Auto Enrolment or Workplace Pensions – An Employee’s Guide

To help people save more for their retirement, the government now requires employers to enrol their workers into a workplace pension scheme.

Why is this happening?

The government’s aim is for more people to have another income, on top of the State Pension, when they come to retire. The full basic State Pension in 2015-16 is £115.95 a week for a single person. This is intended to be a foundation only - you may want more. With an ageing population, the country just won’t have enough money to pay an adequate state pension to us all – it needs people to begin to save for their own retirement to supplement the state pension.

Thus, laws have been passed compelling all employers to enrol their workers automatically into a pension scheme to make it easier for people to start saving for their retirement. Employers face large fines if they dissuade any employees from opting in or encourage any to opt out.

When is this happening?

Your own specific “staging date” is set out in the covering email or letter from us.

This is the date from which your business must begin to comply with the rules relating to auto enrolment. This not far off now and much needs to be considered and done before this date.

What are my obligations as an employer?

Below is a summary of what you as an employer must do:

Before Your Staging Date

On Your Staging Date

After Your Staging Date

  • Review any current pension scheme you have in place to determine how it compares to the new requirements and what changes you need to make.
  • Assess how your workforce will be structured on your staging date to determine what duties you will have for each type of worker.
  • Choose a pension scheme for workers who will be automatically enrolled and agree how this will be established.
  • Possibly choose an alternative pension scheme for workers who will be given the option to join and agree how this will be established.
  • Engage with your pension and payroll providers.
  • Communicate the changes to your workforce.
  • Tell your workforce about how automatic enrolment affects them.
  • Automatically enroll certain workers into your pension scheme.
  • Invite other types of worker to join your pension scheme.
  • You must register with The Pensions Regulator (TPR) within four months of your staging date.
  • Maintain records to prove compliance with the employer duties.
  • Continue to automatically enroll certain workers into your pension scheme.
  • Run an opt in/joining process for other workers.
  • Ensure the correct contributions are deducted and paid into the pension scheme.
  • Manage opt outs, process refunds and re-enroll workers roughly every three years.
  • Monitor age and earnings regularly as workers can move between different categories.
  • Re-register with TPR roughly every three years.
  • Submit a Declaration of Compliance to TPR within 5 months of your staging date


We can explain each of these duties and take away all the hassle of having to comply.

Employer Duties Defined by Worker Category

The tables below show the different categories of workers and an overview of the corresponding employer duties:

Category of Worker

Earnings / Age (inclusive)

16 - 21

22 - state pension age

State pension age - 75

Below £5,876

Entitled Worker

Between £5,876 & £10,000

Non-eligible Jobholder

Over £10,000

Non-eligible Jobholder

Eligible Jobholder

Non-eligible Jobholder

These figures are for 2017/18 - Directors are not deemed to be workers unless they have a contract of employment

Worker Category

Employer Duty

Eligible Jobholder

Must be automatically enrolled into an automatic enrolment scheme. Contributions must be made of at least the minimum amount for as long as they remain active members of the scheme

Non-eligible Jobholder

Must be offered the opportunity to opt in to an automatic enrolment scheme. Contributions must be made of at least the minimum amount for as long as they remain active members of the scheme

Entitled Worker

Must be offered the opportunity to join a pension scheme. They can make contributions if they choose but there is no requirement for an employer contribution


We can categorise each of your workers into their respective category for you.

Options for Contributions

There are two options for deciding the amount of earnings to be used as the basis for how much the employer and employee contributions to the scheme should be. These are ‘banded qualifying earnings’ OR ‘scheme certification’.

Banded Qualifying Earnings Option

Minimum contributions can be based on ‘banded qualifying earnings’ which for the 2017/18 tax year starting 6th April 2017 are between £5,876 and £45,000. The band is £490 to £3,750 per month for monthly paid staff.

Every year the government reviews the earnings thresholds for automatic enrolment. The new thresholds take effect from the start of the tax year on 6th April each year

Qualifying earnings include almost all forms of taxable pay such as:

  • Salary or Wages/Commission/Bonuses/Overtime/Statutory Sick Pay/Statutory Maternity Pay/Ordinary or Additional Statutory Paternity Pay/Statutory Adoption Pay.

However, under current rules no contributions have to be paid on earnings below or above the above band.

Contributions are being phased/increased on the following dates:

Date

Total minimum contribution

Minimum employer contribution %

Minimum employee contribution %

Up to 5th April 2018

2%

1%

1%

6th April 2018 to 5th April 2019

5%

2%

3%

6th April 2019 onwards

8%

3%

5%


Scheme Certification Option

Instead of using banded earnings, it is possible to establish a qualifying pension scheme for auto-enrolment purposes based one of three the following definition of earnings:

Scheme Type

Definition of Earnings

Minimum Contribution Levels

Total
Employer
Employee (assuming minimum employer)

Tier/Set 1

Company defined ‘pensionable earnings’ which must be at least equal to basic pay

9%
4%
5%

Tier/Set 2

Company defined pensionable earnings at least equal to basic pay BUT provided pensionable pay (on aggregate) is at least 85% of total earnings

8%
3%
5%

Tier/Set 3

Total earnings

8%
3%
4%


The table below confirms the phasing applicable for the different sets available:

Scheme Type

Timeline

Minimum Contribution Levels

Total
Employer
Employee (assuming minimum employer)

Set 1*

Staging Date to 05/04/2018
06/04/2018 - 05/04-2019
06/04/2019 onwards

3%
6%
9%

2%
3%
4%

1%
4%
5%

Set 2*

Staging Date to 05/04/2018
06/04/2018 - 05/04-2019
06/04/2019 onwards

2%
5%
8%

1%
2%
3%

1%
3%
5%

Set 3*

Staging Date to 05/04/2018
06/04/2018 - 05/04-2019
06/04/2019 onwards

2%
5%
7%

1%
3%
3%

1%
3%
4%


Tier/Set One: Basic Pay – This includes geographical allowances, but no other allowances, benefits in kind or irregular payments such as commission, overtime or bonus. This basis may apply where for example commission represents a large proportion of total pay for most of the workforce.

Tier/Set Two: Here the total pensionable earnings of all relevant jobholders to whom this tier applies must be at least equal to basic pay and must constitute at least 85% of their total earnings in aggregate (the ratio of pensionable pay to earnings can be calculated as an average at scheme level).

Tier Three: Total Pay – Here all the employee’s earnings must be pensionable.

Certificated schemes are more complex to operate and so generally increase the cost to the employer of implementing and running auto enrolment.

Pension Scheme Options

If you only have non-eligible jobholders (earning between £5,876 and £10,000) or entitled workers (earning less than £5,876), and no-one chooses to opt in or join respectively, then you won’t need to set up a pension scheme (by far the most costly element of any set-up) unless or until someone does choose to opt in, join or you have an employee auto enrolled because they earn more than £10,000 a year or £833 a month.

If you have any eligible workers (excluding directors) earning above £10,000 a year, you will have to set up a pension scheme.

If you only have non-eligible jobholders and/or entitled workers, you only need to write to them once at the start of auto enrolment (staging date) or when they join your business. You don’t need to write every year/again asking them if they would like to opt in/join.

If you have to set up a pension scheme, you have two broad options for providing your staff with a qualifying workplace pension scheme which satisfies your legislative obligations:

a) Own company pension scheme:

Stakeholder Pension, a Group Personal Pension (GPP) or a Contracted in Money Purchase Scheme (CIMP); OR

b) Master Trust pension scheme:

NEST, The People’s Pension, Now Pensions

a) Own Company Pension Scheme

Historically CIMPs were established by city institutions as combined employee and employer contributions could be much greater into a CIMP than a GPP. Stakeholder schemes and GPPs are very similar. The only difference between a Stakeholder and GPP are that the fund choice on a Stakeholder scheme is limited by the cap on charges that apply to Stakeholder Pensions.

Both CIMPs, GPPs and Stakeholders are now able to receive employee contributions up to 100% of salary or £3,600 if lower. Tax relief is only available on employer and employee contributions totalling £40,000. Employer contributions that take total contributions above the £40,000 limit are taxed on the employee as a benefit in kind.

The main advantage of a CIMP over a GPP is that higher rate tax relief is available at source, through payroll, via a CIMP. In order to claim higher rate tax relief members of a GPP or Stakeholder need to complete a tax return. However, CIMPs are trust based schemes and pension legislation has made them much more onerous to run for both the Employer and the Trustees than a GPP or stakeholder scheme which are classed as contract based schemes. As a result, many existing CIMPs are being wound up because of the changes.

b) Master Trust Pension Scheme Offering

There are three major providers that are able to provide a qualifying workplace scheme through a Master Trust as opposed to a specific Company Pension Scheme.

The table below compares the benefits of the schemes offered by NEST, The People’s Pension and Now Pensions.

NEST

The People's Pension

Now Pensions

Charges

1.8% initial fee on contributions, plus 0.3% AMC

£300 + VAT set up fee, plus 0.5% AMC

£1.50 pm employee charge, plus £20 + VAT pm employer charge, plus 0.5% AMC

Default fund strategy

Passive

Passive

Active

Number of funds available

7

6

1

How the contributions work

Relief at Source

This means that where the employee is required to pay a pension contribution of 1%, only 0.8% of will be deducted from their net salary. The employee pays the 0.8% and NEST recovers the 0.2% from HMRC on their behalf. Any higher rate taxpayer can claim more tax relief via their self assessment tax return.

Relief at Source

This means that where the employee is required to pay a pension contribution of 1%, only 0.8% of will be deducted from their net salary. The employee pays the 0.8% and NEST recovers the 0.2% from HMRC on their behalf. Any higher rate taxpayer can claim more tax relief via their self assessment tax return.

Relief at Source

This means that where the employee is required to pay a pension contribution of 1%, only 0.8% of will be deducted from their net salary. The employee pays the 0.8% and NEST recovers the 0.2% from HMRC on their behalf. Any higher rate taxpayer can claim more tax relief via their self assessment tax return.

Contribution Cap

£4,400 (to be amended to annual allowance in 2017)

Annual allowance (£40,000 as per 15/16)

Annual allowance (£40,000 as per 15/16)

Transfers In & Out

No

Yes

Yes

Pension track record

Formed in 2010, first accepted members in 2012.

Commenced in 1942.

Launched in UK in 2012, but running Danish national pension for over 45 years.

Ownership

Government backed, not for profit organisation.

Not for profit organisation.

Run by Danish Pension Provider, ATP.

Postponement Options

It is possible to postpone automatic enrolment from:

  • Your staging date
  • A staff member’s first day of employment
  • The date a staff member first becomes eligible for automatic enrolment.

If you postpone your staging date, it doesn’t change your staging date and doesn’t change the dates by which you have to certify compliance with The Pensions Regulator (TPR).

You must write to tell the staff whose automatic enrolment you’re postponing. You will have one month from the date postponement starts to write to them. You can postpone for up to three months. You can postpone as many or as few staff as you like and the postponement period doesn’t have to be the same length for everyone. During the postponement period, staff whose automatic enrolment you’ve postponed can choose to opt in to the pension scheme.

On the last day of the postponement period, you’ll need to know whether any member of staff whose automatic enrolment you’ve postponed is still eligible to be automatically enrolled. If they are, you must put them into a pension scheme straight away. You cannot apply a further period of postponement even if you postponed for less than the three months allowed.

Postponing automatic enrolment for all employees for a period up to 3 months has the following advantages:

- It allows further time to develop your business processes to meet your employer duties for automatic enrolment; and

- Delays the start of employer and employee contributions and thus saves money for 3 months.

Postponing all new employees and employees moving between categories ensures you do not have to make contributions for staff employed on very short term contracts, for those who leave after a very short period of time or for lower paid employees with short term earnings spikes.

Salary Exchange

Salary exchange (also known as salary sacrifice) is an agreement between you and your workers which forms part of their contract of employment. Each worker agrees to exchange part of their salary in return for a non cash benefit such as employer contributions into a pension scheme.

Salary exchange is a tax efficient way for you and your workers to make contributions into the scheme. The amount the worker agrees to exchange is taken from their gross salary which means they don’t pay any tax or employee’s National Insurance Contributions (NICs) on it. It also means you don’t have to pay employer’s NICs on the amount exchanged.

You can decide what to do with your savings. For example, you may want to use them to help offset the increase in costs to meet your employer duties. Or you may want to re-invest some of your savings into the pension scheme on behalf of your workers.

Whilst this is allowable for a qualifying scheme, you are not permitted to automatically enrol workers on this basis so employee agreements to a salary sacrifice scheme would have to be signed before your staging date or the salary sacrifice element of the scheme offered at a later date.

Whilst a salary sacrifice scheme can save money for both the employee and you as employer, the actual savings are not that substantial, especially where the banded earnings option is adopted. Moreover, as employer you would actually have to renegotiate contracts of employment for each member of staff to formally reduce their basic pay by the amount of pension contribution being sacrificed – and you need to discuss this change to the contract of employment each and every year. This is because the employee is actually agreeing to a reduction to their basic pay – and this in turn could adversely affect their ability say to obtain a mortgage etc.

You can find out more about Employer’s Duties under Auto Enrolment and Workplace Pensions here: http://www.thepensionsregulator.gov.uk/en/employers

and here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/299886/auto-key-facts-enrolment-booklet.pdf

You can find out more about NEST here: http://www.advancedasset.co.uk/userfiles/files/factsheets/A_guide_to_NEST.pdf

This link explains what employer’s duties you may have even if you have no employees automatically enrolled: http://www.icaew.com/en/technical/practice-resources/icaew-practice-support/practicewire/news/nobody-to-put-into-a-pension-scheme-you-may-still-have-automatic-enrolment-duties?utm_source=practicewirenewsletter&utm_medium=copylink&utm_content=aug11&utm_campaign=practicewire

This guidance is intended only as a factual summary of how auto enrolment impacts you. It is not intended to give any financial advice.