|What is Automatic Enrolment for pension’s purposes?
Automatic enrolment as a general term usually defines a governmental objective to establish pension schemes in which targeted individuals are automatically enrolled. Using this as a basis for setting up such schemes typically results in far higher participation rates than when individuals are left to opt-in to schemes voluntarily. The introduction of automatic enrolment for workplace pensions is intended to ensure that many more employees begin to make proper provision for having a work based pension.
The new rules for automatic enrolment came into effect on 1 October 2012. With the introduction of automatic enrolment the requirement for an employer to provide access for staff to a stakeholder pension scheme has been removed.
These new pension rules are encouraging employees to start making provision for their retirement – employers and government will also contribute to make a larger pension pot.
Preparing for automatic enrolment
By the time that automatic enrolment has been phased in all employers will need to have a workplace pension (even if there is only one employee).
Empirical evidence provided by larger firms, who have completed the enrolment process, concludes that automation of the various tasks associated with offering automatic enrolment is advised. This has ensured compliance with the rules and has minimised errors. This can be best achieved by ensuring that payroll or human resources software includes automatic enrolment functionality.
The timetable for employers to begin enrolling their staff started with larger businesses, followed by medium, and then small companies. It is expected that all employers will be part of the scheme by February 2018. The new rules only apply for the provision of pensions to employees, not the self-employed. The methodology for phasing in the scheme is known as ‘staging’.
Employers can use a staging calculator provided by The Pensions Regulator to confirm their exact staging date. Most firms with less than 50 employees will start the process between 1 June 2015 and 1 April 2017. New employers will get their own, later, staging dates but should all be signed up to use automatic enrolment by February 2018.
It is also possible, under certain circumstances, to bring forward or move back an employer’s allocated staging date. The implementation of automatic enrolment is being staggered, in part, to ensure that the process is well managed and takes into account the time needed for businesses to adjust.
Contributions for automatic enrolment
The minimum contributions that employers must pay into their staff’s pension scheme are shown in the table below:
As the table shows, the employer’s contributions are being phased in and start at 1% rising to 3% of staff’s qualifying earnings. The qualifying earnings amount is set by the Department for Work & Pensions. There is no requirement to begin making contributions until after an employer’s staging date.
For the current (2015/16) tax year this is set between £5,824 and £42,385 a year. This means that the first £5,824 of an employee’s earnings isn’t included in the automatic enrolment calculation. For example, if a worker earns £20,000 their qualifying earnings would be £14,176. The maximum amount contributions can be based on is £36,561 (£42,385 minus £5,824) for the 2015/16 tax year. This issue received much press commentary as employees won’t actually see the 8% contribution based on their full salary.
There are special rules for employees earning less than £10,000, who will usually have the right to opt in to the scheme, and employees aged less than 22 years and earning in excess of £10,000. It is important that employers are able to monitor any changes in employee ages and earnings so they can properly enrol any new or existing employees who become eligible at a future date.
It is also important that employers keep their staff informed throughout the automatic enrolment process, for example, by being told how much they will contribute and when.
Whatever their circumstances employers must make eligible employees active members of a pension scheme within a six week period that starts on the date an employee first becomes eligible for automatic enrolment.
Setting up a qualifying scheme?
Employers who do not have a pension scheme or want to change from an existing scheme will need to find a pension provider that offers an automatic enrolment scheme. Proper due diligence should be used to ensure that any scheme providers identified are well run and meet all the necessary legal requirements.
Most employers are likely to use schemes that are known as defined contribution (DC) schemes. This is because these types of scheme do not offer a fixed pension amount on retirement. This means that employers are only committed to paying a finite amount into the scheme.
Employers who already offer a workplace pension may not notice many changes, but there are significant changes for those employees that will be joining a work based pension for the first time. Employers need to check that any existing scheme is a qualifying scheme within the rules for automatic enrolment.
Accessing pension funds
Opting out of a pension scheme
There are certain rules which must be met in order to opt out of a pension scheme. In addition, employees will usually be re-enrolled again every three years or after starting a new job. If this happens and an employee still wishes to opt out, they will need to complete the opt-out process again.
There are safeguards in place to prevent employers from: