What Pension Auto Enrolment means for your business and employees

David Parks of PQR Financial Planning explains pension auto enrolment and how business owners can best prepare for it.

You may have seen the ‘I’m In’ adverts for pension auto enrolment featuring the likes of Theo Paphitis. Many businesses need to be very clear about what exaclty they must do.

Under the auto enrolment scheme which was introduced in 2012 employers have legal duties to automatically enrol certain members of staff into a pension scheme and make contributions towards it. 

Why was auto enrolment introduced?

The changes were introduced to support an ‘ageing population’ (the proportion of the total population which is over retirement age is increasing whilst the proportion of working age remains static).  This affects most developed economies and one of the remedies is to ensure that individuals have some independent means of financial support in older age.

What do you have to do?

• Identify those workers in your organisation who are ‘eligible jobholders’

• Automatically enrol them into a qualifying workplace pension scheme

• Communicate with all workers and provide information appropriate to their situation

• Pay contributions of a total of 8% of a band of earnings of which 3% must come from the employer (this is the full rate applicable from October 2018 – a lower rate applies before this)

• You must repeat this process each ‘pay reference period’ and ensure that all eligible jobholders are automatically enrolled at the first opportunity, that the correct contributions are collected and paid for each employee

• You must register with the Pensions Regulator at staging (& at regular intervals thereafter) providing confirmation of the actions taken

• You must ensure that you keep accurate records of everything you do each pay reference period so that the Pensions Regulator inspectors may see that you have complied with the legislation
  
  

Can an eligible jobholder opt out?

Yes, but an eligible jobholder must be automatically enrolled before they can choose to opt out of the pension scheme.

Automatic enrolment is achieved when the employer has given information about the eligible jobholder to the pension scheme, and the eligible jobholder has received the enrolment information from their employer and has become an active member of the pension scheme.

The employer cannot provide the form to opt out - it must come from your pension company or adviser.  Employees will have one month to opt out after receiving notification they have been auto-enrolled and may receive a full refund of their contributions.  They must however, be auto-enrolled once again in 3 years-time (from the staging date) where they may or may not choose to repeat the opting out process.

As a small business, how does this impact on you?

This affects any employer with one or more employees. It is essential to understand who is caught by this legislation as the categories of ‘worker’ are very wide.

In order to discern the impact on your business, you need to identify which employees will have to be auto-enrolled (eligible jobholders) and those who don’t need to be (entitled workers).  There is a third category (non-eligible jobholders) who may opt-in.  By assessing your workforce it is possible to appreciate the likely cost and to build this into budgets.

How do you find out your staging date?

The following is a guide to staging dates, but to find your exact date enter your HMRC payroll reference number into the following page on the Pensions Regulator website.

You can’t delay your staging date but you can elect to bring it forward.

What next?

We recommend appointing a project team in your organisation and give a senior individual the responsibility of getting the tasks completed on time.  Without this you will not reach your staging date in a state of readiness to comply.  The areas affected by the changes are finance, payroll and HR.  A useful reference guide to follow would be the following steps:

• Find out your staging date
• Understand the employer responsibilities under the legislation
• If you have an existing pension scheme – is it capable (or desirable) to use this for auto-enrolment?  (There are many new schemes available with ultra-low charges and specially designed ‘default’ investment to suit the new environment)
• If you are using your existing pension scheme, it will almost certainly require changes.  Allow adequate time for the ‘consultation period’ to members 
• Communicate with your employees – tell them what is going on
• Allow plenty of time – resources are stretched very thin at the moment and this will get worse.  In May 2014 there will be 10,000 employers reaching their staging date.  This increases to 96,000 in February 2017.  The available manpower at pension companies, advisory firms and payroll providers will be overwhelmed.  Response times will be down as a result
• List all the tasks that must be completed before the staging date and ensure one of your project team is responsible for each
• Involve all those affected (e.g. payroll provider) from an early stage. Remember that all their customers will be impacted and their workload will have been affected dramatically

Do you have to contribute the full 3% straight away?

No, in order that the impact is moderated for both employers and employees, the minimum statutory requirement will reduce during the initial period and increase up to the 3% by 2018.   

Can you avoid the scheme?

Strict regulations prevent employers from using prohibited recruitment policies (favouring candidates who may not join the pension scheme) or using incentives (cash) as an alternative to pension membership are in place.  These practices are specifically banned and carry heavy fines.

Below is a summary of your duties: 

The potential penalties for those employers who do not comply with the legislation are:

David is the Employee Benefit Consultant at PQR Financial Planning, an independent financial planning firm with Chartered status.

The content of this post is up to date and relevant as at 19/12/2013.

While every care has been made in preparing these articles to ensure their accuracy, they cannot be considered to be exhaustive and are no substitute for detailed examination of the relevant statutes, cases and other material when advising clients on particular matters. The opinions expressed herein represent the view of the authors at the time of preparation and should not be interpreted as advice. No responsibility can be accepted either by PQR Financial Planning or any of the authors and their representatives for any loss occasioned to any person acting or refraining to act in reliance on anything contained in these articles. No part of any of the above articles may be reproduced in any form without the prior written permission of the Author.