Employers in the education sector will be used to operating their businesses (many of which are registered charities) in accordance with tight budgetary controls and onerous UK regulatory requirements.

To add a further layer of complexity, employers will need to abide by the new Government requirements relating to the compulsory provision of workplace pensions for qualifying employees – ‘auto-enrolment’. These requirements came into force on 30 June 2012 and will eventually require all employers in the UK to automatically enrol workers into a pension scheme.

Once it becomes subject to auto-enrolment (different staging dates apply depending on the number of employees), each employer will be required to automatically enrol all its employees, classified as eligible jobholders, as active members of a qualifying pension scheme. Qualification as an eligible jobholder depends upon the employee’s age and level of earnings. Employer contributions in respect of eligible jobholders to a qualifying scheme (assuming this is a defined contribution scheme) will initially be 1% of qualifying earnings for employers, rising to 3% after a transitional period (total contributions, including tax relief will be 2% rising to 8%).

Employees can opt-out of scheme membership after being auto-enrolled within tight timescales, but the employer cannot induce or encourage employees to opt-out and have to be careful with all communications with employees for this reason. Further, where employees opt-out, the employer is required to re-enrol them at regular intervals.

The purpose of auto-enrolment is to encourage employees to make adequate financial provision for their retirement, and not to rely on low levels of state pensions.

The auto-enrolment requirements apply on a staged basis in accordance with the number of employees in the employer’s PAYE scheme on 1 April 2012. Employers with a higher number of employees will have an earlier staging date than those with fewer employees (although smaller employers can opt for earlier staging dates). As a guide, the position is as follows:

  • More than 250 employees: staging dates between 1 October 2012 and 1 February 2014;
  • Between 50 and 249 employees: staging dates between 1 April 2014 and 1 April 2015;
  • Fewer than 50 employees: staging dates between 1 June 2015 and 1 April 2017.  

Employers need to consider their auto-enrolment obligations well in advance of their staging date and take appropriate advice to help them deal with these new requirements. It can take 12-18 months for employers to implement the required procedures necessary to comply with auto-enrolment.

As part of this planning stage for auto-enrolment, the following issues will be key for employers:

  • Assessing the workforce: need to identify eligible jobholders/employees who must be automatically enrolled into a qualifying pension scheme. This will involve monitoring the earnings of employees. In addition there are employer duties in relation to other types of worker (called ‘non-eligible jobholders’ and ‘entitled workers’). Systems should be put in place to make ongoing assessments of the employer’s workforce, as employees can move from one category to another;
  • Updating payroll systems: may need to update payroll systems to ensure these eligible workers are properly assessed for auto-enrolment purposes and that the correct level of pension contributions are paid at the right times.
  • Deciding which scheme to use: employers may already participate in an existing scheme which may count as a qualifying scheme for auto-enrolment purposes (such as LGPS, TPS or USS). Alternatively employers may wish to set up their own scheme to comply with auto-enrolment or participate in one of the industry recognised multi-employer schemes for this purpose. Employers may wish to have separate arrangements in place for ‘academic’ and ‘non-academic’ staff;
  • Considering the cost implications: The DWP has indicated that auto-enrolment will cost employers as much as £3.5 billion a year. Tangible employer costs will rise from 1% to 3% after completion of the transitional period after reaching their staging dates. There will also be administrative and planning costs. In view of these costs, employers may wish to make changes to their existing pension schemes (to save costs). Additionally they may wish to make use of salary sacrifice arrangements to save on National Insurance costs;
  • Communicating with the workforce: you will have to write to all workers to explain what membership of a workplace pension means for them. Employers cannot ‘induce’ eligible jobholders to ‘opt-out’ of scheme membership after they have been auto-enrolled – for instance to receive cash instead of pension contributions. Employers who operate flexible benefits packages should make sure all eligible jobholders are auto-enrolled before they can make choices about the benefits offered.

Where changes to the employer’s existing pension arrangement are contemplated (as part of the employer’s auto-enrolment strategy), then these may require the prior consent of the scheme trustees as well. Additionally, the employer will have to consult with all affected staff on the changes in accordance with prescribed pensions consultation requirements before final decisions can be made.

Employers will need to consider their administrative processes and communications for the purposes of the re-enrolment of employees who have opted-out of scheme membership after being auto-enrolled.

Some employers may decide to contractually enrol all new joiners into their qualifying pension scheme. This is called contractual enrolment. Contractual enrolment avoids the need for the employer to assess its workforce, as required for statutory auto-enrolment. This may cut down on administrative costs.

Contractual enrolment may not be an attractive option for employers who have ‘high earning’ employees who may be registered for ‘fixed protection’ against the lifetime allowance charge. These employees have already reached the limits of pension accrual under UK pensions legislation and cannot accrue further pensions benefits without tax penalties. Such employees may lose their ‘fixed protection’ and may incur tax penalties if they are either auto-enrolled or contractually enrolled into a workplace pension scheme. Where they are auto-enrolled they can still opt-out and retain this protection. Where they are contractually enrolled, however, their ability to opt out will depend on the underlying scheme rules.

Auto-enrolment will represent an additional layer of administration and cost for employers, and should be factored into their overall HR and remuneration strategies. Employers will want to tackle these issues early on with their advisers, in order to maximise staff retention and performance, and not fall foul of the trade unions.

Auto-enrolment is not an option but is compulsory and the Pensions Regulator has powers to issue financial penalties for non-compliance.