Auto-enrolment – what does it involve?
Basically, all employers will be obliged to automatically enrol their eligible jobholders into a pension scheme. Implementation is being phased in, with larger employers having had to comply earlier. Implementation begins on 1 October 2012, although most employers with less than 50 employees should not be required to comply until at least August 2015.
Who needs to be auto-enrolled?
Eligible jobholders need to be auto-enrolled. An eligible jobholder is an individual who:
- is a “worker” under the relevant legislation (this involves working under a contract of employment or performing work or services personally but not undertaking that work as part of their own business);
- is aged between 22 and the state pension age;
- is working, or ordinarily working, in the UK; and
- earns an amount in excess of the so-called “earnings trigger” for automatic enrolment (which currently sits at £9,440 but will rise to £10,000 for the 2014/2015 tax year. This amount is inclusive of bonuses, overtime and statutory pay.
Contributions payable by the jobholder (and on his behalf by the employer) must be calculated according to his qualifying earnings. For 2013/2014 this is a band of earnings between £5,668 and £41,450 and in 2014/2015, the band of earnings will be between £5,772 and £41,865.
It is worth noting that the earnings trigger and qualifying earnings will be reviewed annually to allow for inflation.
There are further rules in relation to those workers who are not eligible. For example, certain workers may have the right to opt in to the pension scheme.
How can employees who are not entitled to be auto-enrolled opt in?
Employees who are not eligible as above may have the option of opting in to the pension scheme. Those employees who are under 22 or over the state pension age can give their employer notice accordingly.
Employees who earn less than the earnings trigger may also give their employer notice that they wish to opt in as follows:
- if an employee earns more than the lower limit of the qualifying earnings band (currently sitting at £5,668 but rising to £5,772 in the 2014/2015 tax year) but less than the earnings trigger (currently £9,440 but rising to £10,000) then he is entitled to opt in to the scheme; or
- if an employee earns less than the lower limit of the qualifying earnings band (i.e. less than £5,668) then he has a right to opt in, although the pension scheme in this circumstance does not need to be a “qualifying” pension scheme (see below). This means the scheme need not meet certain criteria and the employer can choose whether or not to make a contribution.
An opt in notice must be in writing and signed by the employee. If the notice is given via email and so unsigned, it must include a statement confirming that the employee personally submitted the notice.
Employers will be obliged to provide their employees with information on opting in within one month, beginning upon the date on which the employee would be entitled to opt in.
Will any pension scheme do?
In a word, no. An automatic enrolment scheme is either:
- the National Employment Savings Trust (“NEST”), a scheme set up by the Government; or
- a “qualifying scheme”.
NEST was set up by the National Employment Savings Trust Order 2010. By enrolling eligible jobholders in NEST automatically, employers will comply with the new law. The NEST scheme incorporates a maximum annual contribution limit, which is currently £4,500 (although this, among other things, is subject to review). Employers are charged for using NEST i.e., there is an annual management charge of 0.3% of a member’s fund value.
Alternatively, employers may enrol employees in a qualifying scheme. Qualifying schemes include occupational or personal pension schemes which are registered under the Finance Act 2004. These schemes must also meet the “quality requirements”, set out in the Pensions Act 2008. For example, a UK personal pension scheme satisfies the quality requirement if, among other things, the employer’s contribution (however calculated) is equal to or more than 3% of the amount of the employee’s qualifying earnings within a specific period.
Importantly, an employee should not be obliged to choose a scheme and need not provide any information to remain an active member of a scheme. So, in other words, there is no pressure on an employee to make an investment choice.
What level of contribution is required?
If an employer has enrolled employees into a qualifying scheme which is an occupational defined contribution scheme (i.e. money purchase scheme), the minimum contributions are as follows:
- employer contribution: 3%
- member contribution: 4%
- tax relief: 1%
If an employer chooses to make use of NEST, the minimum contributions will match those in respect of defined contribution schemes.
Once an employee has been auto-enrolled the contributions payable by him (and on his behalf by the employer) must be calculated according to his qualifying earnings. For 2013/14, this is earnings between £5,668 and £41,450.
Do employers have to start making these contributions immediately upon auto-enrolment?
No. These contributions will be phased in over five years as follows:
- During the first four years, employer and employee contributions will both sit at 1%.
- During the fifth year, the employer contribution will sit at 2% whereas the employee contribution will increase to 3%.
- From the end of the fifth year onwards, the contributions will be as set out above.
What happens once employees are enrolled?
Employers are under a statutory duty not to take any action (or make any omission) which would lead to either:
- an existing eligible jobholder ceasing to be an active member of a scheme; or
- a scheme ceasing to be a qualifying scheme.
Can employees opt out?
Employees are entitled to opt out of a scheme. To do so, the employee must give notice.
An employee who is an active member of a qualifying scheme must give notice in the form set out in the Occupational and Personal Pension Schemes (Automatic Enrolment) Regulations 2010 within one month of the date on which he or she became a member (or within one month of the date on which he or she received enrolment information, whichever date is the later).
If an employee has opted out, there is a duty on the employer to automatically re-enrol that employee every three years. Obviously the employee may opt out each time.
Do employers really have to comply with this?
Yes. Any attempt to contract out of the obligation in a contract of employment is prohibited under the Pensions Act 2008 (the only exception being where a compromise agreement is entered into).
Employers are precluded from asking prospective employees whether or not they intend to opt out of automatic enrolment.
Further, employers may not offer any inducements to encourage employees to opt out of a scheme.
How Exactly Is This Being Phased In?
The starting date was 1 October 2012, although many employers need not worry until further down the line. So-called “staging dates” have been set, based upon the number of employees in an employer’s largest PAYE scheme.
Those employers with 120,000 or more employees in their largest PAYE scheme started auto-enrolment on 1 October 2012. There are a number of fixed dates, up to 1 July 2013 where employers with 3,000 to 3,999 employees in their largest PAYE scheme require to auto-enrol.
For smaller businesses, the Government has acknowledged more time may be required. A timetable has been published in respect of smaller businesses as follows:
Auto-enrolment duty date
|250 or more||1 October, 2012||1 February, 2014|
|50 to 249 members||1 April, 2014||1 April, 2015|
|Test tranche for less than 30 members||1 June, 2015||30 June, 2015|
|30 to 49 members||1 August, 2015||1 October, 2015|
|Less than 30 members||1 January, 2016||1 April, 2017|
|Employers without PAYE schemes||1 April, 2017||---|
|New employers Apr 2012 to Mar 2013||1 May, 2017||---|
|New employers Apr 2013 to Mar 2014||
1 July, 2017
|New employers Apr 2014 to Mar 2015||1 August, 2017||---|
|New employers Apr 2015 to Dec 2015||1 October, 2017||---|
|New employers Jan 2016 to Sept 2016||1 November, 2017||---|
|New employers Oct 2016 to Jun 2017||1 January, 2018||---|
|New employers Jul 2017 to Sept 2017||1 February, 2018||---|
|New employers Oct 2017||Immediate Duty|