Pensions auto-enrolment

Since 1 October 2012 employers are now required to provide employees earning above a certain amount with a minimum level of pension provision that the employer contributes to.  The scheme has been designed to make it easier for people to save for retirement by eradicating the situation where employees fail to take up valuable pensions benefits because they don’t make an application to join their employer’s pension scheme.

When is this effective?

Whilst the legislation came into force on 1 October this year, the actual date on which an employer must auto-enroll employees onto the pension scheme is called the ‘staging date’ and this will vary from business to business.  Staging dates are allocated at various points over the next four years, depending on the size of a business’ PAYE scheme on 1 April 2012.  For a large employer the dates run from 2012 but for smaller employers, the staging date is more likely to be in 2016.

Who is eligible?

Employees who will be eligible for pensions auto-enrolment are those who are:

- At least 22 years old but under state pension age;
- Not already signed up to a work pension that meets the government’s; requirements;
- Earning more than £8,105 a year; and
- Working in the UK.

Can employees opt out?

Employees can choose to opt out of auto-enrolment but the scheme is designed to ensure that everyone has some kind of pension pot for when they retire.  There are a number of important benefits to signing up to a pension at work, from the fact that an employer contributes to the employee’s pensions pot, to the tax relief that is available.  If an employee chooses to leave their job then the pension they have been auto-enrolled into travels with them. 

There is a one month window in which employees can opt out of an auto-enrolment scheme but they must be enrolled before they can opt out and opting out must be an informed and voluntary choice based on certain information being received by an employee.

An employee can opt out by submitting an opt out notice to his or her employer and any contributions that have been paid are then refunded.  Employees who opt out are automatically re-enrolled every three years and must opt out again if they still don’t want to be part of the scheme.

What kind of schemes can be auto-enrolment schemes?

It is possible for an employer to use an existing pension scheme as the scheme in which to auto-enroll employees.  However, it is important that the rules of that scheme are carefully checked to ensure they fit with the requirements (particularly as regards eligibility) – or those rules may need to be changed before the scheme can be used.  The scheme must satisfy a number of minimum requirements, which vary depending on the type of scheme it is.  The two major potential issues for a scheme are where the scheme rules contain provisions that:
­ Prevent the employer from auto-enrolling a job-holder;
­ Require a job-holder to express a choice or to provide any information in order to become or remain a member. 

Where an employer does not have a scheme in mind, there are a number to select from, such as National Employment Savings Trust, a defined contribution pension scheme that anyone can join.

What information do employers have to provide and to whom?

Employers must provide information to each category of employee stating the right to be auto-enrolled or to opt in to a pension scheme, as well as providing information to the auto-enrolment pension scheme about eligible employees.

Information has to be provided within a month of the employee’s auto-enrolment date, so it is important that this is something that employers are organised for in advance.

What are the different types of employees?

Worker – this is simply everyone who has a contract to provide services or perform work for an employer, or who has a contract of employment, where that person is not undertaking the work as part of their own business (agency workers could be included here).  Employers have no obligations with respect to workers unless they fall into one of the categories below.

Entitled Worker – will be aged between 16 and 75, ordinarily working in the UK but earning below the qualifying earnings threshold.  Entitled workers must be provided with information and are entitled to join a scheme but an employer does not have to contribute.

Eligible job holder – will be at least 22 years old but under state pension age, not already signed up to a work pension that meets the government’s requirements, earning more than £8,105 a year and ordinarily working in the UK.   An eligible job holder must be auto-enrolled into a pension scheme.

Non-eligible job-holder – these are employees who are not eligible either because of their age (but they are between 16 and 75) or because their earnings are too low (but their earnings are above the qualifying earnings threshold).  They do not have to be auto-enrolled but they can opt in, at which point an employer has the same obligations as towards an eligible job holder.

For more information on any aspects of pensions auto-enrolment - for assistance preparing your business, or understanding the scheme from an employee’s point of view - please contact us. We can help businesses by recommending suitable expert Independent Financial Advisors.