By Mark Dyer
It’s now been nearly six years since changes to the Pensions Act have required all Employers, under Auto Enrolment, to provide workers with a Work Place Pension Scheme. Indeed, 2018-19 will be the year that many SME Employers will need to look at their re-enrolment duties.
So, What is Pensions Auto Enrolment?
Automatic Enrolment is best summed up by the Joseph Rowntree sponsored study for the Institute of Government ‘Implementing Automatic Enrolment into Pensions’ where they set out the following:
Automatic Enrolment was designed to encourage a retirement savings culture. Employers could use an existing pension scheme or establish a new one. There were several key components to making this happen.
- First, Employers needed to be made aware of their new obligation and be prepared in time, with a mixture of support but also enforcement utilised where necessary.
- Second, the Government needed to establish a pension provider that could enrol Workers who were previously unprofitable for the pension industry, to make sure there was a pension scheme available for everyone.
- Third, the Government needed to decide how to communicate these changes to Workers.
It decided to do this via a Public Awareness Campaign for Workers to ensure they knew the change was coming, and what it meant for them. Implementation of Automatic Enrolment has been ‘staged’ over time. The largest Employers began staging in 2012, small and medium Employers in 2014, and micro Employers later. Virtually all Employers were staged by 2017. Minimum contribution rates are phased in, beginning at a 1% Employer contribution and a 1% Worker contribution. This rose in 2017 and reaches a 3% Employer contribution and 5% Worker contribution in April 2019. According to the original schedule set out in 2010, all Employers would have enrolled their staff by 2015, but a change made in 2011 shifted staging dates such that small Employers would only stage in 2016 and 2017.
There are Three Principal Institutions involved in Implementation:
- Department for Work & Pensions (DWP), specifically the Enabling Retirement Savings Programme team run from the Private Pensions Directorate;
- National Employer Savings Trust (NEST Corporation), a non-departmental public body (NDPB) running NEST, a low-cost pension scheme;
- The Pensions Regulator (TPR) which is responsible for ensuring Employer compliance.
Their roles are as follows:
DWP developed the legislation and regulation – from the initial policy response, to the Pensions Commission, to the detail of Employer regulations. Currently it plays the role of project manager, maintaining a whole-project view of the ongoing scale-up of automatic enrolment across NEST, TPR, and the service industries supporting Employers. It is also responsible for the marketing campaigns for automatic enrolment that are designed to raise Worker awareness. The Personal Accounts Delivery Authority (PADA) was established in 2007 as a non-departmental public body (NDPB) specifically tasked with designing and building the new pension scheme. This was completed in 2010 when the National Employment Savings Trust (NEST) came into existence and PADA was therefore wound up.
NEST is a pension scheme with a public service obligation to take on any Employer without regard for the profitability of individual members. NEST is run by its corporate trustee, the NEST Corporation, an NDPB which is financed by pension charges, a start-up loan and an annual grant covering its public service functions.
The Pensions Regulator (TPR) is responsible for maximising Employer compliance. It ensures this by communicating with Employers and taking enforcement action where necessary. Employers notify their compliance with automatic enrolment to TPR. The monitoring, compliance and communication strands rely on a set of high-volume transactional systems for recording and monitoring activity, responding to Employers’ queries, and targeting communication to Employers. These high-volume transactional services are outsourced to Capita. The tasks of assessing Workers’ eligibility and level of contributions, contracting pension schemes, enrolling Workers, and deducting contributions, belong to Employers, although many use intermediaries or advisers, for example to select a pension scheme. Employers are also responsible for providing information to Workers. Many Employers outsource payroll, HR and accounting – functions affected by automatic enrolment – to external providers, which means that these industries also needed to prepare for automatic enrolment. Once they have enrolled their staff, all Employers have to report to The Pensions Regulator on the numbers enrolled.
The full report can be viewed here.
What does Pensions Automatic Enrolment Mean for Employers?
Pensions Auto Enrolment is a fundamental change in the way pensions are offered to Workers, previously it was the Employer’s decision on whether or not they offered their staff a pension scheme and under what rules. Pensions Auto enrolment turns this on its head as it is now the Worker’s right to be provided with a pension scheme and for each one to decide whether they elect to remain or leave the scheme.
Automatic Enrolment isn’t simply about providing a pension scheme. While this is important, it’s also about having the ability to assess every Worker and communicate to them when they are automatically enrolled into the pension scheme.
What Does This Mean In Practical Terms?
At the time of writing this article, most established Employers will have gone through their initial enrolment process, known as Staging and will have, or will be nearing the three-year anniversary where, under the legislation, they will need to undertake a further Worker wide re-enrolment process. This will be detailed later. However, there will be Employers who, for a range of reasons, such as being recently established, who will have yet to enrol Workers into a pension scheme.
To set up your Automatic Enrolment duties here are some key tasks you will need to complete
Firstly, you will need to know your Staging Date; the date when you will be required to have your pension scheme in place and be able to enrol your Workers into this scheme. If you do not know your Staging Date, this can be found on letters you will have received from the Pension Regulator or by putting your PAYE reference number into the Pension Regulator website.
Once you know your Staging Date you will then need to prepare for this date. The Regulator advises starting the preparation at least 12 months before staging, however we have found that most Employers only start actively preparing less than three months before. While getting everything in place is still achievable in this timescale, it does require concentrated effort.
Qualifying Workplace Pension Scheme
Once you know your Staging date you will then need to select a Qualifying Workplace Pension Scheme (QWP). If you currently have a pension scheme and wish to continue with it, you will need to check with the provider that it meets the Workplace Pension Scheme rules. If it doesn’t then you will need to either modify the scheme or select a new scheme for Auto Enrolment. More details on the criteria required for a QWP can be found here.
When selecting your scheme, it is advisable to check on any charges, as scheme management charges vary, and also what investment options and returns they provide. Once you have selected your scheme the next step is to ascertain what workers you will assess and enrol.
As you may note, the term ‘Workers’ has been used throughout this article rather than ‘Employees’ or ‘Staff’. The reason for this is because the legislation requires Employers to assess this group, which could include not only your employees but also people that work for you under contract, but not paid through payroll. It is worth also checking Employment Contracts and Contractor Terms of Engagement at this stage as you may have clauses in them that may need amending as a result of Automatic Enrolment.
Once Employers have established whom they will be assessing, they will then need to have the capability to assess these Workers every pay period to ascertain whether they qualify for automatic enrolment. Some payroll systems have this capability so check what functionality it has and whether or not an upgrade in systems is required.
What And Who Do Employers Need To Assess?
The Automatic Enrolment assessment is based on Workers’ age and earnings. Each year the Government publicises these criteria. At the time of writing this, the criteria is as follows:
- That the Worker is over the age of 22 or under State Pension Age;
- Earns over £10,000 a year, however this doesn’t mean if a Worker earns less than £10,000 a year they are excluded, the assessment will look at each pay period so if in any pay period they earn over £833, they will meet the automatic enrolment criteria;
- The Worker usually (‘ordinarily’) works in the UK.
There are some people that will not need to be included in any assessments for example:
- Sole Director/Worker (who is a Director of this company with an employment contract);
- Additional Director (not on an employment contract for example some Non-Executive Directors);
- A Worker who has given notice to leave your employment;
- Anyone who has reached their Life Time Tax Allowance.
What Is The Assessment Process?
Every pay period, i.e. the periods in which an Employer pays salaries – weekly, fortnightly, monthly for example. Employers will need to assess their Workers using the criteria set out above to establish their Worker Status. Workers will fall into one of three assessment groups:
- Entitled Workers (EW)
- Non-Eligible Job Holders (NEJH)
- Eligible Jobholders (EJH).
Entitled Workers and Non-Eligible Job Holders do not get automatically enrolled but have the right to Opt-In, to join without being auto enrolled, at any time. Eligible Job Holders will be automatically enrolled.
Once Employers have established their Workers’ Status the next step is to communicate this to the Worker. The key times for this are on the Staging / Re-enrolment date or when the Worker attains Eligible Job Holder status. This means Employers will need to have either an automatic solution in place, which will ensure they meet the strict communication deadlines, or have a manual process to produce letters. These days most preparatory pay and assessment systems have this capability built in and it is well worth the investment as it will ensure you meet the deadlines set out for communications within the legislation.
What Options Are Available To Employers In The Assessment Process?
The Legislation does allow Employers to defer automatically enrolling Workers into their schemes and this is known as Postponement. Postponement was built into the legislation to take into consideration the fluctuations in Worker’s pay which may lead to a Worker being enrolled if they received additional pay within the period that they were being assessed which in a normal pay period they wouldn’t have had. As an Employer you can select the following rules for postponement for up to 3 months:
- On Staging – When as a business you need to comply with your Enrolment Duties.
- On Hire – When you take on a new Worker.
- On reaching Eligible Job Holder Status – When a worker attains age and earnings status.
If you do elect to use postponement you must write to each Worker individually, within six weeks of the start of their postponement, to inform them that you have done so.
It is crucial to note that whilst the Employer may elect to use postponement the Worker still has the right the elect to opt in at any time, and therefore in every circumstance a scheme must be set up for them to be enrolled into.
The Employer has a range of choices on how it applies the legislation in relation to its definition of pensionable pay and the thresholds to apply in the calculation of contributions. Below are the key decisions a business owner will need to consider.
The first decision is whether to include the Legislative Lower and Upper Earnings Thresholds to their contribution calculations, these are the amount above (Lower Earnings Limit) and Below (Upper Earnings Limit) that pension will be paid. Currently at time of writing these are £6,032 and £46,350 respectively. These thresholds cap any pension liability for the Employer, however, may be deemed less attractive to the Worker especially if they are high earners. These thresholds are revised every year and can be found here.
The next decision is to decide what will make up your definition of pensionable pay. The most common approach for Employers is the adoption of the Qualified Earnings Approach, as this considers the majority of common pay elements and meets the current minimum contribution rates of 3% Employer and 5% Worker.
Qualified Earnings are made up of any of the following components that are due to be paid to the Worker:
- Contractual Bonuses
- Statutory sick pay
- Statutory Maternity Pay (SMP)
- Ordinary or Additional Statutory Paternity pay (OMP)
- Statutory Adoption Pay
- Large town allowance
- Some P11D benefits
Expenses such as food, travel or car allowance are not considered to form part of a Worker’s qualifying earnings.
There are three other pensionable pay options available to the Employer, which consider different pay components and can be considered as part of your Auto Enrolment set up.
These Tiers may, in some cases, simplify the set up. For example:
- To avoid changing existing pension scheme rules and/or contracts of employment
- To help simplify the calculation of pensionable pay and pension contributions
- To make budgeting and accounting for pension contributions easier when earnings fluctuate
- To simplify scheme administration
As you will see below, the Regulator has tried to introduce a degree of fairness as by excluding/including different pay components there is a high degree of likelihood that the contribution amounts, in monetary terms, may be affected and therefore this is offset by the change in contribution rates from the Qualifying Earnings minimum standard
Pensionable earnings must be equal to or more than the Worker’s basic pay. This is a Worker’s pay from the first pound. It generally excludes overtime, bonuses and commission. The minimum contribution for this Tier is 9% (from April 2019) with the Employer contributing 4% (Min) and the Worker contributing 5%.
Total pensionable earnings of all Workers must be at least 85% of their total earnings. Total earnings include everything paid to a Worker including salary, commission, bonuses and overtime, performance related pay and any other earnings. It also includes statutory sick, maternity, paternity and adoption pay. The pensionable earnings must be equal to or more than the Worker’s basic pay. The minimum contribution for this Tier is 8% (from April 2019) with the Employer contributing 3% (Min) and the Worker contributing 5%.
Includes all earnings in pensionable earnings, which includes wages, commission, overtime, bonuses, performance-related pay. The minimum contribution for this Tier is 7% (from April 2019) with the Employer contributing 3% (Min) and the Worker contributing 4%.
Once the Pensionable pay definition has been decided the assessment-payroll systems will need to be configured the make these calculations. In addition, Employers will need to, if not using the Qualified Earnings, self-certify their contribution Tier by completing the certification form, details of which can which can be found here. This certification does not need to be submitted to the Regulator but the Regulator will need to be informed via the Declaration of Compliance which needs to be completed as part of the Staging and Re-enrolment process.
Once contributions have been taken from a Worker’s pay Employers have up to 60 days to pass these onto the Pension Provider, along with the Employer contributions for investment into the Workers scheme. Failure to do this, as the Worker is missing out on any potential fund growth by the delay, can result in a fine by the TPR.
Opt-Ins and Outs
As mentioned previously a Worker has the legal right to both Opt-in or Out of the Employer’s Work Place Pension scheme and in doing so they are afforded the following rights:
Opt-In: Whilst the Employer will assess the Workers pay to ascertain if they meet the criteria to automatically be enrolled into the scheme each pay period, the Worker may at any time enact their right to join the scheme voluntary and in doing so the Employer must enrol them into their scheme no later than the following pay period and take the appropriate Worker and Employer contributions from their Pay
Opt-Out: If a Worker is enrolled, they then have up to 30 days to decide whether they wish to remain in the Work Place Pension Scheme. If they decide to opt out the Employer must do one of two things:
- Up to 30 Days from Enrolment Notification: If the Worker opts out of the scheme within one month of being automatically enrolled, they will be treated as if they had never joined the scheme, and any money that was paid into the scheme will be refunded in full. Workers will only receive back the payments that they are deemed to have made; they are not entitled to receive the contributions the Employer may have made or any tax relief the Government has paid.
- After 30 Days of Enrolment Notification: If the Worker opts out later than the one month after the opt out period then any contributions that the Worker and employer paid into the pension scheme will remain invested.
It is worth noting that the TPR has stated that to reduce the risk of coercion, where an Employer actively encourages Workers to opt out to save Employers money, Opt Outs must be managed by a third party, this is usually via the Pension Provider or Scheme Administrator.
If an Employer has previously staged then they will be required, as part of the Legislation, to re-enrol all their Workers back into their Workplace Pension Scheme. There is a six-month window from the anniversary of the original Staging date to do so. This starts three months before this anniversary and ends three months after. For example, a staging date of the 1 October 2016 would mean an Employer could choose to re-enrol on any date between 1 July and 31 December 2019.
As part of the Employer re-enrolment duties, Employers will be required to assess all Workers who are not in the Workplace pension scheme and have not opted out in the twelve-months preceding the re enrolment date and if they meet the enrolment criteria enrol them in the scheme and notify them of this fact. The Worker, as before, then has the option to either remain in the scheme or exercise their right to Opt-Out.
Once an Employer has undertaken their re-enrolment duties they will be required to complete a re-declaration of compliance and submit to the TPR. Employers have to do this within five calendar months of the third anniversary of their original staging date, failure to complete on time means the Employer will not have met all of their duties which could result in enforcement action including fines.
In addition to the re-enrolment date if, for whatever reason, an Employer decides to switch pension scheme providers they will, as a result, need to undertake re-enrolment for all Workers.
Lastly, What Happens if you Ignore your Duties as an Employer?
The TPR has stated it will carry out auto-enrolment compliance spot checks on Employers across the UK. The inspections will ‘serve as a warning to Employers that they cannot ignore the workplace pension and that deliberate non-compliance will not be tolerated’.
The TPR has a range of penalties it can impose, ranging from compliance notices, daily fines and ultimately imprisonment for business owners who continue to ignore their obligations. Ultimately the cost of compliance far outweighs the cost of non-compliance.