PensionsJun 26 2019

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

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

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.

Investments and charges

DC arrangements must have a default investment fund, though they can offer additional options to their members. If a member doesn’t make any investment decision, all their contributions will be invested in the default fund.

As of April 2015, the government introduced a charge cap of 0.75 per cent for active and deferred members of default funds of DC qualifying schemes. This default fund charge cap covers all member-borne charges and deductions excluding transaction costs. Any commission or active member discount structures must not take member-borne charges above this level. From April 2016 no qualifying schemes could contain an AMD or similar mechanism that results in higher charges for deferred members.

There is another change to consider: on September 14 2013, following a government review, legislation came into force effectively banning consultancy charges in auto-enrolment schemes. Originally, these regulations did not apply where the employer entered into such an agreement before May 10 2013. However, since April 2015 the ban applies to all qualifying workplace pension schemes.

Practical process

Employees must normally be enrolled as soon as they start work if they are over the age and earnings thresholds. However, employers can delay the auto-enrolment date by three months providing they both inform those affected in advance and give them the choice of opting in during the waiting period.

Employers have six weeks from the auto-enrolment date to enrol the employee into the scheme (backdated to day one) and provide him or her with the required information. The employee then has up to a month to opt out.

The employer cannot provide the opt-out form to the employee. However, any paper forms must be returned to the employer who is responsible for informing the scheme about the opt-out. Electronic forms will go direct to the scheme with an instant copy to the employer.

The employer will be responsible for deducting contributions for the employee from the first payday, and for making a refund if necessary if the employee opts out. The employer can delay making payments to the pension scheme until after the opt-out period ends, but otherwise will have to reclaim from the scheme should a member opt out.

Employees who opt out will have to be automatically re-enrolled every three years. There will be a single re-enrolment date every three years for each employer rather than a specific one for each member.

What if the employee does not meet the requirements?

There are two groups of employees who are not auto-enrolled, but who have the right to opt into the employer’s pension scheme. The employer will then being required to contribute. These groups are:

  • Employees aged 16 to 21, or aged between state pension age and 75, who are working in the UK with annual earnings in excess of £10,000.
  • Employees aged 16 to 74 who are working in the UK with annual earnings in excess of £6,136 but less than £10,000.

Employees can also give notice to an employer to become an active member of a scheme if they are working in the UK, aged between 16 and 75, and have earnings below £511 a month or £118 a week. This requires the employer to allow them to join the scheme and deduct any applicable employee contribution from their pay and pass it to the scheme. It does not, however, require the employer to make any payments to the scheme themselves.

Directors do not need to be included in auto-enrolment either, so a scheme may not be necessary for a company that does not have any employees and is solely run by a director. But it would need to comply as soon as it employs someone else.

Can any scheme qualify as a workplace pension scheme?

Many people ask if they can use a self-invested personal pension as a Qualifying Workplace Pension Scheme. There is no legislative reason why a Sipp or any other scheme could not become a such a scheme. However, there are a number of practical barriers that would mean the majority of Sipp operators are unlikely to facilitate one of their schemes being used in this way, including:

  • It is unlikely that it could meet the charge cap of 0.75 per cent or equivalent.
  • They are unlikely to be able to operate an investment governance committee.

These compliance requirements would need to apply to the whole of the registered pension scheme, not just the arrangements being used for auto-enrolment.

Final thoughts

Auto-enrolment remains a complex area that, if not dealt with properly, could result in significant fines for schemes and employers. Care needs to be taken, especially for those establishing a new business, to ensure they do not fall foul of the requirements.

It should also be noted that this is a minimum requirement for employers, and offering a better workplace pension is essential to attract employees. To this end there have been calls to reduce the earnings trigger to increase the level of contributions paid for lower earners in statutory schemes. This has been dismissed by the current government, but it should not be discounted for the future.

Claire Trott is head of pensions strategy at St James’s Place Group