The AE Guide

Auto Enrolment

Millions of people are not saving enough to have the income they are likely to want in retirement, and whilst life expectancy in the UK is increasing, people are saving less into pensions.

These are challenges that need to be addressed.

In 1901 there were 10 people working for every pensioner in the UK. In 2005 there were 4 people working for every pensioner. By 2050 it is expected that this will change to just two workers for every pensioner!
A fundamental change to the way that the majority of people save for retirement is needed, and that change is being brought in (with support on both sides of Parliament) through The Pensions Act, 2008.

This focuses on the new employer duties and what companies are going to have to address to ensure that they are compliant with the new legislation.

What are the Employer duties?

From their ‘staging date’, All employers operating in the UK must automatically enrol eligible jobholders’ into a Qualifying Workplace Pension Scheme (QWPS) who meet the following criteria:

  • They are aged from between 22 and the state pension age (at the staging date)
  • Earn more than the minimum earnings threshold – £9,440 (in the 2013/14 tax year)
  • Are not already in a qualifying pension scheme.
  • For a scheme to be qualifying it must pay a minimum level of contributions (as a percentage of salary)
    These will rise from 2% till Oct 2017, then 5% to Oct 2018, then 8% of salary

The qualifying scheme could be an occupational pension scheme (eg Group Personal Pension Scheme GPP), a personal pension scheme, SIPP, NEST, NOW Pensions – or a combination.

Its always best to take advice on the best scheme for your business.

Please contact Nikki or Neil for more information on 0845 470 4918

Employers main duties:

    • register your qualifying scheme with the Pensions Regulator
    • inform existing pension scheme members that they are already in a qualifying scheme (assumingit is a qualifying scheme)
    • tell other eligible employees:
      • that they will automatically be enrolled into the scheme if they don’t join it before automatic enrolment starts
      • the start date for automatic enrolment, and
      • that they have the right to opt out
  • auto-enrol all eligible new ‘jobholders’
  • pay the scheme’s contributions (employer and employee contributions).
  • Keep records for 6 years of all those enrolled into the scheme and those who opt out.

The Pensions Regulator will oversee employer compliance and has the power to fine employers for non-compliance.

(Auto-enrolment is the responsibility of the employer, not the Government or the pensions industry).

What is the Timeframe for employers?

The employer duties will be staged in over 6 years from 2012. Larger employers will need to fall in line first and smaller businesses with less than 30 employees will be last and will have their Staging Date set depending on the last two digits of their PAYE reference number.

In order to avoid a fine, you cannot delay your staging date, but you can usually bring it forward (e.g. to coincide with a convenient accounting period or your pension scheme renewal date)

This is called the ‘Staging Date’ – the table below provides when your company will have to comply by:-

PAYE scheme size or reference Staging date
120,000 or more 1 October 2012
50,000-119,999 1 November 2012
30,000-49,999 1 January 2013
20,000-29,999 1 February 2013
10,000-19,999 1 March 2013
6,000-9,999 1 April 2013
4,100-5,999 1 May 2013
4,000-4,099 1 June 2013
3,000-3,999 1 July 2013
2,000-2,999 1 August 2013
1,250-1,999 1 September 2013
800-1,249 1 October 2013
500-799 1 November 2013
350-499 1 January 2014
250-349 1 February 2014
160-249 1 April 2014
90-159 1 May 2014
62-89 1 July 2014
61 1 August 2014
60 1 October 2014
59 1 November 2014
58 1 January 2015
54-57 1 March 2015
50-53 1 April 2015
40-49 1 August 2015
30-39 1 October 2015
Fewer than 30 with the last 2 characters in their PAYE reference numbers 92, A1-A9, B1-B9, AA-AZ, BA-BW, M1-M9, MA-MZ, Z1-Z9, ZA-ZZ , 0A-0Z, 1A-1Z or 2A-2Z 1 June 2015
Fewer than 30 with the last 2 characters in their PAYE reference number BX 1 July 2015
Fewer than 30 with the last 2 characters in their PAYE reference number BY 1 September 2015
Fewer than 30 with the last 2 characters in their PAYE reference number BZ 1 November 2015
Fewer than 30 with the last 2 characters in their PAYE reference numbers 02-04, C1-C9, D1-D9, CA-CZ or DA-DZ 1 January 2016
Fewer than 30 with the last 2 characters in their PAYE reference numbers 00 05-07, E1-E9 or EA-EZ 1 February 2016
Fewer than 30 with the last 2 characters in their PAYE reference numbers 01, 08-11, F1-F9, G1-G9, FA-FZ or GA-GZ 1 March 2016
Fewer than 30 with the last 2 characters in their PAYE reference numbers 12-16, 3A-3Z, H1-H9 or HA-HZ 1 April 2016
Fewer than 30 with the last 2 characters in their PAYE reference numbers I1-I9 or IA-IZ 1 May 2016
Fewer than 30 with the last 2 characters in their PAYE reference numbers 17-22, 4A-4Z, J1-J9 or JA-JZ 1 June 2016
Fewer than 30 with the last 2 characters in their PAYE reference numbers 23-29, 5A-5Z, K1-K9 or KA-KZ 1 July 2016
Fewer than 30 with the last 2 characters in their PAYE reference numbers 30-37, 6A-6Z, L1-L9 or LA-LZ 1 August 2016
Fewer than 30 with the last 2 characters in their PAYE reference numbers N1-N9 or NA-NZ 1 September 2016
Fewer than 30 with the last 2 characters in their PAYE reference numbers 38-46, 7A-7Z, O1-O9 or OA-OZ 1 October 2016
Fewer than 30 with the last 2 characters in their PAYE reference numbers 47-57, 8A-8Z, Q1-Q9, R1-R9, S1-S9, T1-T9, QA-QZ, RA-RZ, SA-SZ or TA-TZ 1 November 2016
Fewer than 30 with the last 2 characters in their PAYE reference numbers 58-69, 9A-9Z, U1-U9, V1-V9, W1-W9, UA-UZ, VA-VZ or WA-WZ 1 January 2017
Fewer than 30 with the last 2 characters in their PAYE reference numbers 70-83, X1-X9, Y1-Y9, XA-XZ or YA-YZ 1 February 2017
Fewer than 30 with the last 2 characters in their PAYE reference numbers P1-P9 or PA-PZ 1 March 2017
Fewer than 30 with the last 2 characters in their PAYE reference numbers 84-91, 93-99 1 April 2017
Fewer than 30 unless otherwise described 1 April 2017
Employer who does not have a PAYE scheme 1 April 2017
New employer (PAYE income first payable between 1 April 2012 and 31 March 2013) 1 May 2017
New employer (PAYE income first payable between 1 April 2013 and 31 March 2014) 1 July 2017
New employer (PAYE income first payable between 1 April 2014 and 31 March 2015) 1 August 2017
New employer (PAYE income first payable between 1 April 2015 and 31 December 2015) 1 October 2017
New employer (PAYE income first payable between 1 January 2016 and 30 September 2016) 1 November 2017
New employer (PAYE income first payable between 1 October 2016 and 30 June 2017) 1 January 2018
New employer (PAYE income first payable between 1 July 2017 and 30 September 2017) 1 February 2018

Further information is available from The Pension Regulator website.
You can log onto the site at www.thepensionsregulator.gov.uk

What Contribution will have to be paid?

For a pension scheme to qualify under the new regulations, there are rules about the minimum contribution levels required.
There are two qualifying bases: banded earnings and pensionable earnings.

Banded earnings basis

The minimum contribution is 8% of a band of qualifying earnings which is currently between £8,105 and £42,475 (using the figures for the 2012/13 tax year)
Although it is possible for an employer to pay the whole contribution on behalf of their employees, it is expected that many employers will choose to pay 3%; their employees will make up the difference of 4% with the further 1% coming from Basic Rate Tax Relief
These percentages apply to the employee’s total earnings within the band, so they include overtime and bonuses not just basic pay.

Pensionable earnings basis

A business may choose one of the following 3 options as an alternative:

  1. where a minimum of 9% Basic Pay is being invested (with a minimum of 4% being contributed by the employer)
  2. where a minimum of 8% Basic Pay is being invested provided at least 85% of Total Pay is pensionable. (with a minimum of 3% being contributed by the employer)
  3. where a minimum of 7% Basic Pay is being invested provided Total Pay is pensionable. (with a minimum of 3% being contributed by the employer)

It is worth noting that these percentages represent the minimum contributions necessary to comply with the regulations. Contributions over and above these amounts will still be possible within overall pension planning.

Is there a gentle approach to the contribution levels?

Yes, there are provisions for a “phasing in” of contributions in order to help with employers with cash flow.

Banded earnings basis
 

Up to October 2017

Until October 2018

From October 2018

Employer

1%

2%

4%

Employee*

1%

3%

5%

Totals

2%

5%

8%

Pensionable earnings basis
Basis

Up to October 2017

Until October 2018

From October 2018

9% of Pensionable Earnings

Employer

2%

3%

4%

Employee*

up to 1%

up to 3%

up to 5%

8% of Pensionable Earnings

Employer

1%

2%

3%

Employee*

up to 1%

up to 3%

up to 5%

7% of Total Earnings

Employer

1%

2%

3%

Employee*

up to 1%

up to 3%

up to 4%

* The Employee contribution percentage includes Basic Rate Tax Relief.

A note about Nest (National Employment Savings Trust)

Nest is a default QWPS provider, set up at the invitation of the UK Government as a solution for employers who had not set up their own scheme.

It is designed to be a low-cost, no-frills option and is likely to appeal to employers of predominantly lower earners.

As a new entrant into the Defined Contribution market, it is likely that many companies will have at least some of their workforce enrolled into a NEST (or NEST equivalent) scheme.

A note about “Automatic” Enrolment

By far the most important stipulation of the new regulations is that eligible members of the workforce are to be enrolled automatically: the notion being that if it is the default position for employees to be “in” then it will be more likely for them to stay “in”.

Should an individual choose not to be “in” the pension scheme, they may choose to opt out (and have 1 month to decide on this), but only after they have been enrolled!

Should they wish to opt out the employer may not give them the form to do so, but can direct them to the appropriate website for the opt-out form which the employee can complete and hand in.

Everything has been done in order to encourage the employees to remain inside the scheme, and even if they do choose to opt out, the employer must auto-enrol them once more every 3 years.

Effect on your business - what will happen if I ignore this legislation?

If you are an employer you need to take action

The regulation of this legislation is managed by The Pensions Regulator.

As such, it has a number of duties and powers:

  • Preventive – used where there is an immediate or chronic risk to members’ benefits.
  • Detective – used where we need to investigate the cause or consequences of a particular problem.
  • Educative – used where it is clear that the trustees or others do not have the necessary knowledge and understanding to carry out their duties.
  • Remedial – used where benefits have been damaged and we want to reinstate them.
  • Penalties – used to emphasise the importance and value of compliance in protecting members’ benefits, and to deter future non-compliance.

http://www.thepensionsregulator.gov.uk/regulate-and-enforce/regulatory-activity.aspx

Where the regulator feels that a sanction is required, it has the following penalties at its disposal.

Penalty Stage 1:                 Warning
Penalty Stage 2:                 “Wake up call” – Fixed fine £400
Penalty Stage 3:                 Persistent offenders – Fine based on number of employees: (see below)
[fancy_table]

Size of employer (by employee numbers)

Level of fine

1 to 4

£50        per day

5 to 49

£500      per day

50 to 249

£2,500   per day

250 to 499

£5,000   per day

500 and above

£10,000 per day

Persistent failure to comply can also carry a 2-year prison sentence!

How can Ablestoke help an employer?
  • We have the experience of having put into place hundreds of Pension Schemes (and other employee Benefit programmes) and of administering them.
  • We have a large benefits team who can help you through the whole process:
  • Strategy
  • Design
  • Communication
  • Implementation
  • Ongoing Support
  • We will review your existing pension scheme and ensure your business complies with the new rules
  • If you do not have pension arrangements, we will be happy to recommend one that fits your needs, put it in place and ensure that your staff understand (and appreciate) it.
  • We will work with your Operations Department so that they know how to cope with this.
  • We can help you choose an administration platform in order to manage much of the detail
  • We can also help with arrangements such as Salary Sacrifice, which may help your company to offset the impact that these new laws will have on the business.
  • We will handle the communication to employees, through workshops, seminars and 1-2-1s
What are my compliance responsibilities?

Compliance and administration are not to be under-estimated.
Records must be kept for 6 years of, for example:-

  • Scheme registration report – to prove it meets the requirements of the 2008 Pensions Act
  • All staff who are automatically enrolled (Termed ‘Eligible Jobholders’)
  • All staff who opt-out + their re-enrolment date 3 years hence
  • All staff who choose to opt-in, not automatically enrolled (termed ‘Non-eligible Jobholders’)
  • All other staff who ask to join a scheme (termed Entitled workers)

The Pension Regulator estimates that the cost of administering the scheme will be £7-£14 per person per month; not an insignificant amount!

Thankfully there are IT solutions available that can manage all these requirements for you.
Please contact Nikki or Neil for more information on 0845 470 4918

What are my HR responsibilities?

Key considerations for HR will include ensuring that those managers involved in taking recruitment and dismissal decisions are properly trained and that policies and processes reflect the new rules.

For example, the new regulations require that extensive, prescribed information about auto-enrolment must be provided to the workforce.

Ensuring that these obligations are met and, more generally, that documentation is brought up to date will prove to be a major exercise for many HR departments.
For instance the following will all need to be updated in order to reflect employees’ new auto-enrolment entitlements:

  • Offer letters
  • Employment contracts
  • Policies
  • Intranet sites

It will also be necessary to evaluate:

  • Existing clauses in contracts and handbooks
  • Data protection clauses because they will cover the transmission of pension data
  • Deduction-from-wages clauses (there is a statutory exemption if mandatory employee contributions are deducted, but not if the amount is in excess of mandatory levels)
  • Existing pension flexibility clauses, which will need to be reviewed to take potential future changes into account
  • Take into account the possibility that such change could trigger statutory pension consultation rules, which require a consultation of a recommended 60 days
  • Identify workers who are eligible for Auto-enrolment
  • Provide information to all workers
  • Arrange Deductions from pay
  • Deal with Opt-outs
  • Maintain employment safeguards
  • Perform ongoing ‘eligibility’ checks – for those who will at a future date meet the criteria for Auto-enrolment
  • Prepare!!

The key to implementing these changes successfully will be to engage staff and communicate with them effectively. This means that the HR team is likely to spearhead the process of explaining the new rules and should consider planning an internal publicity campaign before they come into force.

But employers examining the question of who their “eligible jobholders” are should also be aware that the new rules include many in their workforce who wouldn’t normally legally be classified as “employees”.
Therefore, they must be alive to the prospect that atypical members of staff such as casual workers will become eligible for auto-enrolment too.

Moreover, those organisations that employ bonus schemes or overtime arrangements may find themselves having to examine such initiatives as the definition of what counts as ‘pensionable pay’ can involve workers “tipping over” the earnings trigger.

As a result, some businesses will, undoubtedly, seek tochange their remuneration structures in order to (legally) try and keep employees beneath the relevant thresholds.

What are the payroll implications?

A recent survey indicated that 40% employers would turn to their Payroll Department/Provider to manage their auto-enrolment responsibilities. So regardless of whether you have an existing comprehensive benefits package and platform to support, or if you have no existing employee benefits and are simply looking at the minimum requirements of auto-enrolment, Payroll is the vehicle through which the deduction from pay is made so it is a fundamental part of the overall planning.

During the 12 months before your auto-enrolment ‘staging date’, you need to manage the following to ensure your payroll department/provider can handle the obligations:

  • Review your existing payroll processes and systems. Can your existing system handle the exchange of data between HR, payroll and pension providers?
  • Do you need your payroll software to function alongside a benefits platform or are you looking for a payroll solution that manages the requirements of auto-enrolment as well as payroll?
  • Is your payroll system able to identify eligible employees? And how the contributions of all eligible employees be calculated? What about the tracking of non-eligible workers and those employees who opt out?
  • Design a payroll solution once you have completed your review.
  • Test your payroll solution.
  • Ensure that everything is in place and fully tested at least 1-2 months before your final staging date.
How can Salary Sacrifice work with Auto-enrolment?

The auto-enrolment process has to operate automatically, without requiring employees to make any decisions.

So you can’t ask employees to decide whether or not they want salary sacrifice when you auto-enrol them.

However, you could do so afterwards.

If an employee joins the pension scheme voluntarily, you can ask them when they join to choose whether they want salary sacrifice (or salary exchange, as it is also known). An employee might join voluntarily during the scheme’s deferred period, for instance.

HMRC has issued guidance confirming salary sacrifice pension schemes will be able to meet automatic enrolment requirements.

Previously HMRC required employees entering into salary sacrifice arrangement for pension contributions could not easily revert to their higher salary – a ruling that was generally taken to mean that employees could not opt out within 12 months, unless it was due to a lifestyle change, without losing all tax and national insurance benefits.

This conflicted with auto-enrolment regulations which permit automatically enrolled individuals to opt out as soon as they have joined their pension.

HMRC has resolved this matter by adding pension contributions to the list of salary sacrifice schemes which allow opting out at any time.

Pension contributions now sit alongside child care vouchers, the cycle to work scheme, and the workplace parking scheme in enjoying this level of flexibility.

These changes are only a short time away – don’t leave it too late.

Contact us now on 0845 470 4918 and ask for Neil Mutton.