Pensions  

Rolling in it: Auto-enrolment and the issues to watch for

Rolling in it: Auto-enrolment and the issues to watch for

Auto-enrolment came into force in October 2012, but its introduction was staggered over almost six and a half years. Its rollout began with the largest employers, as determined by their number of employees, and was gradually extended to all employers in accordance with their size.

By February 2018 all employers had reached their staging date and were expected to be compliant with their auto-enrolment duties.

New employers, or those who took on their first member of staff on or after October 1 2017, would be expected to comply with their auto-enrolment duties from the day their first member of staff started working for them. 

Employers must automatically enrol all staff between age 22 and state pension age who have qualifying earnings of at least £10,000. The figure of £10,000 is called the earnings trigger and has not changed since 2014, although it is reviewed annually.

This £10,000 is based on a 12-month period, but the actual test is determined by the employee’s relevant earnings period, which will in turn be determined by the period in which the employer pays their employee. This could, for example, be a week or a month. As a result, an employee may become eligible even if they do not usually earn the full £10,000 within the year: the same rules will apply if they earn more than £192 a week or £833 a month.

That said, there are additional rules that try to avoid very short memberships of the scheme for those who have fluctuating incomes that will not result in annual qualifying earnings of £10,000 or more. Care needs to be taken in these cases to ensure the auto-enrolment duties are being met correctly.

Qualifying earnings are made up of any of the following components of pay that are owed to the worker:

  • Salary
  • Wages
  • Commission
  • Bonuses
  • Overtime
  • Statutory sick pay
  • Statutory maternity pay
  • Ordinary or additional statutory paternity pay
  • Statutory adoption pay

Since all employers have now passed their staging date, new staff will be automatically enrolled when they join the company, or when they first meet the age and earnings criteria. Employers have to complete a Declaration of Compliance and demonstrate to the Pensions Regulator how they are meeting the requirements.

Contribution levels

On April 6 2019, the minimum contribution level for defined contribution arrangements (including personal and stakeholder pensions) rose to 8 per cent of qualifying earnings, where at least 3 per cent is being paid by the employer. If the employer contributes the minimum amount, the employee must contribute at least 4 per cent of qualifying earnings, with a further 1 per cent coming from tax relief.

There are three alternatives to the standard contribution rates that use different definitions to calculate the pay on which the contributions are paid. It is not only the definition of pensionable earnings that may differ: so do the contribution rates. This means that choosing the most appropriate option can make a significant difference.

The qualifying earnings on which minimum contributions are based for tax year 2019-20 are between £6,136 and £50,000. Although the lower limit has not increased significantly since 2012, when it stood at £5,564, the upper limit has increased to £50,000 from £42,475. This has meant the band for contributions has increased by £6,953 in addition to the level of total contributions increasing to 8 from 2 per cent. This may seem like a negative for some, but saving more sooner into a pension should only be seen as a good thing.