Pension Auto-Enrolment: the good, the bad and the ugly


Retirement Speedometer Racing to End of Work CareerThis article is aimed at micro businesses with employees, outlining how to comply with pension-auto enrolment. If you’re a freelancer you may still be affected, your legal structure amongst other things impacting upon whether you’ll need to comply. It’s quite complex so contact the pensions regulator to clarify.

The Office for National Statistics has projected that by 2020, people over 50 will comprise almost a third (32%) of the workforce and almost half (48%) the adult population. Staggering statistics, that but for a baby boom, suggest a greying UK.

People are living longer, longer than ever before and as such, they’re spending more. Living upwards of 80 odd years you’re going to need a pretty hefty pension to support you in your elder years.

All too aware of this and wary of the need for a growing state pension fund, Parliament has recently introduced Pension Auto-Enrolment, a compulsory scheme that’s set to force businesses big and small into getting their employees onto pension schemes.

It’s already been unfurled for companies with 10,000 employees or more and it’s slowly but surely working its way across the business community. Come January 2016 it’ll start to affect the micro business community specifically, applying to businesses with less than 30 employees operating a PAYE scheme.

Yes that might seem way off, but similar to RTI, there’s a significant amount of groundwork involved. Also, should your micro business really take off, it’s something that could be applying to you sooner, rather than later.

Here’s an overview of what you’ll need to do…

Firstly, assess your staff and identify who to automatically enrol

Before anything, you’ll need to determine which staff you’ll need to enrol. In government legalese, those who’ll need automatic enrolment are called ‘eligible jobholders.’ An eligible jobholder is:

• Aged between 22 and state pension age.

• Working, or ordinarily working, in the UK .

• Earning above a certain amount (currently proposed to be £7,475).

When considering whether a worker’s earnings are above or below the lower earnings limit, an employer needs to look at what is known as the worker’s ‘qualifying earnings’. This will include earnings in salary, overtime, commission, bonuses, sick pay, maternity, paternity and adoption pay, so bear this mind when deciding whether they’re eligible.

Secondly, choose a pension scheme

If your business contains staff within the ‘eligible jobholder’ bracket, then you’ll need to choose a pension scheme they can use for automatic enrolment. There’s a wide range of options, so speak to the regulator and bring in some of their expertise, that’s what they’re there for!

Register with the regulator

To comply with auto-enrolment, all employers will need to register with the regulator through an online process. You’ll be able to do this here.

Make pension contributions

Businesses must pay an overall minimum contribution of at least 8% of the worker’s qualifying earnings, of which at least 3% of this contribution must be from the employer. In most cases, Government tax relief will account for 1% of the total 8%.

Process any opt-out notices

Workers who have been automatically enrolled have the right to opt out of the employer’s pension scheme. To do so they’ll need to complete an ‘opt-out’ notice

There is an opt-out period of 1 month, where any deductions made from their salary will

need to be refunded. The employee can choose to cease membership at any time, although they may not be entitled to a cash refund of contributions after the end of the 1-month opt-out period.

To opt out, workers must give notice via a document called an ‘opt-out notice’ which will need to be handed to the employer. These notices will usually only be available from the pension scheme provider and not the employer, so that workers do not feel pressured into opting out.

When employers receive a valid opt-out notice within the 1-month period, they must pay back any contributions deducted from the worker’s pay. Equally, any contributions the employer has made must be refunded to the employer by the pension scheme.

Process opt-in or joining requests

As well as automatically-enrolling eligible jobholders, employers must also put certain other workers into a pension scheme, should these individuals ask. What the employer will need to do depends on the type of worker.

Certain workers have a right to ‘opt in’ to an automatic enrolment scheme and the employer is required to arrange this and make employer contributions. Other workers have a right to ‘join’ any scheme but there is no requirement on the employer to make employer contributions in respect of these workers; although the employer must set up the deduction of the worker’s contributions from pay. If this is a little unclear, speak to the Pensions Regulator to clarify!

Keep accurate records

Along with all these requirements, employers must keep specific records about their workers and their pension scheme(s). Most of these records must be kept for a minimum of 6 years and electronic or paper filing systems can be used to keep or store any records, as long as they are legible or can be produced in a legible way if the regulator asks to see them.

Phew! Quite a bit to sort out isn’t it.

Whilst 2016 may seem like a long way away, it’ll no doubt come around rapidly. Amongst the rest of your compliance worries, Pension-Auto Enrolment is something that’s well worth keeping at the back of your mind…