How pensions auto-enrolment will affect you
Sep 24, 2015
Business Advice Pensions
What is auto enrolment?
Auto enrolment is the system of workplace pensions introduced in 2012 aimed at encouraging people to save for their retirement via the private sector. Prior to this stakeholder pensions, introduced in 2001, were the first attempt to involve employers in widespread, low cost private pension savings for all employees.
Why is it necessary?
As a nation we are living longer and enjoying better health in old age. The state pension was first introduced in 1909 and from 2016 it will be a new flat rate for all. The Government is keen to encourage all of us to save for our own retirement and reduce the burden on the taxpayers of the future.
Who does it apply to?
The Government, via The Pensions Regulator, has made it a legal requirement for all employers with more than one worker to ensure that eligible jobholders become active members of a qualifying scheme set up with a pension provider. Not all employees will qualify for auto enrolment, and some may be eligible to opt in if they wish.
When does it apply to me?
Larger employers have already gone through the process, starting back in 2012. Now it is being introduced to smaller employers. Your staging date is based on the number of employees on your payroll in April 2012. Employers with fewer than 30 employees at that date will generally stage between January 2016 and April 2017. Some small employers have already been allocated an earlier date in June 2015, to be monitored as a test sample.
What will it cost?
Auto enrolment requires contributions based on qualifying earnings. Currently it is 2%, with at least 1% from the employer. This will rise over time, so that from October 2018 the contribution will be 8%, with at least 3% coming from the employer. In addition to these contributions, the employer is expected to administer the scheme and pay for all of this additional work.
How do I avoid it?
In simple terms you can’t. It is an additional burden that has been placed on the employer by the Government. Failure to comply can result in a fixed penalty fine of £400 and an additional fine of £50 to £10,000 per day, depending on how many employees you have. So far (to the end of June 2015), The Pensions Regulator has issued 332 fixed penalty fines, 4 escalating penalties and 1,295 notices requiring correction of breaches of employers duties.
What do I have to do?
Auto enrolment takes time to organise and you should start thinking about it now. The process is summarised in the following 10 steps:
- Find your staging date
- Create a plan
- Assess your workforce
- Select a pension provider
- Calculate contributions
- Communicate with employees
- Enrol employees and consider postponement
- Register the scheme with The Pensions Regulator
- Process contributions through the payroll
- Keep records
Be aware that not all pension providers are going to offer schemes, unless you meet their criteria. Some existing insurance companies have decided not to take part in this new market. There are, however, several low cost schemes available and NEST, the Government sponsored scheme, will also exist as a default option.
Remember that auto enrolment is not just a one-off exercise – it is going to be part of daily life from here on in and needs to be considered every time you pay your employees. You will need to ensure all employees are assessed and individual pension contributions are calculated. The only way to do this efficiently is to have integrated payroll and pension software.
Am alone in this?
Latest estimates from The Pensions Regulator suggest that there are 1.8m small employers who still have to go through the process. In the summer of 2016, 220,000 employers will need to comply and in 2017 that figure rises to a staggering 350,000. That’s nearly 27,000 employers per week!