A spate of fines in late 2014
The automatic enrolment requirements are now filtering down to smaller companies and, as anticipated, this is leading to more frequent breaches. The Pensions Regulator is not turning a blind eye to this lack of compliance. It fined a total of 166 employers £400 each in the last three months of 2014 alone. It also issued over 1,000 employers with a "compliance notice", instructing them to remedy a breach of their duties, in 2014. This suggests that the Regulator is taking its enforcement duties seriously and that employers should not assume that any infringements will be overlooked.
A large number of the compliance notices that were issued by the Regulator related to employers having missed the five month deadline to submit a "declaration of compliance" to the Regulator, setting out how compliance had been achieved.
The Regulator's director of automatic enrolment commented: "My message to all employers is that failing to declare within five months of your staging date means you risk being fined, which is why we recommend you start your automatic enrolment planning and preparation 12 months before staging." We agree that this is good advice.
How to comply and avoid penalties
By way of reminder:
- The automatic enrolment requirements apply from a date called the "Staging Date", which depends on how many staff were registered on the employer’s payroll on 1 April 2012. Employers who had staff on their UK payroll as at that date will be subject to the requirements by 1 April 2017. Employers that first paid staff through UK payroll later than 1 April 2012 will be subject to the requirements on a date between 1 May 2017 and 1 February 2018 (inclusive).
- Enrolment into the pension scheme must be done without the employee being required to give consent or make any decisions, hence the term “automatic enrolment”.
- The pension contributions required are calculated as a percentage of “qualifying earnings” which are broadly all pay, bonus, commission etc, between £5,772 and £41,865 (in 2014/15 figures). The minimum employer pension contributions start at 1%, increasing to 2% from 1 October 2017 and then 3% from 1 October 2018. (Different percentages may apply depending on what definition of "pensionable pay" is used.) Employee pension contributions will also be required unless the employer chooses to make these too.
- The requirements are complex and require employers to monitor which of their workers are eligible to be auto enrolled from time to time. This depends on earnings levels, among other things. Employers should consider in advance how they will monitor their workforce to ensure that all the relevant deadlines are met.
- There are also requirements to provide staff with specific communications about automatic enrolment, and to submit a declaration of compliance (previously called "registration") to the Regulator within five months of the staging date.
How we can help
For employers, this is one of the most significant developments in pensions law ever to have taken place. To ensure that implementation of the new requirements runs smoothly, you may find it useful to obtain legal assistance in some or all of the following areas:
- Identifying when the requirements will apply to you. This can be straightforward but special rules apply where an employer has more than one PAYE scheme and for small employers using shared PAYE schemes. Complications can also arise on group reorganisations such as a business transfer from one employer that has already reached its staging date to put auto-enrolment in place to another employer that has not.
- There is an option to postpone auto enrolment by up to three months. This option may be particularly useful in relation to workers with fluctuating earnings, to avoid the difficulties that might otherwise arise from the requirement to enrol them as soon as they are eligible. Postponement needs to take place within a strict time limit, and we can advise on the systems you may need to put in place to take advantage of the postponement option.
- Will you use your current pension scheme? We can help with identifying and implementing any changes needed to make your existing pension scheme suitable for auto enrolment. We can also help with identifying alternative options.
- Are any “salary sacrifice” or other flexible benefit arrangements currently in place consistent with auto enrolment? We can advise on any changes required to avoid incentivising workers to opt-out. In addition, it may be helpful to make adjustments to tie in the benefit year with the introduction of auto enrolment.
- Are standard employment contracts consistent with auto enrolment? We can review them to avoid issues such as employees becoming entitled to both their existing pension provision and auto enrolment.
- How will you communicate the changes to the workforce? We can help you comply with the legal requirements about what must be communicated and when. We can also help with explaining why the employer has made the worker a member of a pension scheme – and deducted contributions from the worker’s wages – without the worker’s consent.