For the largest employers, there is now less than 12 months to go until the launch of automatic enrolment. All employers need to take action to prepare for automatic enrolment. In particular, they need to decide how they are going to comply with the new legal requirements, put in place procedures to ensure compliance and consider the impact on their business and on their existing pensions strategy.
What do employers need to do?
- Find out when the new automatic enrolment duty will apply to them
Employers must be prepared to comply with the new automatic enrolment duty on their ‘staging date’. Employers with 50 or more people in their largest PAYE scheme on 1 April 2012 will have a staging date between October 2012 and July 2014 (starting with employers with the largest PAYE schemes). Employers with between 1-49 people in their largest PAYE scheme on 1 April 2012 will have a staging date between August 2014 and February 2016. To allow some flexibility, employers may choose an earlier staging date.
Employers can find out their staging date on the Pensions Regulator’s website.
- Assess the workforce
Workers will fall into one of three categories:
- Eligible jobholders – who will need to be automatically enrolled into a qualifying scheme (but who can opt-out)
- Non-eligible jobholders – who can choose to opt-in to a qualifying scheme (and receive minimum employer contributions), and
- Entitled workers – who have a right to join a company pension scheme but not to receive employer contributions.
An “eligible jobholder” is a person:
- who is working or ordinarily working in the UK
- at least 22 years of age and below state pension age, and
- to whom earnings of more than £7,475 per annum are payable by the employer.
A “non-eligible jobholder” is someone who is earning more than £5,035 and less than £7,475 per annum and who is above 16 years of age and below state pension age, or someone who is earning more than £7,475 per annum and who is aged between 16 and 22 or between state pension age and age 75. An “entitled worker” is an employee who is neither an eligible jobholder or a non-eligible jobholder.
Employers need to assess which category each of their existing employees will fall into. Going forwards, they will also need to consider the position of any new recruits.
- Put in place administrative systems and payroll processes to cope with automatic enrolment and re-enrolment
From its staging date an employer will be required to automatically enrol “eligible jobholders” into a qualifying pension scheme (where they are not already a member of such a scheme).
Generally speaking, an employer will be required to automatically enrol an eligible jobholder within one month of the individual becoming eligible (note: the Pensions Bill contains provisions which will enable employers to operate a 3 month waiting period). Employers will be required to provide certain information to these employees, including information about the pension scheme and their right to opt-out, within this one month window. Employers must also give non-eligible jobholders the opportunity to opt-in to a qualifying scheme.
Minimum contributions (including employer contributions) will have to be paid into the scheme on behalf of eligible jobholders and non-eligible jobholders who opt-in. Employers will need to ensure that payroll processes are in place to cope with this. Employers will also be required to automatically re-enrol eligible jobholders who opt-out or leave the scheme approximately every three years.
- Decide which scheme they will use to meet their automatic enrolment duty
Employers will be required to automatically enrol eligible employees into a qualifying pension scheme that meets certain minimum quality requirements. If an employer plans to use an existing pension scheme to meet its obligations, the scheme will need to be reviewed to ensure that it meets the qualifying criteria. Employers may also use this as an opportunity to review their overall pensions and benefits strategy.
- Appoint somebody to oversee compliance with the new automatic enrolment duty
Employers will be required to monitor their employees’ eligibility for automatic enrolment and re-enrolment and to process opt-outs. They will also need to ensure that correct information is provided to employees within the statutory timescales. Failure to comply with these requirements could lead to enforcement action (which may include a fine) being taken by the Pensions Regulator. Therefore, it is important that employers appoint somebody within their organisation to oversee compliance with the new automatic enrolment requirements.
- Consider the impact of increased costs on the business
Automatic enrolment is designed to increase the number of people saving for a pension by harnessing inertia. Even allowing for fairly high opt-out rates, it is likely that most employers will see an increase in the number of employees participating in their company pension scheme. From October 2017 employers will be required to contribute a minimum of 3% of “qualifying earnings” (i.e. gross earnings from £5,036 up to £33,540 (2006/07 figures)) on behalf of these employees. Coupled with the administrative costs associated with ensuring compliance with the new requirements, this may significantly increase the pension costs for some employers. It is important that employers consider the impact of this on their business and plan accordingly.
- Consider how you will communicate these changes to your employees
The legislation sets out certain prescribed information that employers will be required to provide to their employees. The information that has to be provided will vary depending upon the particular category that an employee falls into. Employers may find the NEST phrasebook and the DWP’s automatic enrolment language guide helpful when preparing employee communications.