First things first, the subtitle of the 2008 pensions act is “Employer Duties”, it’s the law and therefore not something to be taken lightly. It’s serious and affects all UK employers.
Every employer with at least one employed member of staff will be affected by the automatic enrolment legislation. Employers are required to set up a qualifying workplace pension scheme, enrol any staff that are eligible, and enable both employer and employee contributions into it.
You must have your Auto-Enrolment scheme set up and ready to run by your duties date. FSB Workplace Pensions offer services to help set up your scheme, manage your scheme, and dig you out of a hole if you’ve got it wrong. We’ve set out some of the key phrases and features of Auto-Enrolment which you will need to understand below.
Note that this only covers the key duties – complete details of all Employer duties can be accessed directly from the Pensions Regulator by clicking on this link – Automatic enrolment detailed guidance.
Click on the topic for more information:
Categories of Workers
Declaration of Compliance
Duties Start Date
Qualifying Workplace Scheme
*2017/18 tax year figures **SPA – State Pension Age
Your obligations for each category are:
- An Eligible Jobholder must be auto-enrolled at the duties date into the qualifying workplace pension scheme by the employer and the employer and employee must contribute. The employee can ‘opt out’ but the employer cannot opt out for them and cannot encourage, guide or coerce the employee into opting out.
- A Non-Eligible Jobholder must be offered access to the pension scheme. If the employee wants to join the scheme then the employer must let them, and the employer and employee must contribute.
- An Entitled Worker must be offered access to the Employer pension scheme. If the employee wants to join (opt in) then the employer must let them but the employer does not have to contribute.
Both you and your employees can contribute towards their pension. The employer duties mean that you will need to make a minimum level of contribution defined in the legislation.
The minimum contribution levels are being phased in gradually over the next few years to help employers comply with the new law:
After the timetable above is complete these contribution levels will be reviewed every year by the government.
On top of Qualifying Earnings (see below), Employers have a choice of 3 other bases that they may want contributions to be based on, these are, Basic Pay (Tier 1), Basic Pay (Tier 2) and Total Pay. An employer selecting any of these different bases will need to complete a certification of that basis (which confirms that the basis chosen is equal to, or in excess of, Qualifying Earnings) and renew that certificate every 18 months.
A declaration of compliance is an employer’s legal responsibility and is used to inform the Pensions Regulator of what has been done to comply with an employer’s automatic enrolment duties. All employers are required to submit this declaration to the Pensions Regulator within five months of their duties start date regardless of whether they have postponed auto enrolment or not. Auto enrolment duties are considered incomplete until a declaration has been submitted and received.
For those who hire staff for the first time on or after 1st October 2017, even if it is just one person, you become an employer and your legal auto enrolment duties will commence on the day that your first employee starts work. This is known as the Duties Start Date. By this date you will be required, by law to provide a suitable qualifying workplace pension scheme.
Auto-enrolment is the responsibility of the employer, not the Government, the pensions industry or your pension provider.
TPR will oversee employer compliance and has the power to fine employers for non-compliance.
All employers must comply with their duties and have given their employees correct, compliant and timely information, by their duties date. This information must be given in prescribed format and records must be kept of what was issued, and when.
Details of compliant schemes are linked to PAYE records so TPR will be able to identify those employers who fail to comply. The penalties for non-compliance are potentially very severe indeed and will be implemented as below:
- An initial formal notice is issued.
- £400 fixed penalty issued.
- An escalating penalty, charged daily, is then applied. For a firm employing between 5 and 49 employees this is at the rate of £500 per day.
A company can be exempt from auto enrolment duties if it is comprised only of directors. In this situation, you are not legally required to operate an auto enrolment workplace pension scheme. The following are reasons why a company may be exempt from auto enrolment duties by reason of Director Exemption:
- There is only one director and there are no other staff working for the company.
- The only people working for the company are directors and none of them have an employment contract.
- The only people working for the company are directors and only one of them has an employment contract.
- The company does not or no longer employs any staff because it has ceased trading/is terminally insolvent e.g. has gone into liquidation/has been dissolved.
Automatic Enrolment is complex. In our experience the more time you put into preparation, the easier the implementation of your qualifying scheme will be.
Employees can only ‘opt-out’ after they have been auto enrolled. The employer cannot opt them out but must provide the employee with the information they need to opt out.
The right to opt-out of pension scheme membership is a useful and, in some cases, an essential option. However, it is only available during a very specific and short time frame for employers.
Opting out under the automatic legislation only applies to jobholders; both eligible, who have been automatically enrolled, and non-eligible who have opted in and become active members of a pension scheme.
Employers have no right to opt-out of their duties and employees are not able to opt-out of the automatic enrolment process entirely.
An employer’s automatic enrolment duties always start from its duties date but you can choose to postpone contributions for up to 3 months, allowing automatic enrolment to be aligned with any other business processes, such as payroll. This does not allow you to postpone your duties date, just the contributions, all other auto-enrolment duties due at the duties date must still be completed by the duties date.
You must write to all employees to confirm that you are postponing automatic enrolment contributions within six weeks of the duties date to inform them of their rights.
If any employees wish to ‘opt in’ during the postponement period, they must be allowed to do so and both employer and employee contributions must be made.
Once out of postponement all ‘eligible jobholders’ must be automatically enrolled into the pension scheme.
Irrespective of whether an employer has postponed auto enrolment or not, all employers are required to submit their declaration of compliance to the Pensions Regulator within five months of their staging date/duties start date.
Qualifying Earnings is generally the default choice of contribution basis for auto enrolment. i.e. the amount that the percentage contributions are based on.
Qualified earnings are earnings that are between £5,876 and £45,000* p.a., and that are made up of any of the following components that are due to be paid to the employee;
- Statutory sick pay
- Statutory maternity pay
- Ordinary or additional statutory paternity pay
- Statutory adoption pay
Expenses such as food, travel or car allowance are not considered to form part of an employee’s qualifying earnings. The employer is responsible for assessing whether a component of pay constitutes an element of qualifying earnings. Employers make contributions to an employee’s pension fund based on a percentage of the employee’s qualified earnings (assuming the employee is not an entitled worker). The employer is under no obligation to contribute to the employee’s pension fund for any earnings above the qualified earnings threshold of £45,000*
To be a qualifying scheme, suitable for auto enrolment, a scheme must:
- Be registered with the Pensions Regulator for auto enrolment.
- Enrol all eligible employees without any decisions needing to be made before joining.
- Contain a default investment fund.
- Require minimum contributions (as prescribed by the legislation) to be made.
- Complete the Declaration of Compliance for the Pensions Regulator.
- Assess your employees (and continue to do so at every pay period).
- Give statutory communications to your employees.
- Keep records of all the activity listed above.
Employers cannot offer advice, cannot discourage membership to new or existing employees, nor encourage opting out. Fairly obviously, employers cannot ignore this legislation. The Pensions Regulator (TPR) have significant powers to police and enforce the legislation.