Automatic pension enrolment

This month’s business briefing is on the topic of auto-enrolment of pensions.

It explains the obligations on employers when it comes to auto-enrolment.

What is auto-enrolment?

• From a date after October 2012, businesses will be required to automatically enrol eligible “jobholders” in a pension scheme. A “jobholder” will include permanent, fixed-term and temporary employees, as well as agency workers.
• A business can use an occupational or personal pension scheme if it meets statutory quality requirements. Otherwise the business will have to enrol jobholders in the National Employment Savings Trust (NEST), a central defined contribution scheme to be set up by the government.
• Employees may opt-out of either scheme, but only once they have been automatically enrolled.
• Businesses must pay a minimum level of pension contributions for each employee.
• The requirement to automatically enrol eligible jobholders will be phased in over five-and-a-half years from October 2012, with larger businesses required to comply first.  Every business has a staging date which is set by the number of staff.
• Businesses will be required to automatically re-enrol eligible jobholders every three years after they first become subject to the statutory employer duties.

No exemption for smaller businesses

Small businesses will not be exempted from the auto-enrolment requirements since this would exclude 1.3 million employees from the reforms and create substantial enforcement problems. On 1 October 2012, regulations came into force extending the implementation period for businesses with fewer than 50 employees. Small employers will therefore not be subject to auto-enrolment until June 2015 at the earliest.

What is the income threshold at which individuals are auto-enrolled?

• Jobholders will only be automatically enrolled once they reach the income tax threshold (£10,000 in 2014/15).
• Contributions will be based on earnings between the National Insurance lower earnings limit (£5,772 in 2014/15) and the upper earnings limit (£41,860 in 2014/15). Employees who have been automatically enrolled will continue to pay contributions until their earnings drop below the income tax threshold (unless they opt out).
• Any employees with earnings between these thresholds will be able to opt in and receive an employer contribution.

What are the age limits for automatic pension enrolment?

The age band for eligibility is between 22 and the state pension age. Retaining the state pension age as the upper age limit gives people access to pension saving during their  normal working lives and avoids automatically enrolling people for whom saving is no longer the right option.

Three-month waiting period before an employee is automatically enrolled

A business can use a three-month waiting period to avoid automatically enrolling employees who leave employment soon after joining (for example, seasonal or temporary workers). This will also allow businesses to align enrolment dates with their own payroll systems.

Businesses can voluntarily comply ahead of schedule

Businesses that were scheduled to automatically enrol in October or November 2012 were allowed to bring forward their staging dates to 1 July, 1 August or 1 September. Other businesses can bring forward their staging dates too, provided they notify the Pensions Regulator and have a qualifying scheme available. Voluntarily complying ahead of schedule can bring benefits in terms of the packages offered to employees over that time.  Whilst it will be at a cost to employers if it is well planned there are ways to mitigate the burden and specialist advice should be sought.