Employment Contractsby Kate Russell
Automatic enrolment is a legal requirement for all employers to automatically enrol their employees into a workplace pension and make contributions to that pension.
All employers – even those that only employ one person – are included.
How much is auto enrolment going to cost?
The cost of implementation, planning, payroll modifications, assessment, communications and record keeping will depend on the decisions an employer makes regarding suppliers and providers and their current internal structures.
There will be the ongoing costs in respect of the compulsory contributions employers will need to make to staff pensions. These will depend on the average salary of members of the scheme and the contribution structure chosen.
On 6th April 2018, the total minimum contribution increased from 2% to 5%. Employers must now contribute a minimum of 2%. Employees contribute a minimum of 3%.
There are further increases in April 2019, with the total minimum contribution rate increasing to 8%, representing a 3% employer and 5% employee contribution.
It is an employer’s responsibility to make sure that they are prepared for these new contribution levels. If an employer wishes, it can decide to pay the total minimum contribution rate. In these cases, the employee does not have to pay any contributions, unless the rules of the pension scheme say otherwise.
The employer and the employee can also choose to contribute a higher amount to the pension scheme if they wish. If an employer chooses to pay more than the employer minimum but less than the total minimum amount, the employee must make up the difference.
New employers who reached their auto enrolment start date on or after 6th April 2018 will immediately be required to comply and implement the total minimum 5% contribution rate. Equally, employers who reach their auto enrolment start date on or after 6th April 2019 will need to comply with the total minimum 8% contribution rate.
Which employees are eligible for auto enrolment?
All employees aged between 22 and state pension age earning more than £10,000 per year are eligible for auto enrolment and must be auto enrolled. People in this category are called ‘eligible job holders’.
Employees aged between 16 and 74, earning more than the current annual threshold but less than £10,000, are not eligible and won’t be automatically enrolled. However, they can opt-in, and if they choose to do so, then employers will be required to contribute.
Employees that earn more than £10,000, but are under 21 or over the state pension age are not eligible and won’t be auto enrolled. But they can opt-in, and the employer will be required to contribute.
People who are not automatically eligible but can choose to opt-in are called ‘non-eligible job holders’.
Workers aged between 16 and 74 earning less than the current annual threshold will not be auto enrolled, but they can opt-in. In this case, employers will not need to contribute to the worker’s pension. People in this category as called ‘entitled workers’.
Certain people are exempted from the right to be automatically enrolled, including:
- directors not working under an employment contract;
- a director who is working under an employment contract, where they are the only employee in the company - but only for the work they carry out for that company;
- office-holders who are not considered workers (eg non-executive directors, trustees, elected members). They are only excluded for the activities they carry out as an office holder;
- the (truly) self-employed.
A director of a company is not classed as a worker, unless the individual works for the company under a contract of employment and there is at least one other person working for the company under a contract of employment.
A director who is not working under an employment contract is never classed as a worker. The exemptions can apply to more than one director working for the same company.
However, if a director who is classed as a worker triggers automatic enrolment, the employer can choose whether or not to automatically enrol or re-enrol them (the director will have the right to opt-in or join a pension)
Employers have a duty to:
- automatically enrol all staff who are eligible (‘eligible jobholders’);
- enrol other staff who have the right to ask to opt-in or join a pension;
- communicate the process, time scales and costs to their staff;
- manage opt-outs and promptly refund contributions;
- re-enrol staff who are eligible every three years;
- complete a declaration of compliance with the regulator;
- keep records;
- maintain payments of pension contributions.
Employers must not induce staff to opt-out or cease membership of a pension, and must not indicate, when recruiting new staff, that the decision to opt-out would influence them in the prospective employee’s favour.
Postponement delays the duty of automatic enrolment and the need to assess and can be used at the employer’s duties start date for any or all existing staff, on the first day of employment for any new joiner after the duties start date, and on the date a member of staff meets the criteria to be an eligible jobholder.
Only one postponement per member of staff can be made at a given time. Each worker can be postponed from one day up to a maximum of three months.
The employer must notify any postponed member of staff within six weeks and a day of the start of postponement. The member of staff has the right to opt-in or join during postponement.
Employers must assess on the last day of postponement and automatically enrol eligible jobholders. Staff not eligible must be monitored for each future pay period.
Asking to join a pension scheme
Entitled workers can request to join a scheme at any time, including during postponement. Jobholders can opt-in at any time, including during postponement. However, workers will not necessarily know whether they are jobholders or entitled workers and this could vary over time. All requests (whether an opt-in or join request) are treated the same way.
On receipt of any request to opt-in or join a pension from a worker, employers need to:
- assess the worker, to see if they are a jobholder or entitled worker, then
- enrol jobholders into an automatic enrolment scheme, and
- enrol entitled workers into a scheme of the employer’s choice.
A jobholder must not be required to carry out any further action to achieve active membership (eg the pension scheme should have a default fund).
Asking to leave a pension scheme
Workers automatically enrolled (or who have opted in) may opt-out. Employer must inform staff of their right to opt-out and how to opt-out. The employer must not give out or send out opt-out forms requests to opt-out must be handled by the scheme provider, and completed forms would normally be sent to the employer.
A one calendar month opt-out window starts on the later of two dates:
- once the worker is an active member of the pension scheme, or
- when the employer gives a notice of enrolment letter/email to the worker.
If the worker opts out they will get a full refund of all contributions.
Early opt-outs (before the opt-out window starts) are not allowed. After the opt-out window has closed, staff may still cease active membership and normal pension scheme rules will apply (so they will not get a refund).
A worker who has opted out does not need to be assessed again until the employer’s next re-enrolment date (occurs approximately every three years).
Employers must keep records about their workers and the pension scheme used to comply with the employer duties (pension providers and trustees will also have duties to keep records).
An employer can use electronic or paper filing systems to keep or store any records, as long as these records can be produced in a legible way.
Most records must be kept for six years. Those that relate to opting out must be kept for four years.
The records must be provided to The Pensions Regulator, on request.
Declaration of compliance
After staging, employers must complete a declaration of compliance and it must be completed within five months of the staging / duties start date and within five months of the third anniversary of the staging / duties start date (or previous re-enrolment date)
Employers may receive a penalty fine if they do not complete their declaration on time. Employers will need to provide certain details, for example:
- which pension schemes were used to comply with the duties, (after cyclical re-enrolment only) their chosen re-enrolment date,
- the number of eligible jobholders automatically enrolled into each scheme.
All postponements applied at the staging / duties start date must have come to an end before the declaration can be completed.
What are the common stumbling blocks?
One of the biggest stumbling blocks in the auto enrolment process is inaccurate or incomplete payroll data. Taking the time to ensure that payroll data is complete and entirely up to date, will help avoid problems during the implementation process and beyond.
Where possible, obtain e-mail addresses for all staff as issuing communications about auto enrolment via email is much cheaper and more efficient than post.
If you are late, take action as soon as you can. Within five months of their staging date, all employers need to complete a declaration of compliance so that The Pensions Regulator knows that the auto enrolment duties have been met.
Employers that don’t complete their declaration by their deadline may be subject to enforcement action. The fixed penalty fines start at £400 but increase considerably.
Auto enrolment duties don’t stop once the business has enrolled its staff. There is an ongoing responsibility to:
- pay regular contributions into the pension;
- monitor the age and earnings of all staff, and any new staff joining to ensure scheme eligibility;
- process any opt-in, joining or opt-out requests;
- keep and maintain accurate records;
- re-enrol every three years.
New employers will be contacted by The Pensions Regulator.
- Where a new employer is about to employ someone for the first time, they will need to complete certain tasks in preparation for auto enrolment.
- Once registered as an employer with HMRC, you will need to inform the Pensions Regulator of the chosen point of contact for auto enrolment.
- On the start date, similar to what happens at staging, all staff must be assessed to see if they meet the criteria to be put into a pension scheme.
- Eligible employees must be automatically enrolled into a qualifying auto enrolment pension scheme, where the employer must also make contributions to the pension pot.
- All employees must receive communications informing them of how auto enrolment will affect them and what their rights are.
- Employers must also complete the declaration of compliance within 5 months of the duties start date, regardless of whether or not postponement is used.
Useful resources The Pension Regulator