Auto Enrolment

The aim of auto enrolment is to increase the retirement savings of the nation, particularly the low paid who tend not to save and small employers who are less likely to have workplace pension scheme arrangements. The hope is that many employees will continue to save and not opt-out after they have been automatically enrolled into a workplace pension scheme.

Employer Duties
For some small employers the biggest hurdle is to understand that this affects them too.  Under these latest pension reforms, all employers with at least one employee must automatically enroll certain members of their workforce into a pension scheme and make a contribution towards it, a fact that not all small employers have yet realised.

Auto enrollment
An employer must automatically enroll any “eligible jobholder” working for them who is not already a member of a qualifying pension scheme with them.  The time limit for completing auto enrolment is set out by law.  During what is known as the “joining window”, a one month period from the eligible jobholder’s auto enrolment date, the employer must:

• give information to the pension scheme about the eligible jobholder
• give enrolment information to the eligible jobholder
• make arrangements to achieve active membership for the eligible jobholder, effective from their auto enrolment date

Once enrolled into an auto enrolment pension scheme, an eligible jobholder can decide to opt-out of the pension scheme.  It is important they are able to make an informed decision so the employer must provide the eligible jobholder with certain enrolment information, within the joining window, that tells them:

• that they have been, or will be, automatically enrolled and what this means to them
• of their right to opt-out and their right to opt back in
• where to find further information about pensions and saving for retirement

Staging dates
This is the date that the auto enrolment duties start and is the first piece of information employers need to know in order to start planning.  Staging dates are being rolled out based on the largest to smallest PAYE schemes. This process began in October 2012, when the largest employers had to enrol eligible employees into either their existing workplace pension scheme or an alternative qualifying pension scheme, the staging process will continue beyond 2017. 

Assessing the workforce
Once the staging date has been identified the first step for an employer is to assess the workforce to see if they employ anyone classed as a worker. To do this, they will need to understand their contractual relationships.  A worker is defined as any individual who:

• works under a contract of employment
• or has a contract to perform work or services personally (i.e. they cannot send a substitute or sub-contract the work)
• is not undertaking the work as part of their own business

Anyone who has entered into a contract of this type with an individual is an employer and will be required to comply with the new employer duties. With agency workers, the consideration is who is paying them, if it is the agency then the employer does not have to do anything as the agency is the employer and therefore it will be the agency who must comply with the auto enrolment duties.

The next step is to categorise each of their workers, as only certain sections of the workforce will need to be automatically enrolled.  There are two main categories of worker for which the employer duties apply:

• Jobholders
• Entitled workers

The category of jobholder then further subdivides into two groups:

• Eligible jobholders
• Non-eligible jobholders

The category a worker falls into is determined by their age and whether they earn qualifying earnings.

Eligible jobholders
They are called eligible because they are ‘eligible’ for Automatic Enrolment. They must:

• be aged between 22 and state pension age
• be working, or ordinarily working, in the UK
• have qualifying earnings, payable by the employer, in the relevant pay reference period that are above the earnings trigger for automatic enrolment (currently £9,440).

The employer must automatically enroll eligible jobholders and pay minimum contributions to the scheme.

Non-eligible jobholders
They are called non-eligible workers because they are not eligible for auto enrolment.  They:

• are at least 16 years old and under 75
• work, or ordinarily work, in the UK
• have qualifying earnings payable by the employer in the relevant pay reference period that are above the lower earnings level for qualifying earnings (currently £5,668) but below the earnings trigger for auto enrolment
• are aged at least 16 and under 22 or between state pension age and under 75
• work, or ordinarily work, in the UK
• have qualifying earnings payable by the employer in the relevant pay reference period that are above the earnings trigger for auto enrolment

Non-eligible jobholders can choose to opt-in to a pension scheme. Crucially, if a non-eligible jobholder requests to join a scheme, then the employer must also contribute to the scheme even though the employee has not been automatically enrolled.

Entitled workers
They are called entitled workers because they are ‘entitled’ to join a pension scheme.  They

• are aged between 16 and 74
• are working, or ordinarily working, in the UK
• do not have qualifying earnings (above the lower level of £5,668) payable by the employer in the relevant pay reference period

The key difference between an entitled worker and a non-eligible jobholder is that the employer does not have to pay into the scheme, unless they choose to, or have chosen a scheme that requires employer contribution.

Specific employer duties for each category of worker
Duties vary depending on the category of worker.

Eligible jobholder
The employer must:  

• automatically enroll and make contributions
• if using postponement, provide a notification to the eligible jobholder
• process any opt-out notice
• automatically re-enrol approximately every three years
• keep records of the automatic enrolment process

An eligible jobholder must be automatically enrolled into a qualifying workplace pension scheme. The employer must deduct employee contributions and pay these and employer contributions over to the pension scheme.  Postponement is a three-month window that is provided to try and ease the process if casual and temporary employees are common in the workplace. If the employee opts out the employer must process that notice.

Auto re-enrolment must then take place around every three years if the eligible jobholder has opted out. The hope being that if the individual was struggling financially and opted out because of that, their situation may have improved three years later. Employers must keep records for a minimum of six years.

Non-eligible jobholder
The employer must:
• arrange pension scheme membership if the non-eligible jobholder decides to opt-in, and also make contributions
• provide information about the right to opt-in, unless using postponement
• if using postponement, the employer must provide a notification to the non-eligible jobholder
• process any opt-out notice
• keep records of the enrolment process  
Non-eligible jobholders are not auto enrolled but have the right to opt-in to a scheme which the employer must arrange and deduct employee contributions, then pay these and employer contributions over to the pension scheme. Postponement, opt-out and record keeping also apply in the same way but there is no obligation to re-enroll every three years as they were not auto enrolled in the first instance.

Entitled worker
The employer must:  

• arrange pension scheme membership if the entitled worker decides to join
• provide information about the right to join, unless using postponement
• if using postponement, provide a notification to the entitled worker
• keep records of the joining process

The entitled worker has the right to join a scheme, so the employer must arrange pension scheme membership and deduct employee contributions. The employer does not have to contribute but may choose to do so. Again postponement, opt-out and record keeping obligations also apply in the same way, but there is no obligation to re-enroll every three years.

Assessment dates
There are various dates on which workers will need to be assessed:

• the employer’s staging date, for a worker already in employment on that date
• the first day of employment, for a worker who starts employment after the employer’s staging date
• the date of the worker’s 22nd birthday, where this occurs after the employer’s staging date
• the date of the worker’s 16th birthday, where this occurs after the employer’s staging date

Employers will need to be aware of employees who change category when they reach their 22nd and 16th birthdays, or because earnings increase. A process will need to be in place to trigger when these events happen in order to comply with the resulting duties.

The assessment must be based on the worker’s circumstances on the actual assessment date. Employers can carry out assessments for employees already in employment ahead of the staging date but confidence is required that their circumstances will not change before the date duties apply.

Employers should exercise caution when it comes to identifying eligible jobholders. This is because it is important to also establish the first day that the criteria for an eligible jobholder is met. This is known as the auto enrolment date and is the date from which the employer must auto enrol the eligible jobholder.
Although a worker may appear to be an eligible jobholder, e.g. if they are contracted to earn far in excess of the earnings trigger, an employer will still usually have to identify the first day that their earnings exceed the earnings trigger for automatic enrolment.

Qualifying earnings
Qualifying earnings include any of these components of pay due to be paid to the worker:

• salary
• wages
• commission
• bonuses
• overtime
• Statutory sick pay
• Statutory maternity pay
• Ordinary or additional statutory paternity pay
• Statutory adoption pay

An employer needs to consider what is due to be paid to the worker in the relevant pay reference period and how much of this is made up of qualifying earnings.

When a worker is paid in arrears, the employer considers what is due to be paid in this period, not what is due to be earned. If an employer is treating multiple employment contracts with the same worker as a single employment relationship they should include all the earnings under all the contracts in the assessment.

A key element of the employer’s duties is to communicate with their workers. Irrespective of the category each worker falls into, every employer will almost certainly have an obligation to give specified information to groups of their workers within prescribed time limits.  Information about communication obligations is available on The Pensions Regulator’s website.

Whose job is it anyway?
From securing a qualifying pension scheme to identifying, assessing and communicating with workers, to supplying earnings information each pay reference period and deducting and paying over pension contributions, the obligations are lengthy.

And these are just some of the key employer duties, there are many more. Even from those it's clear there is a lot of work involved.  The Pensions Regulator recommends a preparation time of around 18 months.

Plummer Parsons

Plummer Parsons