The chosen pension scheme for an employer can be defined benefit, defined contribution or a hybrid scheme.
Employers may choose to set up a new scheme for automatic enrolment, or ensure their existing scheme meets the necessary standards, or both.
The government has set up the National Employment Savings Trust, which has a public service obligation to accept all employers and workers. Employers can also choose from a number of other pension providers in the market.
The pension provided by the employer must include a satisfactory default investment option, in which contributions will be automatically invested unless the employee chooses a different option.
Employers have a number of decisions to make when it comes to automatic enrolment. The answers will depend on the employer’s business needs and the reasons why they offer a pension scheme to employees.
These key decisions are related to:
1) Staging date: every employer has one based upon their PAYE size at 1 April 2012, but the employer can bring it forward, for example if as the prescribed date presents a problem for seasonal businesses.
2) Contribution levels: employers can choose from a phased minimum contribution approach, if affordability for the employer and employees is a concern, or a higher rate from day one where the level of retirement income for employees is the major concern.
3) Postponement period: employers can delay assessment of employees by up to three months, if affordability is an issue for the company is an issue, or if there are temporary workers the employer would like to avoid enrolling.
Similarly if there are spikes in pay, caused by bonuses or seasonal overtime, employers may want to use postponement to avoid enrolling employees who would otherwise earn less than £9,440 a year. Postponement can also be used to align enrolment dates with the payroll cycle.
The answers to the questions may be different for different groups of employees, while employers may want to consider applying different rules to each group, according to Dale Critchley, technical reform manager of Friends Life.
In making this decision, Mr Critchley said employers should consider whether complexity adds value for the employees and themselves.
He said: “The duties are often complex; they involve assessing the workforce and making payroll deductions often within a short timescale.”
Communications need to be issued to employees within timescales laid down by legislation - and again these can be tight.
Finally the employer has to deal with requests to opt in and inevitably there will be those who wish to opt out.
Employers need to consider whether they want to carry out these duties in-house, or through their adviser, pension provider or third party such as a payroll provider. Many providers, for example, and advisers are developing services to help employers effectively meet their duties.
