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Auto-Enrolment and Company Pensions

Following government changes to workplace pension regulations, all UK employers must help their workers save for retirement

Employers must provide a company pension which meets certain minimum quality standards.  All eligible employees who are 

not already in a qualifying workplace pension scheme (QWPS) will automatically be enrolled into a scheme.  Even if workers are not eligible to automatically enrol or opt-in, they still have the right to join a scheme and employers have a legal duty to their staff to enrol them in a suitable arrangement.

 

1.2 million employers 86% have no pension scheme or a 'shell' stakeholder

Source: Making Auto Enrolment Work Review October 2010  

 

Staging Date

The staging date is the date an employer is legally required to start auto-enrolling eligible jobholders and allowing an opt-in for non-eligible jobholders.  The staging dates depend upon the number of employees in the company as at 1st April 2012 and take place over a six-year period which commenced in October 2012.  It is the employer's duty to find out its own staging date.

 

Now that the larger employer - 'early stagers' are out of the way, the small to medium sized businesses need to start taking action in preparation for auto-enrolment.  There are financial, administration and employee perception implications which need to be addressed; HR, payroll and existing pension arrangements are also likely to be impacted.  Poor choices may result in damage to the business in the long-run. 

 

"Our research shows that...employers with as few as one hundred staff - are expecting help from NEST and other providers...the fact is we won't be able to and nether will any other provider."

 

Roy Porter, NEST assistant director, distribution  

Source:www.professionalpensions.com, "NEST warns small employers will not be 'hand held', 30  October 2012

 

Safeguards

The safeguards mean an employer must ensure:

  • It does not take any action for the sole or main purpose of inducing a jobholder to opt out of a qualifying scheme, or a worker to give up membership of a pension scheme (this is known as 'inducement').
  • During recruitment, it or it's representative does not ask any questions or make any statements that either states or implies that an applicant's success will depend on whether they intend to opt out of the pension scheme (this is known as 'prohibited recruitment conduct').
  • It does not breach new employment rights for individuals not to be unfairly dismissed or suffer detriment on grounds related to the new employer duties.

How will the reforms affect employers and employees?

All employers operating in the UK will have to automatically enrol employees into a qualifying pension scheme who are:

  • Aged between 22 and state pension age.
  • Earn more than the minimum earnings threshold in their pay period - this amount is set by the government each year and may continue to be based on the income tax personal threshold (£10,000 in the 2014/15 tax year), and;
  • not currently in a qualifying pension scheme.

The table below shows the auto-enrolment trigger amounts for different payment frequencies.

 

 

 

 

 

 

 

 

For the scheme to be qualifying it must pay a minimum level of contributions.  The contribution levels are covered below.  The qualifying scheme could be an occupational pension scheme, a personal pension scheme or NEST.

 

How much do employers and employees have to pay in?

For a pension scheme to qualify under new regulations, there are rules about the minimum contribution levels required.  Employers and employees can pay higher contributions to build up greater levels of pension savings.

 

There are two qualifying bases: banded earnings and pensionable earnings.

 

Banded earnings basis

From October 2012, the minimum contribution is 8% of a band of earnings (£5,772 to £41,865 using the figures for the 2014/15 tax year), but the lower and upper levels will change from time to time, probably on an annual basis.

 

The employer must contribute at least 3% and can ask employees to pay the remaining amount up to the 8% total.  These percentages apply to the employee's total earnings within the band, so they include overtime and bonuses, not just basic pay.

 

Pensionable earnings basis

Pensionable earnings are the higher of: 

  • The employer's definition of pensionable earnings.

or

  • Basic pay - in other words, those elements of pay that do not vary.  Basic pay excludes variable elements of pay such as commission, bonuses and overtime. 

Contributions are based on the employee's earnings from £1 upwards. This is different to the banded earnings basis, where contributions are only based on the employee's earnings within the band (£5,772 to £41,865 using the figures for the 2014/15 tax year).

 

Employers using a defined contribution scheme can choose not to base contributions on banded earnings if they satisfy one of the following minimum contribution requirements.  This is known as certification.  The certificate can cover all or part of the workforce.

 

 

 

 

 

 

 

 

 

 

If you already have an existing scheme, you may find it easier to use a pensionable earnings basis rather than change to a banded earnings basis.  You should take professional financial advice if you're thinking of changing the contribution basis. 

 

When auto-enrolment starts, will contributions have to be at the full qualifying rate? 

If you certify to the Pensions Regulator that your existing scheme meets the minimum contribution levels, you can't reduce contributions to a lower level than you have given in the certificate.  However, if you provided a new certificate, you could change to a lower qualifying basis.  For example, you could change from paying 8% of pensionable earnings at the full rate to phasing in the contributions.  It's important to bear in mind though that you should consult with your employees about any reduction and you may need to give them at least three months' notice.  We recommend that you get professional legal advice if you are considering changing your contribution basis.  

 

If you auto-enrol existing and new employees into a new auto-enrolment scheme, then depending on your staging date, you can choose for contributions to be phased-in.

 

Phased contributions for all banded earnings schemes have to meet the following minimum levels, including tax relief.

 

 

 

 

 

 

 

Phased contributions for all pensionable earnings schemes have to meet the following minimum levels, including tax relief:

 

 

 

 

 

 

 

 

 

 

 

 

What is NEST?

NEST stands for the National Employment Savings Trust, a new government-backed pension scheme.  It was launched on 1st October 2012 and provides access to any employer that wishes to use it.  However, it is only one of the solutions available to employers for auto-enrolling employees.

 

Possible use for NEST are:

  • as a starter scheme (for example, where new employees might go into NEST for one year before moving it the main scheme), or
  • for specific categories of employees only, or
  • as a scheme for employees who would receive a lower employer contribution than employees in the main scheme, or
  • as the only scheme.

Your choice of whether to use NEST or another provider, or to use a combination, will depend on your requirements.

 

Summary - Employer's Duties

  • Following a prescribed process, automatically enrol any eligible jobholder into a scheme.
  • Make arrangements to establish active membership of an automatic enrolment scheme if a non-eligible jobholder chooses to opt into a pension scheme.
  • Make arrangements to establish active membership of a pension scheme if an entitled worker chooses to join.
  • Provide information to workers about how the different duties affect them.
  • Register with The Pensions Regulator to state what they have done to comply with their new duties.
  • Process any opt-outs from the pension scheme, including refunds of contributions.
  • Ensure they do not take any actions or make any omission by which the eligible jobholder ceases to be an active member of the qualifying scheme.
  • Ensure they do not take any action or make any omission by which the scheme ceases to be a qualifying scheme.
  • Re-enrol any eligible jobholders who opted out or ceased active membership, after a certain amount of time (approximately every three years). 

Project Management Team

You should put together a team made up of representatives from your HR, Pensions, Payroll, IT and Communications teams to project-manage the design and implementation of the auto-enrolment strategy.  Main problems so far include payroll systems; co-ordination of HR, payroll and pensions teams et al; part-timers with irregular earnings patterns and selection of suitable qualifying scheme and contribution basis.

 

Future problems are regular assessments of workers with different pay reference periods and temporary earnings 'spikes'; payroll systems, whether robust and able to cope with irregular earnings patterns and lack of internet access in the workplace leading to poor communication. 

 

Impact 

Auto-enrolment is as much a process issue as it is a pensions issue.  An employer will need to ensure that it puts the right processes in place to deal with auto-enrolment at staging date...AND BEYOND.  HR will need to determine who will be responsible for providing information to the different categories of worker, whether it is HR or an external party such as the pension scheme provider.  Whatever the preference, this information will need to be produced before your staging date.  HR should review any contracts of employment and offer documentation for provisions that may conflict with the auto-enrolment requirements, such as clauses that make pension entitlement conditional upon a minimum level of service or which require  workers to opt out of pension benefits for all or part of their service.

 

The introduction of auto-enrolment will increase costs for most employers through:

  • Increased employer pension contributions.
  • Increased administration costs.
  • Increased staff required and or systems costs - "can your current teams cope with the increase in workload?"
  • System costs - "do your systems need updating - indeed  - can the existing system even be updated?"
  • One-off project costs for enrolling existing staff that are not members of existing pension arrangements (assuming that it will be certified appropriately) prior to, or at, staging date.

Strategy

You need to make several key decisions in order to determine your auto-enrolment strategy, including which scheme to use, what the contribution rate will  be, whether to operate a waiting period by using the postponement option and whether to use contractual or statutory enrolment.

 

Contribution Strategy

Communication is the key.  Therefore, you as an employer need to develop an effective communication strategy to ensure that your workforce knows what's happening and when an how they stand to benefit.

 

As well as deciding on your overall communications strategy, you need to ensure you are prepared to provide workers with the mandatory auto-enrolment information that you are legally obliged to provide to your workers within the relevant statutory timescales.

 

Governance

You should consider whether to appoint a Governance Committee to ensure members' interests are looked after:

  • Reviewing administration.
  • Selecting the default fund and reviewing investment choices.
  • Dealing with UK Regulator.

How Jacobs Financial can help

We have access to an Employer Impact Assessment Tool in order to give you an insight into your workforce and existing pension arrangements in the light of auto-enrolment.  Indeed, the analysis should provide you with the information, enabling you to much better understand the impact of auto-enrolment as part of the journey to provide an agreed solution.

 

Jacobs Financial has created a range of services to guide you through the whole spectrum of employer responsibilities and can help you to plan the most appropriate auto-enrolment solution for your business, including:

  • What the new rules mean to your business.
  • When you are legally required to start auto-enrolling your employees into a qualifying workplace pension scheme (your staging date).
  • Impact assessment.
  • Key decisions on the most appropriate contributions structure to be made, and the planning process.
  • How to segment your workforce into the three categories defined in legislation - eligible jobholders, non-eligible jobholders and entitled workers.
  • Which pension schemes are right for both you and your workforce.
  • Guidance as to the most appropriate IT solution.
  • How to make it happen.
  • Keeping abreast of compliance and what the regulator expects.  Providing an audit trail to help you meet your regulatory duties. 

The Jacobs Financial approach to auto-enrolment is designed to help the employer assess the needs of its company and find the right solutions for both the business and its staff.  We take account of all aspects of the benefits package and our proposition enables us to offer a dedicated ongoing service.

 

If you would like to know more about the services we offer, please contact us at enquiries@jacobsfinancial.co.uk