One of the most radical changes to the UK pensions regime in living memory is underway. After years of waiting, today sees the new pensions automatic enrolment requirements apply to the UK’s largest businesses (those that had 120,000 or more people in their largest PAYE payroll scheme on 1 April 2012). The new requirements are being phased in and will ultimately apply to all employers with workers in the UK, including those in the public sector.
What is automatic enrolment?
Under the new automatic enrolment legislation an employer is required to enrol all ‘eligible jobholders’ (and ‘non-eligible jobholders’ who opt-in) into an automatic enrolment scheme and pay minimum employer contributions or provide a minimum level of benefits. Employers are also required to provide information to workers about their new rights and to re-enrol eligible jobholders who opt-out approximately every three years. In addition, certain protections have been given to workers to ‘safeguard’ their automatic enrolment rights.
Why has automatic enrolment been introduced?
Automatic enrolment has been introduced by the Government to encourage more people to save for their retirement. The DWP has estimated that 11 million people in the UK are not saving for their retirement, with the majority of these working in the private sector. The Government hopes that automatic enrolment, by overcoming inertia, can help to address this by significantly increasing participation rates in workplace pension schemes.
What should employers do to prepare for automatic enrolment?
Preparing for the introduction of automatic enrolment is a major challenge for employers. There are reputational and financial risks associated with non-compliance: getting it seriously wrong could result in fines of up to £10,000 per day and two years in jail – in addition to employment tribunal claims.
Some of the key steps that employers need to take are set out below:
- Find out when the new automatic enrolment duties will apply to them
Employers must be prepared to comply with these new legal requirements from their ‘staging date’. An employer’s staging date is based on the number of people in its largest PAYE payroll scheme on 1 April 2012. An employer can confirm its staging date on the Pensions Regulator’s website.
- Identify the workers that will be covered
Employers need to assess which eligibility category each of their existing workers falls into, in order to determine which of their workers will be covered by the new automatic enrolment requirements and to estimate the likely increase in the number of workers participating in their pension scheme and the cost implications of this. Things can get complicated with agency staff, secondees, consultants and self-employed contractors – all of whom may count as “workers” for the purposes of the legislation.
- Update payroll and admin systems
Employer’s payroll systems need to be updated to assess worker’s eligibility for automatic enrolment and to ensure that the correct level of contributions are paid at the right times. This can become particularly complicated where workers have fluctuating working and earnings patterns. Employers also need to update HR and administrative processes so that they are able to deal with automatic enrolment, opt-outs, opt-ins and automatic re-enrolment.
- Decide which scheme to use
Employers need to decide whether they plan to use an existing scheme as their automatic enrolment scheme or whether they need to set up a new scheme or a new section of an existing scheme. Employers also need to decide whether they will use the same scheme for all staff or have different schemes for different members of their workforce. Whatever an employer decides to do, any pension scheme that is used as an automatic enrolment scheme will need to be reviewed to ensure that it complies with the qualifying criteria.
- Consider the cost implications
The DWP has estimated that automatic enrolment will cost British businesses approximately £2.8 billion by 2050. These costs will arise from increased participation, the payment of minimum employer contributions and compliance and administration costs. To offset these costs employers may wish to make changes to the pensions and other benefits that they offer to their staff. Employers may also want to introduce, or extend, salary sacrifice arrangements in connection with the payment of members’ pension contributions, to take advantage of the national insurance savings that result from this. Early planning is essential where any such changes are to be made.
- Prepare an effective communication strategy
Issuing effective and timely communications is essential so that workers understand these changes and what it will mean for them. Employers may find the NEST phrasebook, NEST’s Golden Rules of Communication and the DWP’s automatic enrolment language guide helpful when preparing such communications.
- Appoint somebody to oversee compliance
Failure to comply with the automatic enrolment requirements could lead to enforcement action (which may include a significant fine) being taken by the Pensions Regulator. Therefore, it is important that someone within an organisation is appointed to “own” the issue and oversee compliance.
Where can I find out more about automatic enrolment?
We have produced a guide to automatic enrolment which answers many of the most common questions that employers are asking about these new requirements. We are also running a series of seminars during October and November which will examine the new automatic enrolment requirements in more detail.