auto-enrolment: a guide for employers€¦ · regulator know how you’ve met your automatic...

Tel: 0117 314 1783Email: [email protected]: www.hl.co.uk/company-pensions

Auto-enrolment:a guide for employersAre you ready for takeoff?

Important Notes This guide has been written for employers. It is not suitable for individual investors. The guide is based on our understanding of the rules and legislation as at 7 April, which is subject to change. If you have any questions on this guide, please call us on 0117 314 1783. None of the information should be taken to be personalised advice and if you are unsure you should seek professional financial, legal or tax advice. The exact amount of tax relief received depends on individual circumstances and is subject to change. No part of this guide may be reproduced without permission.

Contents

3 Auto-enrolment: the basics4 Who do you need to auto-enrol?5 When do you need to auto-enrol?7 What do you have to pay?

Arrivals StatusGate 1

This is called automatic enrolment because your employees don’t have to do anything.

It is up to you to ensure your eligible employees are enrolled into a pension scheme – this does not happen automatically. Even if you are already paying contributions into a pension scheme for your staff, you will need to check it is suitable for automatic enrolment.

Preparation is important. Ideally, you should give yourself up to 12 months to prepare. This is because there are a number of tasks in particular that will take you some time to complete:

• Setting up a pension scheme.• Enrolling your staff into the pension

scheme and making employer contributions. You’ll need to make sure you contribute the right amount.

• You’ll need to let The Pensions Regulator know how you’ve met your automatic enrolment duties by completing a declaration of compliance.

Remember, automatic enrolment is your legal duty and if you don’t act you could be fined.

If you haven’t yet started preparing for auto-enrolment, this guide will be a useful starting point. If you have already, it could serve as a valuable reference.

Mark KiddellHead of Corporate Solutions Hargreaves Lansdown

Are you ready for automatic enrolment?

Every employer with at least one member of staff must enrol every employee who is eligible into a workplace pension scheme and make contributions towards it.

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When?...See page 5 for WHEN you need to do it >

What?...See page 7 for WHAT you and your staff will need to pay >

Auto-enrolment represents a huge change for workplace pensions. Before auto-enrolment, most pension schemes required the member to make an active decision to join.

When an employer starts auto-enrolment, employees won’t have to complete an application form or provide any information to join. They won’t be required to make any decisions, such as where to invest, although they can make these choices if they wish.

All employers will need to auto enrol their workforce and many have already done so.

The new rules will probably mean extra contribution and administration costs for employers. It is important you start planning for auto-enrolment as early as possible.

For more information on planning, please see the regulator’s guidance for employers - ‘First steps to prepare for the new employer duties’:

www.thepensionsregulator.gov.uk/doc-library/automatic-enrolment-detailed-guidance.aspx

Alternatively you may find the ‘Next steps’ section on page 11 of this guide useful.

Employers will need to automatically join nearly everyone earning over the “earnings trigger” (set at £10,000 for tax year 2015/16) into a pension. They will also be required to make a minimum contribution.

Auto-enrolment: the basics

Who?...See opposite for WHO you need to enrol >

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Who do you need to auto-enrol?

Employers will need to identify the people they need to auto-enrol. This will apply to most, but not all, of the workforce, whether they are a full-time, part-time, permanent, temporary, casual or zero-hour workers.

Who you need to auto-enrolAuto-enrolment is required for eligible jobholders, who are those who:

• Work, or ordinarily work, in the UK under a contract;

• Are aged between 22 and State Pension age; and

• Earn over the earnings trigger (the equivalent of £10,000 for 2015/16). Bonuses, commission, overtime and statutory sick, maternity, paternity and adoption pay all count towards this trigger.

All workers who are enrolled have the right to opt out, although they have to make an active decision to do so. Broadly, every three years a scheme must repeat the auto-enrolment process for those who have opted out.

Who you don’t need to auto-enrolThe rules mean most people will have to be auto-enrolled. There are, however, exceptions:

Non-eligible jobholdersThese include people:• Aged between 16 and 22 and between

State Pension age and 75.

The earnings trigger and band earnings apply to each pay period. E.g. the earnings trigger for those paid monthly is £833 and £192 for those paid weekly.

• Earning between the lower limit of the qualifying earnings band and the earnings trigger, set at the equivalent of £5,824 and £10,000 respectively for 2015/16.

They do not need to be auto-enrolled but they must be informed of their right to opt in. If they opt in they must receive an employer contribution and be given the right to opt out.

If they become eligible jobholders (e.g. by turning 22 or after a salary increase) and they are not already an active member of a qualifying pension scheme they will need to be automatically enrolled.

Entitled workers People earning less than £5,824 are entitled to join a pension scheme, but there is no requirement for the employer to contribute on their behalf. The scheme does not have to be one used for auto-enrolment. If the worker’s earnings increase over the earnings trigger then they must be auto-enrolled.

Someone who has a spike in their earnings (for instance because of a bonus) will need to be auto-enrolled if that takes them over the weekly or monthly equivalent of the earnings trigger.

For more information on assessing your workforce, please see the regulator’s guidance for employers - ‘How to identify the different categories of worker’:


AT A GLANCE

People you don’t need to auto-enrol

• People under 22 or over State Pension age.

• Some people on short-term contracts.

• People earning less than the equivalent of £10,000 a year.

• Members of the armed forces in respect of service in the armed forces.

• Company directors who are either not considered to be employed or where they are the only worker.

• People that neither work, nor ordinarily work, in the UK.

• People who are already in a qualifying pension scheme.

• People who ceased to be active members of what would have been a qualifying scheme in the 12 months before they were enrolled.

• People working a notice period.• People with LTA protection.

: [email protected] 0117 314 1783

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Employers have a set date on which they must start auto-enrolment – known as their ‘staging date’. This began in October 2012 with the largest employers and will end in February 2018 with the smallest and new employers. Most staging dates will be based on the number of people in the employer’s largest PAYE scheme as at 1 April 2012. For employers with fewer than 30 members, the date will be based on the employer’s PAYE reference number. and for new employers the staging date will be based on the date they first had a PAYE scheme (after 1 April 2012).

Employers will need to check when their auto-enrolment duties start.

The Pensions Regulator’s automatic enrolment planner can help you understand what you need to do and when you need to do it: www.tpr.gov.uk/ae-planner

You will need to know your employer PAYE reference. The Pensions Regulator should write to employers to remind them of their staging date 12 months in advance and send a reminder three months before.

Early auto-enrolmentAn employer can choose to bring forward their staging date. They must notify the Pensions Regulator at least one month before the earlier staging date and have agreement from the pension scheme they wish to use.

AUTO-ENROLMENT

Often pension arrangements are only open to staff after they have been employed for a certain period. This is because some will leave their job in the first few months. This is called a probationary or waiting period and its length is at the employer’s discretion.

Employers will still be allowed to use a waiting period, but it will be capped at three months. It can apply from the employer’s staging date, the date a new worker is employed or the date an existing worker becomes eligible for auto-enrolment. Eligible and non-eligible jobholders can opt in to the pension scheme during the waiting period.

Please see ‘An explanation of how to apply postponement’ for further detail:


Postponing auto-enrolment for Defined Benefit (DB) schemes

If workers are eligible to join a DB scheme but have not yet joined, employers will be able to defer auto-enrolment for these workers until early 2018 if it remains a qualifying scheme.

When do you need to auto-enrol?

When do you have to start auto-enrolment?

Waiting periods and postponing auto-enrolment

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Automatic enrolment means every employer in the UK is required by law to provide an automatic enrolment company pension into which they can automatically enrol eligible employees. An automatic enrolment scheme is a qualifying scheme into which you can automatically enrol. A qualifying scheme must meet certain government standards.

Defined Contribution schemesThe rules require minimum contributions to money purchase pension schemes, including a minimum payment from the employer. These are expressed as a percentage of qualifying earnings. There must be an agreement between the employer and the pension provider under which the employer will make at least the minimum required contributions. If this contribution is not sufficient to cover the total contribution there must also be an agreement between the employee and the pension provider under which the employee will make up the difference. If a Group Personal Pension is being used it must be possible to make pension contributions from directly from pay.

What are qualifying earnings?Qualifying earnings are earnings between the lower and upper limits of the qualifying earnings band (set at the equivalent of £5,824 and £42,385 for 2015/16). This includes wages, salary, commission, bonus and overtime as well as statutory sick, maternity, paternity, and adoption pay. These limits will be reviewed each year. Initially, total contributions will start at 2% (of which the employer will have to pay at least 1%). This will be increased so that by 2018 they reach 8% in total (of which the employer will have to pay at least 3%).

Alternative qualifying requirementsMany employers will prefer to use their existing or an alternative definition of pensionable salary. Therefore, a scheme can also base contributions on one of three alternatives. In general, the more generous the definition of pensionable pay, the lower the minimum qualifying contributions, see page 7 for more details.

There are three alternative qualifying requirements:

• Total earnings If all earnings are pensionable.

• Pensionable salary is at least 85% of total earnings

The 85% level is averaged over all those in the pension using this definition.

• Pensionable salary Typically where basic salary is

the pensionable salary definition and is less than 85% of total earnings.

Employers will need to review their staff’s earnings profile and assess whether current arrangements are likely to meet the new rules. Employers who don’t currently offer a pension contribution or offer one below the minimum requirements will be particularly affected. They may want to bring in alternative pension arrangements in advance of the auto-enrolment requirements. If employers lower their contributions or increase employee contributions they may need to undertake a 60-day statutory consultation with their employees.

Defined Benefit schemesA defined benefit pension scheme (e.g. final salary) will need to provide sufficient benefits. Any such scheme will need to be certified by the employer or the scheme actuary.

Hybrid schemesHybrid schemes must satisfy the Defined Benefit or Defined Contribution requirements in proportion with how much of the scheme is Defined Benefit or Defined Contribution.

For more information, please refer to section 4 of the regulator’s guidance - ‘Pension Schemes’:


What will you have to pay?


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At a glance: Minimum contribution levels for the four alternative quality requirements.

Qualifying Earnings

Date Employer Total Employee pays (min) Required potentially pays

From staging date to Sept 2017 1% 2% 1%

Oct 2017 to Sept 2018 2% 5% 3%

Oct 2018 onwards 3% 8% 5%

Set 1 – At least basic pay



Oct 2017 to Sept 2018 3% 6% 3%


Set 2 – At least basic pay which is at least 85% of total earnings



Oct 2017 to Sept 2018 2% 5% 3%


Set 3 – Total earnings



Oct 2017 to Sept 2018 2% 5% 3%


In each case the total can be made up entirely by the employer, or paid by a combination of employer and employee contributions. If the employee contributes they will receive tax relief. Both the employer and employee can choose to pay more than the minimum contributions.

If an employer is using Set 1 or 2, pensionable salary should normally be at least equal to basic pay. Testing contributionsEmployers will need to assess that contributions or accruals are sufficient. They will need to certify the minimum requirements are met.

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StatusGate 1

When an employee is enrolled they must be provided with certain information, including how to opt out. If a worker wishes to opt out they must request an opt-out notice from the pension provider and return it to the employer within a month from either joining the pension scheme or being provided with the auto-enrolment information, whichever is the later.

They cannot opt out until they have been enrolled. If a worker opts out the employer needs to return contributions to them and the pension scheme will need to return contributions to the employer.

Broadly every three years the employer will have to re-enrol those who opted out. The employer can choose a re-enrolment date three months either side of the three year anniversary of the staging date.

Workers who still do not want to be in the pension scheme will have to opt out again.

The employer will not be required to re-enrol those who have left the scheme or opted out within the previous twelve months.

An employee can choose to pay lower contributions than the required minimum, if the scheme rules allow. However, employers are not allowed to offer this option to induce an employee to opt out. Employers would still need to re-enrol the employee at the required minimum contribution level every three years.

An employer wishing to provide this option should take into account how The Pensions Regulator could view their motive as well as the additional administrative issues.

For more information on opting out and re-enrolment, please see the regulator’s guidance for employers - ‘How to process ‘opt-outs’ from workers who want to leave a pension scheme’:


Opting out and re-enrolment

What about those who want to opt out?

Every three years the employer will have to re-enrol those who have opted out.


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Most employers will find their costs rise through increased levels of membership or contributions.

Research carried out by the DWP shows that auto-enrolment has increased average pension scheme membership to around 73% of the workforce.

Some employers will decide to reduce or mitigate the costs of increased membership by keeping contributions to the bare minimum and many experts are worried about this.

There will also be costs associated with the additional administration and record-keeping.

Employers will need to complete The Pensions Regulator’s declaration of compliance (registration) within five months of their staging date and provide updates to the Regulator every three years after that. They will need to keep records for up to six years, including details of people who have opted out.

What are the costs to the employer?

The Pensions Regulator will ensure employers comply with auto-enrolment. As employers have to register with The Pensions Regulator, it is able to compare the data it gets on auto-enrolment with PAYE data. If the opt-out rates look comparatively high for the employer’s size or industry it is likely to investigate. Employees are also able to alert The Pensions Regulator.

The Pensions Regulator is able to issue compliance notices, penalty notices and fines if employers break the rules.

Penalties can be given for providing false or misleading information to The Pensions Regulator, failing to make contributions, or to enrol eligible people (including re-enrolling those who have opted out). It is an offence for an employer to induce workers to opt out of a pension scheme, or recruit new staff on the understanding they will opt out.

Employers who fail to comply will be issued with a fixed penalty of £400, followed by penalties of £50 to £10,000 a day depending on the number of staff and the scale of the offence. Wilfully failing to comply could result in up to two years’ imprisonment.

What if I don’t comply?

Costs

Employers who fail to comply will be issued with a fixed penalty of £400, followed by penalties of £50 to £10,000 a day depending on the number of staff and the scale of the offence.

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Don’t leave it too late. It’s important that you give yourself plenty of time to prepare. The Pensions Regulator recommends up to 12 months, which includes selecting a pension scheme and ensuring it is set up correctly.

Contact your payroll provider and pension scheme in plenty of time. You may also have an accountant, financial advisor or bookkeeper whom you wish to contact.

Don’t forget you will also need to enrol your staff into the pension scheme and make employer contributions – making sure you contribute the right amount. Taking the time to get your staff and payroll records in order ahead of your staging date is essential. You must be able to provide information to your pension scheme in the correct format. Make sure the necessary records are to hand and that you have correct information about your employees before your staging date.

You’ll also need to complete a declaration of compliance, which lets The Pensions Regulator know how you’ve met your automatic enrolment duties.

If you have an existing scheme for your workforce (perhaps called a ‘stakeholder scheme’) you should check with your pension provider to see if you can use it for automatic enrolment.

For further information, please refer to The Pensions Regulator’s website for more details about automatic enrolment duties:

www.thepensionsregulator.gov.uk/employers.aspx

Next steps - preparation

Taking the time to get your staff and payroll records in order ahead of your staging date is essential.

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0415

Tel: 0117 314 1783Email: [email protected]: www.hl.co.uk/company-pensions

auto-enrolment: a guide for employers€¦ · regulator know how you’ve met your automatic...

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