You must have heard about auto-enrolment, if only because of the Government’s television and poster campaigns about workplace pensions, including the current one featuring a large furry monster. There has been compulsory pension saving for both employees and the self-employed for many years because National Insurance contributions earn credits in the basic State scheme and since 1978 employees have earned credits in the supplementary scheme, which began as SERPS and changed its name in 2002 to the State Second Pension (S2P).
In April 2016 S2P will cease to exist, but for those reaching State pension age after that date an improved basic State pension will be payable, named the Single Tier Pension. The Government recognises that STP will not be sufficient for most people and is using auto-enrolment to require employers automatically to enrol their staff into a workplace pension arrangement. This is not compulsory saving because workers can opt-out, but note that they can only opt-out of the workplace pension; they cannot opt-out of auto-enrolment. It is illegal to agree with a prospective worker that he will not be auto-enrolled. Anyone who opts-out must be automatically re-enrolled three years later.
The legislation bans any involvement by workers when they are auto-enrolled. They cannot be required to provide information, to sign an application form, nor make any decisions, including which fund or funds will receive their and the employer’s contributions. You cannot use your worker’s refusal to engage with pensions as a reason or excuse for not auto-enrolling him.
Auto-enrolment might be stage two in a journey towards compulsory saving for retirement. The first stage was the stakeholder legislation, which required employers to designate schemes and make it easy for their staff to contribute to them via payroll, but did not require employers to contribute with the result that many schemes did not have any contributions paid into them. Auto-enrolment can be seen as a nudge in the direction of saving for retirement because workers can opt-out. Compulsory saving for retirement is the logical next step if auto-enrolment does not result in wide spread saving, particularly by the lower paid.
The stakeholder legislation did not apply where an employer had fewer than five staff. There is no such rule in the auto-enrolment legislation; a single worker must be auto-enrolled if he or she meets the age and pay conditions. Auto-enrolment applies to workers, which is a wider category than employees. Family members, casual workers and temporary staff can be caught, but employers may operate a waiting period of up to three months.
For the sake of simplicity, we assume that you have not already got a pension arrangement for your staff and that you intend to designate a defined contribution scheme, probably the National Employment Savings Trust. NEST was set up by the Government as the national default scheme, which is just as well because the insurance companies are reluctant to provide arrangements for micro-employers.
Your first task is to find out your staging date, which can be done by going on the Pensions Regulator’s website and entering your PAYE reference. Your staging date is the date from which you must admit your so-called eligible jobholders into a qualifying scheme. You must therefore have designated that scheme, which might be NEST, before your staging date. Employers with fewer than 50 staff are being staged in batches between 1 June 2015 and 1 April 2017. The Pensions Regulator will write to you one year before your staging date to notify you of it and to encourage you to prepare for it.
Assessing the workforce
Auto-enrolment divides workers into three categories: eligible jobholders; non-eligible jobholders and entitled workers. The factors that distinguish between them are age and pay. An eligible jobholder must be auto-enrolled. A non-eligible jobholder is either outside the core age range of 22 – State pension age or does not qualify as an eligible jobholder because he earns less than the earnings trigger of £10,000 pa (£192 per week) but more than the earnings threshold of £5,824 pa (£112 per week). A non-eligible jobholder must be told that he has a right to opt-in and to benefit from an employer contribution if he does so. An entitled worker is the least entitled; he may opt-in but is not entitled to an employer contribution. He can be any age but earns less than the earnings threshold of £5,824 pa. The earnings trigger of £10,000 pa used to be aligned to the personal allowance for income tax but is no longer. Both it and the earnings threshold are reviewed annually.
Employer and member contributions
Contributions for both workers and employers apply to qualifying earnings, meaning the band of earnings between £5,824 pa and £42,385 pa. The earnings trigger operates as a reverse poverty trap; a worker who earns £9,999 pa is not auto-enrolled, but an eligible jobholder who earns £10,000 or more benefits from employer contributions on his pay in excess of the threshold of £5,824 rather than just on his pay in excess of £9,999.
Auto-enrolment operates by reference to a worker’s earnings from a particular employer; earnings from two or more employers are not added together. A part-timer might have total earnings in excess of the threshold but will only be a non-eligible jobholder if his earnings from any job exceed the threshold; if they do he will only be able to opt-in by reference to that job rather than all of them.
Pay is tested against the earnings trigger by reference to each pay reference period. A pay reference period is a month if the worker is paid monthly or a week if he is paid weekly. If a worker is paid monthly and earns less than £833 a month, being 1/12th of the earnings trigger of £10,000, the employer is not required to auto-enrol him, but if in any month overtime increases his pay to more than £833 he must be auto-enrolled. The reduction of his pay at a later date to less than 1/12th of the trigger is immaterial. The newly enrolled worker is entitled to an employer contribution on all his pay in excess of the threshold until such time as he opts-out. It is illegal to offer any inducement to a worker to encourage him to opt-out . An opt-out form must be obtained by the worker from the pension scheme and may not be provided by the employer.
A contributions taper will apply until 5 April 2019. It reduces the rates of contribution payable by both the employer and the worker. For the period to 5 April 2018 each of them may pay as little as 1% of qualifying earnings, meaning earnings in excess of the earnings threshold. The rates will increase to 2% of qualifying earnings for employers and 3% for members during the year beginning 6 April 2018 and thereafter the minimum contribution rates will be 3% for employers and 4% for members.
Note that the taper is fixed to the dates given above and it is not the case that the employer contribution rate is 1% for the first year after its staging date, with 2% for the year after that and 3% from the second anniversary of the staging date. The justification for this is that an employer which does not achieve its staging date until, say, 1 May 2018 and so has to pay 2% from the outset will not have had to pay anything in the period before that date, in contrast to employers who staged earlier and so will have had to pay a 1% employer contribution from an earlier date.
Postponement allows employers to postpone the date on which they assess the workforce or individual members of it. An employer can serve a postponement notice of up to three months with effect from its staging date, thereby delaying the time from which contributions start to be paid. An employer can apply postponement to new joiners and so avoid having to enrol an eligible jobholder who does not survive a probationary period. It also allows temporary staff to be exempted from auto-enrolment if they are employed for periods of less than three months. However, for postponement to operate the staff must be given postponement notices and they can opt-in during the postponement period if they wish.
Postponement can be operated more than once. This is relevant to workers whose regular earnings are below the trigger but who have spikes in earnings such that they qualify as eligible jobholders in a pay reference period. Suppose that the worker’s pay spikes during harvest. If he joins in January he could be postponed until April and if his earnings in that pay reference period are below the trigger he need not be auto-enrolled. But if his earnings for June are in excess of the trigger he could then be served with a postponement notice expiring in September. He must be auto-enrolled in September if his September earnings are in excess of the trigger, but if they are not the duty to auto-enrol him might not arise again until the following June when another postponement notice could be given to him.
The concept of auto-enrolment is straightforward, but the practical application of it is anything but. There is a great deal of information on the Pensions Regulator’s website about auto-enrolment, including templates of the letters and the notices to be given to workers to make them aware that they have been auto-enrolled, of postponement and of the right to opt-in. Micro employers might not find it cost effective to pay a fee to an independent financial adviser to help them with the process and the insurance companies will be reluctant to take them on. A payroll provider, if you have one, should be able to provide the software which monitors pay and applies the correct deductions from the time when a worker is auto-enrolled. There are also record keeping requirements.
Finally, the Pensions Regulator is charged with ensuring that all employers comply with auto-enrolment. The consequences of failing to do so can include fixed penalty notices and escalating penalty notices for more serious or persistent breaches by employers. An escalating penalty can impose a fine of £50 a day or more, depending on the size of the employer’s workforce. Wilful failure to comply with the employer duties is a criminal offence, liable on conviction to imprisonment or a fine or both.