Auto-enrolment is a new scheme that requires employers to enrol all eligible employees automatically into a qualifying pension scheme and to make contributions on their behalf. The scheme is far-reaching and complex. It prompts a major change to pensions and will affect every single employer in the UK.
The scheme started with the biggest employers in October 2012. Small and medium sized employer's (SME's) will follow with ‘staging dates' from April 2014 onwards. For all employers, compliance with the new duties and safeguards is compulsory. This makes it extremely important that employers understand the responsibilities and the duties imposed upon them. Here we will outline the main rules and discuss the key issues that businesses will need to address.
Don't get caught out!
SME's across the UK with more than 50 employees now have just over 6 months to complete their planning. Businesses really need to be taking steps sooner rather than later to ensure they are in a good position to negotiate on fees and benefits.
The Davidson Chalmers team are in the process of preparing a seminar on dealing with auto-enrolment for SME's. If you would like to receive further details regarding this seminar please click here.
Automatic enrolment has been introduced to protect employees who initially overlook the benefits of a pension scheme. Businesses can decide the type of pension scheme they wish to use so long as it meets the minimum requirements in terms of the benefits it provides and contributions that are paid into it or they can enrol employees into the National Employment Savings Trust (NEST). Employees are eligible if they are 22 years of age or over, but under state pension age, and earn above £9,445 (this figure will be reviewed each year). Contributions are payable on income between £5,668 and £41,450. There are compulsory contributions from both employer and employee. These will be introduced, gradually, on a sliding scale until the maximum contribution level of 8% of qualifying earnings is reached (4% for employees and 3% for employers with 1% in tax breaks).
Employers will also have to register with The Pensions Regulator within four months of their staging date and there are wide-ranging requirements to maintain records and supply the Regulator with a variety of information.
Employee opt outs:
Employees will be entitled to opt-out of the scheme at any time. However, the latest government figures revealed that fewer than 10% of workers have chosen to opt-out. As such, it would be unwise for businesses to delay planning for auto-enrolment by relying on their workers opting out.
If employees do opt-out within the first month of being enrolled contributions will be repaid. If, at any time, they decide they wish to opt back into the scheme the employer must re-enrol them (at least once in every 12 month period). Employers will also have to automatically enrol such employees back into pension schemes at regular intervals, usually every 3 years. Other employees, who are not automatically eligible, can also opt-in to the scheme. Employers must enrol them and pay contributions.
The new duties came into effect on 1 October 2012; however, the responsibilities of individual employers will be staggered over six years. Staggering will be based on the size of your PAYE scheme, working from the largest to smallest employers.
All existing companies will need to have enrolled their staff by April 2017 while some new employers will have until February 2018. By the end of 2013, all companies with 250 employees or more should have begun automatic enrolment. Medium-sized employers (companies with between 50 and 249 employees) will need to start automatically enrolling their employees from 1 April 2014 to 1 April 2015. Companies with fewer than 50 employees will have until June 2015 to coordinate their auto-enrolment.
Employers may think that a staging date of 2014 or 2015 is a long way off but there is a risk of jamming the system if all businesses seek advice at once. Some smaller companies may also face particular difficulties if they are providing a pension scheme to their workforce for the first time. This will create a strain on the traditional pension providers who may be unlikely to accept new schemes.
It may take up to 18 months for a business to ensure it is fully prepared for automatic enrolment so it is important to think ahead and leave plenty of time to get auto-enrolment systems up and running. If left to the last minute businesses could be hit by higher fees and could struggle to negotiate the best deal for themselves and their employees.
Impact on Other Areas:
Employers must consider the effects of auto-enrolment on other parts of their business. For example, the introduction of the new auto-enrolment rules will require employers to update their existing employment contracts and employee handbooks. These documents should be reviewed and updated to reflect the changes. Given the nature and complexity of these changes, businesses may wish to seek advice and assistance on how best to do this. We would be delighted to provide this advice and assistance to businesses.
Risks of Non-Compliance:
The responsibility for complying will rest solely with the employer. The consequences of doing nothing, or leaving it too late, could have serious ramifications for an employer's business.
The government has outsourced part of the supervision of the scheme to private bodies who will work alongside The Pensions Regulator. These bodies have already made it clear that they intend to take a robust approach to ensuring strict compliance by all businesses and will not hesitate to use their powers where necessary. Failing to comply with the new rules could result in substantial fines. This can include flat-rate penalties of £400 or escalating fines that range from:
Number of employees Prescribed daily rate (£)
In addition to fines, it is even possible that an employer may face a maximum of 2 years imprisonment.
The rules are complex and robust. It is not simply about having a pension scheme in place. Auto-enrolment represents a massive cultural change in the UK, if you are not ready for it and continue to be complacent over deadlines your business could be hit by serious penalties which may even lead to it being closed down.
We urge businesses to obtain expert advice sooner rather than later in order to give them enough time to coordinate their pension scheme well ahead of their staging deadline.
Want to know more?
If you would like further advice, then the employment team at Davidson Chalmers would be delighted to help.
The matter in this publication is based on our current understanding of the law. The information provides only an overview of the law in force at the date hereof and has been produced for general information purposes only. Professional advice should always be sought before taking any action in reliance of the information. Accordingly, Davidson Chalmers LLP does not take any responsibility for losses incurred by any person through acting or failing to act on the basis of anything contained in this publication