This HR Micro Guide is designed to give you the employer an overview of the legal employment law requirement to Auto enrol your workforce into a suitable pension scheme.
Background to Auto enrolment
The Lord Turner 2005 Pensions Commission recommended the Government needed to change peoples’ view of not saving for a pension. Eventually this turned into a new statutory obligation on all UK employers and the Auto enrolment scheme was born.
From 2014 onwards it is the turn of the SMEs. It is based on your given staging date fixed by the HMRC as per your employee records as of 1st April 2012. Although you can choose to auto enrol before this date. Auto enrolment is compulsory and non compliance on your staging dates will mean daily fines thereafter.
The level of total Auto enrolment contributions is being phased in from 2012 to 2018 (see below). Also not everyone in your workforce needs to be auto enrolled so it is important first to assess your entire workforce. (you may want to first have a look at our HR Micro Guide: Defining your workforce.)
How much do you need to contribute?
Auto enrolment contribution
The levels are being phased in and are:
October 2012 – September 2017: At least 2% of qualifying earnings, of which, at least 1% must be paid by you the employer
From October 2017 to September 2018: least 5% of qualifying earnings, of which, at least 2% must be paid by you the employer
Then finally from October 2018: At least 8% of qualifying earnings, of which at least 3% must be paid by you the employer
Of course, these are just minimum amounts you may contractually offer more – or perhaps already do. However, any current pension contributions are most likely to be based on basic gross salary, so you will need to do your calculations to ensure your compliance (see below).
When do you need to do this?
You can choose to postpone automatically enrolling your people for up to three months from:
- Your Auto enrolment given staging date
- First day of their employment
- The date a person becomes eligible.
Otherwise you have one month to enrol a person as an active member and provide the information. A postponement on employment can be useful if you employ seasonal casual staff, or there are seasonal spikes in earnings during busy periods, or just whilst you are assessing a new person’s suitability for the role.
If you do not comply there are considerable fines (see below) – and they are checking!
How much will it cost me?
It is based on qualifying earnings. Now this is interesting, as anyone currently running a pension scheme will know the % contributed is normally based on a person’s basic gross salary. Be warned, this is not the case here, as qualifying earning include (but not limited to) the following gross payments:
- Basic salary
- statutory payments.
Actions you need to take
First find out your auto enrolment staging date and start making plans.
Trust me when I say it will take you a lot longer to organise than you may think. I personally would recommend you start making plans a year before your date if you can.
So first check your staging date.
If you have a current pension scheme then you will need to start finding out if it will meet the standards of a ‘qualifying scheme’. Your pension provider will know.
If it doesn’t, or you do not have a current pension scheme, then you need to find a pension scheme that meets the qualifying standards. Many medium sized businesses have already struggled to find a pension scheme provider who will provide a scheme at reasonable management costs and investment flexibility.
There is a default government scheme NEST. But you need time to do your homework to get the best scheme for you and your employees and this does take time.
It is important to note that the industry is reporting that it is already being overwhelmed by demand.
Also if like many SMEs you use the HRMCs free online return and PAYE service this will not be able to help you with the preparation and compliance for auto enrolment.
If you pay salaries in-house, or out of house, you need to check the software used will support compliance. Remember you will now need to monitor who is enrolled, who has opted out and in. Also you will need to monitor an individual’s status for any changes and every three years re-enrol entitled jobholders who have opted out. As well as make payments, deduct contributions and manage the scheme itself.
There are also certain legally required records you have to make for auto enrolment. You do need to assess if your current system will do this, or find one. It may help to have a look here. www.tpr.gov.uk/guidance-record-keeping. To see what you need to do.
Now assess your workforce
Eligible Jobholders are defined by those who
Work or ordinarily work in the UK under their contract; are aged at least 22 and the state pension age current at the time, and
Earn more than the personal allowance for Income Tax (currently for the tax year 14/15 £10,000).
You have to pay contributions on the part of your employee’s salary that falls within the prescribed contributions earnings band which is currently £5772 to £41,865 in this tax year (2014-15).
Eligible jobholders can choose to opt out within one month of being auto enrolled.
It may be worth mentioning it is illegal for any employer to put any requirement or pressure for an employee to ‘opt out’ of auto enrolment. It also does not affect your duty to enrol them in the first place – even if they tell you up front they do not want to be in it!
Your pension provider will generally provide an Opt Out form (you will need to confirm this with them) which must comply with strict auto enrolment guidelines.
If a person chooses to opt out you must stop deducting contributions. You then must refund the job holder any deductions made, and the pension provider must refund you. After this period however, if the job holder chooses to leave the scheme there are no refunds to anyone.
It is important to note that if a person is an eligible job holder and they opt out, you have to re-enrol them every 3 years. So you need a system to be able to monitor this.
Other people entitled to join – non eligible job holders
If they ask to join you have to contribute the minimum required amount.
- Work or ordinarily work in the UK under their contract
- Be aged 16-21, above state pension age, but under75, and those earning less than the personal allowance, but more than the lower limit of qualifying earnings.
Then there are entitled workers.
They have the right to join a pension scheme, but it does not have to be a qualifying scheme. Whatever the scheme, there is no legal requirement for you the employer to contribute. They must:
- Work or ordinarily work in the UK under their contact
- Be over 16 and under 75 and earn less than the personal allowance
Note if any person becomes an eligible jobholder at a later point in time during their employment with you, you are then required to auto enrol them as eligible jobholders. Therefore your system must monitor this.
Is there any employees exempt from Auto-enrolment?
- They are already members of an Employer’s Final Salary Pension scheme that meets the required standards
- Or are members of an Employer’s Money Purchase Pension Scheme where the employer contributes more than the statutory requirement and, it meets the required standards
- Or, member of an Employer’s Group Personal or Stakeholder Pension Scheme where the employer contributes more than the statutory requirement and, it meets the required standards.
You must register with the Pensions Regulator
You have to inform how you have fulfilled your new duties under auto enrolment by registering this information on line shortly after your staging date. Follow this link Automatic Enrolment Registration | The Pensions Regulator to see what you need to do.
What if you do not comply with auto enrolment?
The government is issuing fixed penalty fines to those employers who do not automatically comply and are currently doing so. The range of automatic fixed penalty fines is £50 to £10,000 per day.
This HR Micro Guides on Auto enrolment is just an overview. It is designed to give you a taste of what, as a small or medium sized business, you will now have to do to comply with your auto enrolment duties.
If you want a more comprehensive guide to auto enrolment then the Pensions Regulator has published comprehensive guides on line. Good luck, their Auto enrolment guide was not an easy read!
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