I am sure that you will have you seen the adverts with Theo Paphitis declaring “I’m in” and wondered what he is talking about. Under new rules which are being phased in over a few years, employers are being required to automatically enrol their employees into a pension scheme. This is known as ‘Auto Enrolment’ and it will affect everyone who is an employer or a worker.
Given that we, as a population are living longer and (according to research) not saving enough for our retirement, the government has introduced compulsory workplace pensions in an aim to address the issues.
When you will be affected from will depend on the size of the employer. Every employer has been assigned a ‘Staging Date’ which is the date from which they need to comply with the regulations. To find out your staging date you can visit The Pensions Regulator website, you will need your PAYE reference. Larger employers are likely to have already staged with smaller employers staging during 2015, 2016 and 2017.
From the staging date an employer will have to assess their workforce every pay period, and those who are eligible will have to be enrolled into a qualifying pension scheme. This is where the first of a number of issue lies, have you got a qualifying pension scheme? You may already have a scheme, in which case you need to find out if it is qualifying for auto enrolment, ask your pension provider or pensions advisor as they should know. If you don’t have a scheme then you will need to arrange one and again this can be done either directly with pension provider or via an advisor. Given the number of employers who will be requiring a scheme in the coming years it is highly recommended that you address this first and very important issue as soon as possible as it takes time to set up a scheme and you don’t want to leave it until the last minute when your choice in the market will be greatly reduced.
The next big consideration is how, practically, are you going to deal with the assessment of employees which has to be done on every pay run? Payroll software is slowly coming up to speed to deal with this, and the pension providers are also providing what they are calling ‘middleware’ software solutions to help with this process. Whichever options you take, it will be likely that you will have to obtain additional software or modules to software and undertake additional training on the processes involved.
Workers are assessed on set criteria every pay period and those who are eligible are automatically enrolled in the pension scheme, however, they are able to opt out if they wish to. For a worker who has opted out, the employer must re-assess and if appropriate re-enrol them after a 3 year period, they can opt out again if they wish to and the cycle of enrolling and opting out continues every 3 years. There are also other categories of worker which have their own rights under the legislation. Non Eligible job-holders are not automatically enrolled but can opt into the scheme. When opting in the employer must pay contributions for them as well as deduct their employee contribution. Entitled workers can also opt into a scheme but are not entitled to receive an employer contribution into their scheme.
There are additional considerations for those who may have protection on their pension scheme as large tax charges could be crystallised, it is quite ironic that Theo declares he’s in when in reality I bet he opted out straight away!
Contribution rates are being phased in over a period of time, beginning at 1% employee and 1% employer and rising to 3% employer (minimum) and 5% employee from 1 October 2018. These costs do need to be taken into account when budgeting and forecasting for the coming years as they are real costs which the employer cannot avoid.
The reality is that auto enrolment is quite complex, it can be a large additional administration burden and will result in additional costs to an entity. In order to ensure that these are understood and controlled PREPARE, PREPARE, PREPARE!