Pensions – automatic enrolment


The government is placing greater responsibility and sometimes higher costs on employers. Employers are required to provide access to pension provision for their employees. If you are an employer in the Nottingham area, we at AHACCOUNTANTS can provide help and advice on your auto-enrolment responsibilities.

What is Automatic Enrolment?

Automatic enrolment places duties on employers to automatically enrol ‘workers’ into a work-based pension scheme. The main duties include:

  • Assessing the types of workers in the business.
  • Providing a qualifying automatic enrolment pension scheme for the relevant workers.
  • Writing to most workers to explain what automatic enrolment into a workplace pension means for them.
  • Automatically enrolling all ‘eligible jobholders’ into the scheme and paying employer contributions.
  • Completing the declaration of compliance and keeping records.
  • Conducting a re-enrolment and re-declaration every three years.

Assessing the Types of Workers in the Business

The complexity of this task varies based on the nature of the business. For instance, a business employing casual workers or workers of varying ages may need to analyze its workforce more closely than one that employs salaried staff exclusively.

A ‘worker’ is defined as:

  • An employee; or
  • A person contracted to provide work or services personally, not as part of their own business.

This includes individuals such as agency workers and short-term casual workers who, while not classified as employees, are entitled to core employment rights such as the National Minimum Wage (NMW).

There are three categories of workers: eligible jobholders, non-eligible jobholders, and entitled workers.

An eligible jobholder is a worker who is:

  • Aged between 22 years and the State Pension Age.
  • Earning over the minimum earnings threshold (currently £10,000).
  • Working or ordinarily working in the UK.
  • Not already in a qualifying pension scheme.

Most workers will fall into the eligible jobholder category unless the employer already has a qualifying pension scheme. Automatic enrolment is required for these workers.

Non-eligible jobholders may have the right to ‘opt in’ and should be treated as eligible jobholders if they do. Entitled workers can join the scheme but the employer is not required to make contributions on their behalf.

Assessing worker categories can be complex. If you’re unsure how to proceed, please contact us for guidance.

In December 2017, a review by the Department for Work and Pensions proposed to lower the age limit for automatic enrolment from 22 to 18, maintaining the upper age limit at the State Pension Age. This change would see workers aged 18 to the State Pension Age automatically enrolled if they earn above £10,000 annually. The government plans to implement this in the mid-2020s.

What is a Qualifying Automatic Enrolment Pension Scheme?

Employers can comply with their obligations by using an existing qualifying pension scheme, setting up a new scheme, or utilizing the government-backed, low-cost scheme, the National Employment Savings Trust (NEST).

It’s crucial that the chosen pension scheme delivers favorable outcomes for employees’ retirement savings. An employer’s existing scheme may not be suitable if it was designed primarily for higher-paid and senior employees, making NEST a potentially appropriate option for other employees.

To qualify as an automatic enrolment scheme, the pension scheme must meet specific qualifying criteria, including minimum standards that vary depending on the type of pension scheme. Most employers prefer a defined contribution pension scheme, which requires a minimum total contribution based on qualifying earnings, a portion of which must come from the employer.

To qualify for automatic enrolment, the scheme must not contain provisions that:

  • Prevent the employer from making arrangements to automatically enrol, opt in, or re-enrol a jobholder.
  • Require the jobholder to express a choice or provide information to remain an active member of the pension scheme.

The latter means that the pension scheme should have a default fund where contributions from jobholders will be invested, though jobholders should have options for other funds.

We can advise you on selecting an appropriate route for compliance. Please contact us for more information.

Does Automatic Enrolment Apply to All Employers?

The law has been in effect for very large employers since 2012, gradually rolling out to all sizes of employers. Since October 2017, all employers have automatic enrolment duties from the date they hire their first employee.

In principle, contributions are due from the first day of employment, but employers can postpone automatic enrolment for some or all employees for up to three months. This can help avoid calculating contributions on part-period earnings.

Employers can find further details about their duties at The Pensions Regulator website.

Communicating with Your Workers

Employers are required to inform all workers (except those aged under 16 or over 75) about what automatic enrolment means for them.

Information requirements differ by worker category. For an eligible jobholder, the letter must include details on how to opt out of the scheme if they wish, although the letter must not encourage opting out.

The Pensions Regulator (TPR) offers letter templates to assist in communicating with employees.

Automatic Enrolment of Eligible Jobholders and Payment of Contributions

Employers must contribute to the pension scheme for eligible jobholders as part of the automatic enrolment process.

All employers are required to contribute at least 3% on qualifying pensionable earnings for eligible jobholders. If the employer does not meet the total minimum contribution of 8%, employees must contribute the difference.

Example:

  • If the employer contributes 3%, the employee’s gross contribution will be 5% to meet the 8% minimum total contribution.
  • If the employer contributes 5%, the employee’s gross contribution will only be 3%.

What are Qualifying Pensionable Earnings?

Qualifying earnings encompass cash elements of pay, including overtime and bonuses (gross), but minimum contributions are not calculated on total earnings. Contributions are payable on earnings between a lower and a higher threshold, currently £6,240 and £50,270, respectively.

If we manage your payroll, we can assist with these calculations, detailing deductions from pay and required pension scheme payments.

Declaration of Compliance

TPR was established to regulate work-based pensions.

Employers must complete the Declaration of Compliance within five months of their original staging date (or upon hiring their first employee). This process requires employers to:

  • Confirm that correct auto-enrolment procedures have been followed.
  • Provide various information, including the number of eligible jobholders enrolled.

Employers’ Ongoing Duties

Employers have ongoing responsibilities regarding auto-enrolment.

Re-enrolment: Employers must re-enrol specific employees back into an automatic pension scheme every three years. This involves reassessing the workforce and re-enrolling eligible staff into a qualifying automatic pension scheme. Employers are also required to complete the re-declaration of compliance with TPR, even if no staff are re-enrolled. Re-enrolment should occur approximately three years after the original staging date.

Key Steps for Re-enrolment:

  1. Re-enrolment Date: This is always the third anniversary of the previous re-enrolment date. For the first re-enrolment, employers have a six-month window to choose a re-enrolment date, which can be three months before or after the third anniversary of the original staging date.
  2. Reassessing the Workforce: Employers must assess employees who previously opted out, left the pension scheme after the opt-out period, or stopped/reduced contributions below the minimum level, provided they meet the age and earnings criteria for re-enrolment. Eligible staff should be re-enrolled and contributions started within six weeks of the re-enrolment date.
  3. Informing Employees: Employers must notify each employee who has been re-enrolled into the pension scheme within six weeks of the re-enrolment date. Template letters are available on the TPR website.
  4. Completing the Re-declaration of Compliance: Employers must submit this declaration to TPR within five months of the third anniversary of the staging or previous re-enrolment date, even if no staff have been re-enrolled.

Failure to comply with re-enrolment and re-declaration is a legal requirement and may result in fines.

Penalties for Non-Compliance

Employers failing to comply with legal duties may face enforcement action. TPR has various powers for non-compliance, ranging from warning letters and statutory notices to financial penalties. Fines can range from a fixed penalty of £400 to escalating daily penalties of between £50 and £10,000, depending on employee count. In severe cases, the regulator may pursue criminal prosecution.

Keeping Records

Employers must maintain records to prove compliance with their duties. Accurate record-keeping is also beneficial for avoiding or resolving potential disputes with employees and for reconciling contributions made to the pension scheme.

Duties Checker and TPR Guidance: TPR offers guidance to help employers comply with automatic enrolment duties. Employers can follow a step-by-step process using the duties checker available on the TPR website.

Changes Ahead

New legislation, The Pensions (Extension of Automatic Enrolment) Act 2023, extends the automatic enrolment regime. The Secretary of State will have the authority to introduce new regulations to:

  • Lower the automatic enrolment age limit from 22 to 18.
  • Remove the lower earnings threshold for qualifying earnings, allowing contributions to be calculated from the first £1 earned up to the upper limit (currently £50,270).

The implementation date for these changes has yet to be announced.