Welcome to our no-nonsense guide to Auto Enrolment. Over this 2-part blog we’ll be guiding you through everything you need to know on the subject. This includes what it is, how and why it affects you, how to prepare and the consequences of not being compliant with the new regulations.
Kindly Note: The value of pensions and investment can go down as well as up and you may not get back as much as you put in. Auto enrolment is not regulated by the Financial Conduct Authority.
A really important point we should get across right at the start is that unless you are a sole trader – this DOES affect you and your organisation, regardless of its size.
So what is it then and what do you need to know?
Well, the government has introduced new pension legislation for businesses. Under these new rules, employers must automatically enrol eligible workers into a qualifying company pension scheme, if they aren’t already in one and make contributions into their pension pot.
We’ll be looking at who counts as an eligible worker later in this blog sequence, but essentially if an employee is over 22 and earns more than £10,000 per year – they’re eligible. Other’s outside of this bracket may be eligible too so it’s worth reading our “Who is eligible?” section later on in this blog.
When do the new rules come into effect?
They are already in effect and staging dates (dates by which organisations must be in compliance) have been set and will vary dependant on the size of the organisation. For the largest organisations, the staging date was back in 2012 and for the very smallest it may be as late as 2018. As we’re already in 2018, it is a must for all businesses to comply with these regulations. If you haven’t done so already, or struggling in the process, Credius is here to help you do it the right way, at the first attempt. It’s better to have auto enrolment setup as soon as possible as it could take you as long as 12 months to prepare for it.
What happens if I don’t comply with the new regulations?
The Pensions Regulator is taking a pretty hard line on any organisation that does not comply and has significant powers to ensure compliance. Pleading ignorance is simply not be an option, nor is already having a pension scheme in place if that scheme does not meet the required standard.
Any organisation falling outside of the regulations will have to back pay into a pension scheme for the time it has not met the regulations in addition to paying escalating daily penalty notices of between £50 and £10,000 per day so get ready to start your preparations as we continue this blog post to ensure you don’t fall foul of the new regulations.
When do I have to be ready for Auto Enrolment?
The first point of call for any organisation in regards to Auto Enrolment is to find the staging date which is relevant to them. This is the deadline by which the scheme MUST be in place and functioning and is dictated by the size of the business. However, as mentioned before, 2018 is the last stage for all business to comply with the regulation regardless of the business size.
What’s really important to stress here is that getting ready for Auto Enrolment may mean significant changes to your systems and processes including HR, Management, IT and Payroll so you need to begin planning 9-12 months before your staging date to ensure everything is in place come the day.
Here’s a quick glimpse of what is involved in Auto Enrolment:
• Eligibility Assessment of all employees
• Registration with the Regulator
• Ensuring compliance of any existing pension schemes
• Sourcing of new schemes
• Communication and management of the enrolment process for all employees
• Management of the opting out process
• Management of contributions
• Re-enrolment of opted out employees on a regular basis
• Keeping accurate records of all the above
Can you change your staging date?
Yes you can, you can bring it forward if you want, but I’m afraid you can’t put it back.
If you decide to bring it forward, you’ll need to inform The Pensions Regulator at least one month before the revised date.
You can also postpone some of your duties by up to three months so they fit in better with your business. The period you postpone for is called a ‘postponement period’.
If you do choose to postpone, you’ll still need to have a qualifying pension scheme set up and communicate this to your employees within six weeks of your staging date and of course you’ll need to advise the Pensions Regulator well in advance that you require a postponement period.
Before you begin – How to create an Auto-enrolment project team?
Depending on the size of your organisation and what you currently have in place already in regards to a pension scheme, your journey to becoming Auto Enrolment compliant could be a tricky one.
In this section of the blog, we’re going to be going through the initial preparation that you will have to do in order to be in compliance with this regulation.
A great starting point then, in taking on this significant task is to decide who needs to be involved in the initial planning process and share some of the responsibilities.
Some questions you should ask yourself are:
1. Who is going to be communicating the changes to your employees? How and when is this going to happen? A HR representative would be ideal to take on this task.
2. Who will identify an appropriate pension scheme or determine whether your current scheme is compliant? A financial adviser or accountant might be the best point of call for this.
3. Who will identify which workers are eligible for Auto-enrolment and who will manage the opt-out process? Perhaps a payroll representative would take on this task.
4. Are there any technological changes that need to happen? Do you need upgraded payroll software? If you do need new technology, perhaps the IT department, procurement and training staff need to be identified.
5. Who is going to be the key point of contact (and secondary point of contact) to the Pension Regulator? It is important that you advise the Pensions Regulator well in advance. You can do that by clicking on this link.
6. Who is going to take overall responsibility for ensuring timelines are adhered to and all requirements are met? This might also be the person you have nominated as the primary point of contact which could be someone from your finance department.
Obviously if you’re a small organisation that doesn’t have a Finance, HR, IT or Payroll department this could be a really difficult task to undertake but these responsibilities need to be undertaken by someone. Failing to be compliant on time can have significant financial implications as we’ve mentioned before.
What’s more, there’s also a need for regular compliance checks once the scheme is underway so if you don’t have expertise internally we would strongly recommend taking on the services of a 3rd party consultant or adviser.
Want to have an unbiased chat around Auto Enrolment? You should consider reaching out to us to organise a free confidential initial meeting session see how Credius can be of any assistance regarding this matter.
Are all my employees eligible for Auto Enrolment?
It’s a great question, but unfortunately there is no simple answer to this.
According to the Pensions Regulator, employees are split into three categories with regards to Auto Enrolment:
• Eligible jobholders
• Non-eligible jobholders
• Entitled workers
All employees will therefore need to be assessed to determine which category they fall into BEFORE the staging date.
Additionally you’ll need to monitor those that are not currently categorised as Eligible Jobholders, to ensure that if their circumstances change (a pay increase or they move into the qualifying age criteria) they are automatically enrolled.
To understand who’s who, let’s first look at employees that automatically qualify for Auto Enrolment and must be placed onto a company scheme.
These are known as “Eligible jobholders” and meet ALL of the following criteria:
• Are not already an active member of a qualifying scheme
• Work or usually work in the UK
• Earn more than £11,850 a year*
• At least 22 years of age but under State Pension age
*The figure of £11,850 applies to the 2018/19 tax year and will be reviewed every year by the government.(These statistics can be found on the GOV.uk Website)
Now let’s look at the other two categories.
Non-eligible jobholders are workers in the UK aged between 16 and the State Pension Age and earning upwards of £5,772 but not fitting into the category above.
A non-eligible jobholder is entitled to opt into a Qualifying Workplace Pension Scheme from the staging date and so must be provided with information on how to do this in advance. If they do opt in then employers must pay contributions to this scheme for them at a level set out in the legislation.
Entitled workers are workers in the UK aged between 16 and 74 and who earns less than £5,772 (2014/15 figures annualised).
An entitled worker is entitled to access to a pension scheme and the employer must provide them with information in relation to this in advance of their staging date. The scheme that they are given access to, does not have to be the same scheme that eligible and non-eligible jobholders are given and the employer does not have to pay any contributions to the scheme in relation to them.
What is the procedure for opting out of Auto-enrolment? Is it possible to persuade your employees to opt out?
For those of us that remember the old SERPS (State Earnings Related Pension Scheme) – you’ll know there was an option to opt out of it and make your own pension arrangements.
Well this is still the case, however the process of “opting out” is a little different.
With Auto Enrolment, everyone that is entitled to Auto-Enrolment must by default be auto enrolled in to a scheme, regardless of whether they want to or not.
If a staff member then chooses to opt out, they will have to fill in the Opt-Out Notice form given to them by the Pensions Provider when they receive their pensions pack and this would need to be completed within 1 month of the policy starting.
Why so complicated?
The Pensions Regulator has designed this process to ensure the employee has full control over the decision to opt out and is not being influenced by the employer in any way. This means an employer cannot use opting out as a point of leverage when offering employment.
As an employer, any encouragement to staff (or potential staff) to opt out will be could considered an ‘inducement’ and is punishable with a heavy fine.
So I couldn’t offer my employees a pay rise and encourage them to take out a pension themselves instead?
That’s right. It’s a big NO-NO I’m afraid. Whilst it might be financially better for the business and would certainly reduce the workload, employers can be fined up to £5,000 per person for breaching inducement rules.
What’s more, the Pension Regulator will be cross checking its records with HMRC’s RTI (Real Time Information) database to make sure all those that are eligible are accounted for.
Other examples of inducement include asking some to opt-out in exchange for:
• An extended or renewed contract in the case of a short-term worker
• A one-off payment
• A higher salary level
• A promotion
In short, any encouragement to your employees to opt-out could land you in very big trouble so we recommend against it in the strongest terms.
Ongoing “Opt-Out” responsibilities
One last thing we need to mention on the topic of Opting-Out is your responsibility as an employer to anyone who has opted out. All “opted-out” employees must be automatically re-enrolled every 3 years and they must then chose to opt out once more if they wish to do so.
Contractual vs Automatic Enrolment, What’s the difference?
There’s no doubt about it, implementing and complying with auto-enrolment will be a burden (at least initially) to every organisation.
Among the many requirements, as an employer, you will need to track different workers, auto-enrol those who become eligible in each pay reference period, deduct contributions and issue appropriate communications within the required timeframes.
So it’s hardly surprising that some employers (particularly those with schemes already in place) have asked the question
“Can’t I just auto enrol everyone?”
This is known as contractual enrolment and whilst it is possible, it does create a number of challenges.
Firstly, contractual enrolment requires the workers consent (whilst auto enrolment does not), which is typically included in a workers employment contract.
If you do not already have consent, as an employer you will need to ensure all employment contracts are amended to permit contractual enrolment for every employee. This in turn could create further complications as there may well be staff who choose not to accept the change.
One particular group who refuse a change in their contract is those on lower pay, who due to means testing, might ultimately see no additional benefit on retirement. An employer who contractually enrols everyone could therefore be inadvertently penalising its lower paid workers if they are required to make member contributions.
Another complication is that workers on a contractual enrolment scheme do not have the option to Opt Out. Once they are in, they’re in.
However, if they refuse to sign up for contractual enrolment in the first place, and they are eligible for auto-enrolment, you must provide them with an auto-enrolment scheme from which they can manually opt out themselves once enrolled. This messy circumstance is not likely to go down well with employees.
Running 2 schemes together, will undoubtedly make the burden on your business even greater. What’s more, many employers already using contractual enrolment are putting more workers into their pension scheme than are required by automatic enrolment costing them more money.
The message here then, is contractual enrolment may look the easy option, but do your homework and speak to a financial adviser.
We have reached our halfway point! If you feel that you need additional advice / information regarding auto enrolment, why not see if Credius could help? Contact us directly at firstname.lastname@example.org or call us today on 020 7562 5868 to arrange an appointment, or click here for our contact page.
To continue to the second part of the blog, please click here