker and 3% from the business.
Is it a legal issue or a practical one?
Definitely a practical one. The law is the basis for the obligation, but the main thing to get right is the payroll operation.
Payroll will be the key to assessing who needs to be auto-enrolled, and then for making sure the worker and the business pay the correct contributions.
If you outsource your payroll, your provider is likely to have the software and systems in place to help you with auto-enrolment, although there may be an extra cost for this. If you run payroll yourself, your software may need updating or replacing for auto-enrolment, again at a cost.
Part 2: The Key Steps
Step 1: Know when you have to comply.
This is called your ‘staging date’, which you can find out by entering your PAYE reference number at:
Ideally you should leave six months to plan for auto-enrolment, although there are pension schemes and providers in the marker who can put something in place in a shorter timescale.
Step 2: Check what pension (if any) and payroll arrangements you already have.
If you have an existing pension scheme, you need to check if it can deal with the new obligations and if it is open to new business (some insurance companies are no longer taking on business – even from existing customers). If you do not have an existing pension scheme you will need to put one in place.
Nest (National Employment Savings Trust) is a default option which can help if you cannot find a pension scheme provider who will take on your business.
You may need to change your payroll software or your contract with a payroll provider to allow for auto-enrolment.
Step 3: Check which workers are affected.
Auto-enrolment only applies to workers between age 22 and state pension age who are earning at least £192 per week or more (£481 per month, £10,000 per year).
You can check how your workers need to be treated in the Employer Guide issued by the Pensions Regulator:
Step 4: Work out how much you will be contributing.
Although we set out the minimum 1% and 1% contributions earlier, you can pay more if you wish.
Step 5: Communicate with your workforce.
There are rather strict obligations about what you have to tell your workers about auto-enrolment.
The Pensions Regulator has prepared templates to help you comply:
Some pension schemes offer a service, at an extra cost, where they will handle the communications for you. There are also advisers who can help.
Step 6: Complete the registration requirements.
This is important. Within four months of the date when auto-enrolment applies to you (your ‘staging date’) you must tell the Pensions Regulator that you have complied with auto-enrolment:
Step 7: Ongoing tasks.
This is not the end of the story.
After the initial auto-enrolment, the business has ongoing obligations. When new employees join, you must auto-enrol them if they meet the age and income thresholds. You must also monitor current employees, and if they go over the age and income thresholds you must auto-enrol them at that point.
Finally, if anyone opts out, three years later you must auto-enrol them back into the pension scheme!
Again, some pension schemes and payroll providers will carry out this ongoing monitoring and compliance for you, although there may be an additional fee.
Auto-enrolment is a cost for your business. There is no getting away from that. There is also an administrative burden involved in putting it into practice, although there are people out there to help with this.
Ultimately, the worst element should be the date when it first applies to you. After that, it will become part of your usual pay and benefits, and in the future auto-enrolment is likely to become unremarkable.
Written by Craig Looker and Ruth Bamforth of Gordons LLP’s Pensions Team.
Contact them on [email protected] and [email protected]
This article is for guidance only. The law and practice referred to has been summarised and should not be treated as or relied upon as legal advice.