Pensions — automatic enrolment

What is automatic enrolment?

Auto­mat­ic enrol­ment places duties on employ­ers to auto­mat­i­cal­ly enrol ‘work­ers’ into a work based pen­sion scheme. The main duties are:

• assess­ing the types of work­ers in the busi­ness
• pro­vid­ing a qual­i­fy­ing auto­mat­ic enrol­ment pen­sion scheme for the rel­e­vant work­ers
• writ­ing to most of their work­ers explain­ing what auto­mat­ic enrol­ment into a work­place pen­sion means for them
• auto­mat­i­cal­ly enrolling all ‘eli­gi­ble job­hold­ers’ into the scheme and pay­ing employ­er con­tri­bu­tions
• com­plet­ing the dec­la­ra­tion of com­pli­ance and keep­ing records
• doing a re-enrol­ment and re-dec­la­ra­tion every three years.

Assessing the types of workers in the business

Whether this is an easy or dif­fi­cult task depends on the type of busi­ness. A busi­ness which uses the ser­vices of casu­al work­ers, very young or very old work­ers will need to spend some time in analysing its work­force. A busi­ness which only employs salaried staff will have an eas­i­er task.

A ‘work­er’ is:

• an employ­ee; or
• a per­son who has a con­tract to pro­vide work or ser­vices per­son­al­ly and is not under­tak­ing the work as part of their own busi­ness.

The sec­ond cat­e­go­ry is defined in the same way as a ‘work­er’ in employ­ment law. Such peo­ple, although not employ­ees, are enti­tled to core employ­ment rights such as the Nation­al Min­i­mum Wage (NMW). Indi­vid­u­als in this cat­e­go­ry include some agency work­ers and some short-term casu­al work­ers.

There are three cat­e­gories of work­ers: eli­gi­ble job­hold­ers; non-eli­gi­ble job­hold­ers; and enti­tled work­ers.

An ‘eli­gi­ble job­hold­er’ is a work­er who is:

• aged between 22 years and the State Pen­sion Age
• earn­ing over the min­i­mum earn­ings thresh­old (cur­rent­ly £10,000)
• work­ing or ordi­nar­i­ly work­ing in the UK
• not already in a qual­i­fy­ing pen­sion scheme.

Most work­ers will be eli­gi­ble job­hold­ers unless the employ­er already has a qual­i­fy­ing pen­sion scheme. These are the work­ers for whom auto­mat­ic enrol­ment will be required.

Oth­er work­ers (non-eli­gi­ble job­hold­ers) may have the right to ‘opt in’ (ie join a scheme) and should there­fore be treat­ed as eli­gi­ble job­hold­ers if they do opt in. ‘Enti­tled work­ers’ are enti­tled to join the scheme but there is no require­ment on the employ­er to make employ­er con­tri­bu­tions in respect of these work­ers.

The cat­e­gori­sa­tion of work­ers can be dif­fi­cult in some cir­cum­stances. Please con­tact us if you are unsure of how to assess the types of work­ers you have.

What is a qualifying automatic enrolment pension scheme?

Employ­ers are able to com­ply with their oblig­a­tions by using an exist­ing qual­i­fy­ing pen­sion scheme, set­ting up a new scheme or using the gov­ern­ment low cost scheme — the Nation­al Employ­ment Sav­ings Trust (NEST).

It is impor­tant that the pen­sion scheme cho­sen will deliv­er good out­comes for the employ­ee’s retire­ment sav­ings. This may mean that an employ­er’s exist­ing scheme may not be appro­pri­ate as it may have been designed for the needs of high­er paid and more senior employ­ees. This may mean that NEST for exam­ple may be an appro­pri­ate scheme for employ­ees who are not cur­rent­ly enti­tled to be a mem­ber of an exist­ing employ­er scheme.

To be a qual­i­fy­ing auto­mat­ic enrol­ment scheme, a scheme must meet the qual­i­fy­ing cri­te­ria and the auto­mat­ic enrol­ment cri­te­ria.

The main part of the qual­i­fy­ing cri­te­ria requires the pen­sion scheme to meet cer­tain min­i­mum stan­dards, which dif­fer accord­ing to the type of pen­sion scheme. Most employ­ers will want to offer a defined con­tri­bu­tion pen­sion scheme. The min­i­mum require­ments for such schemes are a min­i­mum total con­tri­bu­tion based on qual­i­fy­ing earn­ings, of which a spec­i­fied amount must come from the employ­er.

To be an auto­mat­ic enrol­ment scheme, the scheme must not con­tain any pro­vi­sions that:

• pre­vent the employ­er from mak­ing the required arrange­ments to auto­mat­i­cal­ly enrol, opt in or re-enrol a ‘job­hold­er’
• require the job­hold­er to express a choice in rela­tion to any mat­ter, or to pro­vide any infor­ma­tion in order to remain an active mem­ber of the pen­sion scheme.

The sec­ond point above means, for exam­ple, that the pen­sion scheme has a default fund into which the pen­sion con­tri­bu­tions attrib­ut­able to the job­hold­er will be invest­ed. The job­hold­er should how­ev­er have a choice of oth­er funds if they want.

We may be able to advise you on an appro­pri­ate route to take. Please con­tact us.

Does automatic enrolment apply to all employers?

Since Octo­ber 2017, all employ­ers have auto­mat­ic enrol­ment duties from the date they employ their first mem­ber of staff.

In prin­ci­ple, con­tri­bu­tions will be due from the first day of employ­ment but it is pos­si­ble to post­pone auto­mat­ic enrol­ment for some or all employ­ees for a peri­od of up to three months. This may, for exam­ple, be used to avoid cal­cu­la­tion of con­tri­bu­tions on part-peri­od earn­ings.

An employ­er can find out more about their duties at www.thepensionsregulator.gov.uk.

Communicating with your workers

Employ­ers are required to write to all work­ers (except those aged under 16, or 75 and over) explain­ing what auto­mat­ic enrol­ment into a work­place pen­sion means for them.

There are dif­fer­ent infor­ma­tion require­ments for each cat­e­go­ry of work­er. For an eli­gi­ble job­hold­er, the let­ter must include details of how the employ­ee can opt out of the scheme if they wish. The let­ter must not, how­ev­er, encour­age the employ­ee to opt out.

The Pen­sions Reg­u­la­tor (TPR) has devel­oped a set of let­ter tem­plates to help you when writ­ing to your employ­ees.

Automatic enrolment of eligible jobholders and payment of contributions

As part of the auto­mat­ic enrol­ment process, employ­ers will need to make con­tri­bu­tions to the pen­sion scheme for eli­gi­ble job­hold­ers.

All employ­ers now need to con­tribute at least 3% on the ‘qual­i­fy­ing pen­sion­able earn­ings’ for eli­gi­ble job­hold­ers. There is also a con­tri­bu­tion which needs to be paid by employ­ees if the employ­er does not meet the total min­i­mum con­tri­bu­tion of 8%.

What are qualifying pensionable earnings?

Earn­ings cov­er cash ele­ments of pay includ­ing over­time and bonus­es (gross) but min­i­mum con­tri­bu­tions are not nec­es­sar­i­ly cal­cu­lat­ed on total earn­ings. Con­tri­bu­tions will be payable on earn­ings between a low­er and a high­er thresh­old. These thresh­olds are cur­rent­ly £6,240 and £50,270. (The earn­ings between these amounts are called qual­i­fy­ing earn­ings).

If we do your pay­roll, we can help you make these cal­cu­la­tions and tell you the deduc­tions from pay and the pay­ments required to the pen­sion scheme.

Declaration of Compliance

TPR was estab­lished to reg­u­late work-based pen­sions.

An employ­er should have ini­tial­ly com­plet­ed the Dec­la­ra­tion of Com­pli­ance with­in five months of their duties start­ing. In essence the Dec­la­ra­tion of Com­pli­ance process requires the employ­er to:

• con­firm the cor­rect auto enrol­ment pro­ce­dures have been fol­lowed; and
• pro­vide var­i­ous pieces of infor­ma­tion such as the num­ber of eli­gi­ble job­hold­ers enrolled.

Employers’ ongoing duties

Employ­ers con­tin­ue to have ongo­ing duties in respect of auto-enrol­ment.

Re-enrolment

Employ­ers have a legal duty to re-enrol cer­tain employ­ees back into an auto­mat­ic pen­sion scheme every three years. The process involves reassess­ing the work­force and re-enrolling cer­tain employ­ees into their cho­sen qual­i­fy­ing auto­mat­ic pen­sion scheme. Employ­ers are also required to com­plete the re-dec­la­ra­tion of com­pli­ance with TPR, even if they do not have any staff to re-enrol. Re-enrol­ment should take place approx­i­mate­ly three years after the orig­i­nal stag­ing date.

As part of their re-enrol­ment respon­si­bil­i­ties, employ­ers are required to car­ry out the fol­low­ing tasks:

Re-enrol­ment date

Unless it is the first re-enrol­ment date this is always the third anniver­sary of the pre­vi­ous re-enrol­ment date. There is no option to post­pone the re-enrol­ment date.

If it is the first re-enrol­ment date there is a six month win­dow from which to choose a date for re-enrol­ment. This can be either three months before or after the third anniver­sary of the orig­i­nal stag­ing date. This sit­u­a­tion is like­ly to be unusu­al.

Reassess the work­force

The employ­er will only need to assess employ­ees who were pre­vi­ous­ly auto-enrolled and have sub­se­quent­ly either: asked to leave (opt­ed out) of the pen­sion scheme; left the pen­sion scheme after the end of the opt-out peri­od; or stopped or reduced their pen­sion con­tri­bu­tions to below the min­i­mum lev­el (and who meet the age and earn­ings cri­te­ria to be re-enrolled). Once the assess­ment is com­plete, employ­ers should re-enrol eli­gi­ble staff into a qual­i­fy­ing pen­sion and start mak­ing con­tri­bu­tions with­in six weeks of their re-enrol­ment date.

Write to those who have been re-enrolled

The employ­er will need to write to each employ­ee who has been re-enrolled into the pen­sion scheme. This should be done with­in six weeks of the re-enrol­ment date. Tem­plate let­ters are avail­able on TPR web­site.

Com­plete the re-dec­la­ra­tion of com­pli­ance

the employ­er is required to com­plete and sub­mit the re-dec­la­ra­tion of com­pli­ance with TPR to let them know that they have met their legal duties. This should be done with­in five months of the third anniver­sary of the staging/previous re-enrol­ment date. An employ­er is required to do this even if they have not re-enrolled any staff into the pen­sion scheme.

Remem­ber, re-enrol­ment and re-dec­la­ra­tion is a legal require­ment and fail­ure to com­ply with the reg­u­la­tions may result in a fine.

The penalties for non-compliance

Employ­ers who fail to com­ply with their legal duties may be sub­ject to enforce­ment action. TPR has a range of pow­ers it can utilise when tak­ing action for non-com­pli­ance. This can range from warn­ing let­ters and statu­to­ry notices to finan­cial penal­ties. Fines range from a £400 fixed penal­ty, to a vary­ing dai­ly esca­lat­ing penal­ty of between £50 and £10,000, depend­ing on the num­ber of employ­ees. In the most extreme cas­es the Reg­u­la­tor may seek a crim­i­nal pros­e­cu­tion.

Keeping records

Final­ly, an employ­er must keep records which will enable them to prove that they have com­plied with their duties. Keep­ing accu­rate records also makes good busi­ness sense because it can help an employ­er to:

• avoid or resolve poten­tial dis­putes with employ­ees
• help check or rec­on­cile con­tri­bu­tions made to the pen­sion scheme.

Duties checker TPR guidance

TPR guid­ance is avail­able for employ­ers to help them com­ply with their auto­mat­ic enrol­ment duties: www.thepensionsregulator.gov.uk/en/employers.

Using the duties check­er and the guid­ance, employ­ers can fol­low a step-by-step process to com­ply with their duties. The guid­ance also includes links to tools and resources.

Changes ahead

New law in the form of The Pen­sions (Exten­sion of Auto­mat­ic Enrol­ment) Act 2023 extends the auto­mat­ic enrol­ment regime. The Sec­re­tary of State will have the author­i­ty to be able to intro­duce new reg­u­la­tions to:

• Reduce the low­er age lim­it for auto-enrol­ment from 22 to 18
• Remove the low­er earn­ings thresh­old for qual­i­fy­ing earn­ings (this is cur­rent­ly £6,240 per annum) so that con­tri­bu­tions are cal­cu­lat­ed from the first £1 earned up to the upper lim­it (cur­rent­ly £50,270 per annum)

The imple­men­ta­tion date for this has not yet been announced.