Last reviewed 28 May 2014
If you are a small business with fewer than 50 employees then the chances are that you do not currently pay into a pension scheme for your employees. From 1 June 2015, this will need to change and you should start preparing now for both the cost and the administration requirements of pensions auto-enrolment. Jenny Davidson, Director of Reward Innovation Ltd, explains.
New legislation introduced in October 2012 is being phased in over a number of years, with the largest employers first. This requires all employers to enroll their employees into a pension scheme and pay contributions on their behalf. You do not need your employees’ consent to enroll them into the pension scheme; you have to do this automatically when they start work or first meet certain criteria. Any of your employees can then opt out if they so wish, but only after you have enrolled them — they cannot leave the pension scheme before they have joined.
You are likely to have many questions about what this means for your business, and we provide the answers to some of these below.
How much will I need to pay into the pension scheme?
All employers must pay contributions in respect of their employees and they must, in addition, operate a facility to collect member contributions as deductions from an employee’s pay and pay these to the pension scheme in a timely manner.
Although these contributions are to be phased in over time, the requirement is for a minimum of 8% of “qualifying earnings” to be paid into the pension scheme for each individual each time they are paid (weekly or monthly). A minimum payment of 3% must be from the company and the balance may be paid by the company or collected from the employee, and tax relief is also included.
The minimum pension contributions will be phased in as follows.
Employer minimum contribution
Total minimum contribution from employer and employee (including tax relief)
Up to 30 September 2017
From 1 October 2017
From 1 October 2018
When calculating these minimum contributions, pay is determined as “qualifying earnings”.
Qualifying earnings are gross earnings (including sick pay and statutory maternity pay) between £5772 and £41,865 per annum for the 2014/15 tax year. These numbers will change each tax year.
You can set up your pension scheme so contributions are calculated with reference to base pay rather than this band of earnings, provided the minimum contribution amounts are met.
Can I not just give my employees more salary instead?
You are not able to offer your employees an alternative to the pension scheme, nor encourage them to opt out of being a member. The Pensions Regulator will monitor that employers are complying with the legislation and can issue heavy fines to a company (or even prosecute a company) who is trying to avoid their obligations or avoid the additional costs.
Do I need to offer a pension scheme to all my employees, even those who work for me part-time?
You will need to assess all workers who have a contract of employment with you, which will include those with a fixed-term contract. A self-employed contractor will not usually be a worker for these purposes.
The category of workers that you then need to auto-enroll into the pension scheme are the “Eligible jobholders” defined below.
Eligible jobholders are:
aged between 22 and state pension age (state pension age is not the same for all employees)
those who work ordinarily in the UK
those who have gross earnings of at least £10,000 per annum in the 2014/15 tax year.
Therefore, any part-time employee earning more than £10,000 per annum will need to be included.
In practice, the minimum earnings to trigger an employee being an eligible jobholder are looked at for each pay period (ie £192 per week or £833 per month) and if earnings are above this level, the employee needs to be enrolled into the scheme.
When do I need to offer a pension scheme to my employees?
Automatic enrolment is being introduced gradually based on the employer’s size, payroll reference and when they were established. The Pensions Regulator will write to you up to 18 months before your “staging date” with details of when you need to comply with the requirements. The Pensions Regulator will give you a unique reference code, which you should use in all correspondence with the Regulator.
The full table of “staging dates” is found on the Pensions Regulator’s website, together with a tool to determine your own staging date by entering your PAYE reference number. The link to the staging date tool is: http://www.thepensionsregulator.gov.uk/employers/tools/staging-date.aspx.
You can always start your pension scheme earlier or delay for a period of up to three months, but you need to inform the Pensions Regulator if you are going to use a different start date.
If you bring forward your staging date you must notify the Pensions Regulator at least one month in advance. This notification should be completed online.
If you want to delay (“postpone”) your staging date for up to three months you must provide a notice to any employee to whom postponement applies, within one month of when they would otherwise have been automatically enrolled. This notice must be issued to each employee even if the information in it is generic. There are four types of postponement notice that can be used, which are detailed on the Pension Regulator's website.
How do I choose the pension scheme for my staff?
For automatic-enrolment purposes, the pension scheme you select must meet minimum requirements and be registered for tax purposes. The scheme may be any of the following.
The National Employment Savings Trust (NEST) — a scheme established by legislation and run by the NEST Corporation.
A group personal pension or stakeholder pension scheme — where the contractual relationship will be between the employee and the provider.
A master trust set up by an insurance company or other provider, whereby many employers can be part of the same arrangement.
The default position if you do not select your own pension scheme will be that you need to enroll your employees into NEST. The NEST website is very informative and will provide all the information you need to enroll your employees into this scheme.
However, you may want to consider setting up a group personal pension scheme or joining a master trust arrangement set up by an insurance company or other provider. If you would like to compare the arrangements offered by companies other than NEST you could visit http://www.pensionplaypen.com, which is a comparison site for small employers.
What do I need to tell my employees?
Once you have chosen a pension scheme you need to tell your employees about it. This could be an opportunity to encourage them to start saving for their retirement if they do not do so already. Your pension provider will have standard communication material that you can use to advertise the scheme to your employees.
As you start to enroll employees into the pension scheme, you need to inform them they are able to opt out within the first month of membership. You need to tell them how they can go about opting out. Again, your pension provider should be able to help you with this communication.
Is there anything else I need to do?
You must register the pension scheme that you are going to use to meet the automatic enrolment obligations. Registration needs to be online using the address below and must be within five months of your “staging date”. You must provide certain information to the Regulator about how you have complied with the automatic enrolment duties, such as how many people have been automatically enrolled. (http://www.thepensionsregulator.gov.uk/employers/automatic-enrolment-registration.aspx#s12386)
You also need to keep records relating to the pension arrangements, the enrolment of employees, employees who have opted out and any postponement notices, as there is a requirement to re-enroll any employee who has opted out every three years.
Who can I turn to for help?
The auto-enrolment legislation can be quite complex and time-consuming so it usual for an employer to ask their payroll provider or pension provider to help them comply with these requirements on an ongoing basis. Many pension and payroll providers have developed tools to help assess who must be auto-enrolled as part of their service offering.
The Pensions Regulator has a very comprehensive and informative website, and has designed a project plan to help employers identify what they need to do to prepare for automatic-enrolment, which is downloaded via the following link: