From October 2012, new legislation will require employers to automatically enrol their staff in pension schemes.
In 2005, Lord Turner’s Pensions Commission recommended that the Government needed to change the mindset of the millions of employees not saving for a pension. It has taken seven years to turn his solution into a new statutory obligation for UK employers. That delay is testament to the political hot potato that is any sort of compulsion for employees and employers to save for a workplace pension.
Too many people still think that they can rely on the state to provide for them in retirement, but with the full state pension only £107 per week (from April 2012), plus any pension credit and state second pension entitlement, it is simply is not enough to prevent millions of future pensioners ending up poverty stricken. The critics of the reforms proposed by Turner say that although small and medium-sized enterprises (SMEs) will find it difficult to fund the mandatory employer contributions proposed, they will still only deliver tiny pension pots for low earners and that many will simply opt out and continue to rely on the state. On the other hand, it is a simple fact that we are living longer and saving too little to support ourselves for those extended years of retirement.
Since Christmas 2011, the final pieces of the auto-enrolment legislative jigsaw have fallen into place and employers must now accept that the reforms are going ahead, so let us look at what they will mean for UK plc.
1. How do I find out when I have to auto-enrol?
Employers are given a “staging date” when they have to begin auto-enrolling eligible employees, who are not already members, into a qualifying workplace pension. The date is based on their size (fixed by the number of HM Revenue and Customs employee records on file as at 1 April 2012) or the letters in their PAYE scheme reference. The staging dates have been subject to several amendments over the last year but the groupings have now been finalised as follows: specific dates will be published by the Department for Work and Pensions (DWP) in a consultation that is due to be released soon. For most small employers the date is not until 2015 or beyond but it will be before 2017.
2. So do all employees have to be auto-enrolled?
No. There are three different types of employee – or to give them their correct title as per the legislation: eligible jobholders, non-eligible jobholders and entitled workers. Only eligible jobholders have to be auto-enrolled. To qualify, they have to be aged between 22 and state pension age with earnings at or above the PAYE threshold. Those outside these age brackets, or who earn over the national insurance lower earnings limit (LEL) but not enough to pay tax, can voluntarily opt-in to a pension scheme but are not auto-enrolled – they are known as non-eligible jobholders. If they do opt in voluntarily, they must be treated in the same way as auto-enrolees in terms of the type of scheme they join and the contributions made on their behalf.
The final group, entitled workers, can be of any age but with earnings under the LEL. They can ask to join a pension scheme but it does not have to be a qualifying pension scheme and the employer does not have to contribute. The DWP is due to confirm in the next month whether or not it plans to use the 2012/13 PAYE threshold and LEL for this first staging year – £8,105 and £5,564 respectively.
3. Presumably our payroll software will work out who has to be auto-enrolled and do it all for us?
You should have discussed with your payroll-software provider what functionality they will be providing and when. The more sophisticated systems will carry out the eligibility assessment each payroll run, provide sample letters and automated interfaces of data to your chosen pension schemes. For SME employer payroll providers, it may be that only reports are provided that indicate who needs to be auto-enrolled and the employer will have to generate all the documents and set up the relevant deductions.
It is important, though, to understand that auto-enrolment is not just a payroll project. It requires a review of reward structures to embed pension saving as part of the remuneration package and budget for the cost of providing a qualifying pension to the eligible jobholder section of the workforce, plus any other jobholders who may opt in. The tight legislative deadlines will mean that recruitment and payroll processes will all have to be refined in order not to face penalties from the Pensions Regulator.
4. So what are these “tight legislative deadlines”?
An employer has a maximum of one month from the auto-enrolment date to achieve active membership of a qualifying pension scheme for all eligible jobholders. The auto-enrolment date is their 22nd birthday, their start date or the date of the beginning of the pay reference period that their earnings go over the earnings trigger. Within three months of the third anniversary of their staging date, all eligible employees who have opted out must be auto-enrolled again (unless it is a year or less since they last decided to opt out, in which case they are ignored for re-enrolment).
5. What if my staging date coincides with a seasonal peak for our organisation?
You can move staging forward to an earlier date as long as it is one of the fixed staging dates and you have notified the Pensions Regulator to that effect – you cannot move it back. However, all employers can operate a three-month postponement window when an employee first becomes eligible for auto-enrolment and this can be repeated multiple times as long as they aren’t eligible on the day after the end of that three-month period. Postponement can be useful to avoid auto-enrolling casuals who have a spike in earnings or to avoid part-period deductions by always moving the auto-enrolment date to the start of a pay period.
6. I have got lots of PAYE schemes, what is my staging date?
The staging date that applies is the one that applies to your largest PAYE scheme, as long as all the other schemes are within that same employer entity. An organisation with lots of different employers within a group may have different staging dates for each employing entity.
7. How much will this cost me?
That depends on how many eligible employees are not in a qualifying pension scheme with you at the moment. Experts say that you should budget for 2% of qualifying earnings for the initial five-year phase to 2017 for an employer with a 500-plus payroll. That equates to the 1% minimum employer contributions and 1% for administration costs. So let’s unpick that a little more: “qualifying earnings” are, specifically: salary, wages, commission, bonuses, overtime and all statutory payments.
This is a broader definition of pensionable pay than most schemes that only include basic pay, but employer contributions are only required on a band of earnings from the LEL to an upper limit yet to be confirmed; this is expected to be around £39,853.
Minimum employer contributions will then be phased in as laid out in the table below.
Table 1: Money purchase and personal pension schemes
|Minimum contributions (percentages of qualifying earnings on the qualifying earnings band
From 1 October 2018
July 2012 to 30 September 2017
1 October 2017 to 30 September 2018
8. We already have a good pension scheme – does that let us off the hook?
You will need to assess if it is a “good” scheme based on the Government’s criteria and, if not, make changes to the scheme rules to make it qualifying, which will probably involve employee consultation.
It may be that your contribution percentages are higher and from the first pound of earnings but are based on a narrower definition of earnings than that stated by the Government. If that is the case, you can certify that your scheme is different to the Government’s default criteria but still delivers as good or better an outcome than using those default quality criteria.
If anyone is not a member of your current (or amended scheme) then you will still have to auto-enrol them once you reach staging if they are an eligible jobholder and let them opt out; then every three years, all those who have opted out will have to be re-enrolled to try to give them another chance at committing to pension saving.
After seven years of consultation across two Governments, more time has been lost to make good that hole in the nation’s pension saving. The coalition has been under pressure to deal with two competing priorities – reducing the burden on business in a weak economy while tackling the pension savings’ time bomb. This year’s reforms are a compromise as they still give people a chance to opt out of saving if they really cannot commit to it; but if our pension savings’ habits are not changed by auto-enrolment, plan B can only be to make pension saving compulsory, effectively, another tax.
Please contact me on firstname.lastname@example.org or on 07899697172 for help on this or any other employment related item.