Are you worried about automatic enrolment? Well you’re not alone. Many of our clients have been grappling with problems ranging from whether their existing schemes are suitable, to whether they can still operate salary sacrifice. We thought we would share with you the top ten questions that we have been asked.
1. When should I start preparing for auto enrolment?
The National Employment Savings Trust (NEST), the auto enrolment scheme established by the government, has recently stated that in its experience, it will take an employer 18 months to get to grips with the preparation required. This indicates that employers with as few as 90 employees should be taking initial steps now in relation to this if they are not already doing so.
2. When is my staging date?
The Pensions Regulator will write to you 12 months before your staging date (the date on which auto enrolment goes live for your business) to let you know when this will be. An easy way to find out is to input PAYE information into the Pensions Regulator’s interactive website, which will then tell you what your staging date will be.
3. We have staff under 3 separate paye references – does that mean we have different staging dates for different staff?
Not necessarily. The use of separate PAYE arrangements does not mean that each PAYE group is treated as a distinct employer unless, as a matter of fact, there are different employers within the business. Unless this is the case, the staging date for an employer will be the one that is applicable to the largest PAYE group and will apply in respect of all of employees.
4. I have a money purchase scheme with contributions that are higher than those required under auto enrolment – that means I don’t need to do anything, right?
Wrong! There are a few key points to note here:
· You will need to check that the rules of your scheme are auto enrolment compliant (for example, they must not restrict eligibility, include a waiting period or require employees to sign anything before they can join).
· Also, you should check the elements of pay on which contributions are calculated under your pension scheme. Contributions under the auto enrolment legislation are calculated on all earnings, including overtime and bonuses, between the lower earnings limit and the upper earnings limit. If your current pension scheme does not calculate contributions on the same basis (for example by only calculating contributions on basic pay, or excluding bonuses or overtime), then the easements contained in the legislation will need to be examined further to determine whether your scheme will still be classified as a qualifying scheme and an automatic enrolment scheme.
· If your scheme qualifies as an automatic enrolment scheme under the legislation you will need to automatically enrol all eligible employees into the scheme who are not currently members of it on your staging date, even if they have previously been offered membership
5. What if I don’t have a suitable pension scheme?
If you don’t have a suitable pension scheme then various options are available to you. The government’s own scheme, NEST, can be used. Some private pension providers have established arrangements specifically to deal with auto enrolment for companies. Most insurance companies that provide group personal pension arrangements also have an auto enrolment offering, and will usually guide clients through what they need to know.
Picking a provider to supply your business with an auto enrolment scheme is not as simple as picking a provider of a stakeholder pension scheme. The contract that you will be asked to enter into with the service provider will be detailed and complex. If you require assistance negotiating the terms of such a contract we would be happy to help.
6. How do I know which employees I have to automatically enrol?
The legislation divides employees into three different categories. The requirement to provide a pension for an employee differs depending on the category into which he or she falls. The categories and requirements are as follows:
· An eligible jobholder is a worker in the UK who is aged between 22 and state pension age earning more than £8,105 (annualised). An eligible jobholder must be automatically enrolled into a pension scheme on the employer’s staging date and the employer must pay contributions to this scheme for them at a level set out in the legislation.
· A non-eligible jobholder is a worker in the UK who is either aged between 16 and 21, or between state pension age and 74 earning more than £8,105 (annualised), or aged between 16 and 74 and earning between £5,564 and £8,105 (annualised). A non-eligible jobholder is entitled to opt into a qualifying pension scheme from the staging date and so must be provided with information on how to do this in advance of that date. If they do opt in then the employer must pay contributions to this scheme for them at a level set out in the legislation.
· An entitled worker is a worker in the UK who is aged between 16 and 74 and earns less than £5,564 (annualised). An entitled worker is entitled to access to a pension scheme and the employer must provide them with information in relation to this in advance of their staging date. The scheme that they are given access to does not have to be the same scheme that eligible and non-eligible jobholders are given access to and the employer does not have to pay any contributions to the scheme in relation to them.
7. Do we need to automatically enrol non-executive directors?
No. Office holders, such as non-executive directors, are not the subject of the auto enrolment requirements unless they also happen to hold a position of employment with the company. The remuneration of non-executive directors does not, therefore, constitute qualifying earnings for assessment purposes.
8. Can I still operate salary sacrifice?
Yes. Historically, a salary sacrifice arrangement had to include giving up salary permanently in order for HMRC to accept it as a valid sacrifice of salary. This generally meant that once an employee had entered into a salary sacrifice arrangement he or she would have to stay in that arrangement for at least 12 months except on the happening of a significant life event, such as long term illness or maternity leave.
HMRC has relaxed this restriction in relation to employees who are automatically enrolled into a pension scheme on a salary sacrifice basis. In the case of those employees they will be permitted to opt out of the salary sacrifice arrangement and revert to their higher level of salary without jeopardising the company’s salary sacrifice arrangements.
Ordinarily salary sacrifice would require employee agreement, because it involves a reduction in gross salary, however, automatic enrolment clashes with this in that enrolment into the pension scheme has to be automatic and an employee should not have to sign anything before joining the pension scheme. This will need to be managed and if you would like any further advice in this regard we would be happy to help.
When operating a salary sacrifice arrangement care should be taken to ensure that nothing is done to encourage an employee to opt out of auto enrolment. An employee should therefore be allowed to opt out of salary sacrifice without having to also opt out of the pension scheme. You should therefore be prepared to operate auto enrolment on a non-sacrifice basis in relation to any employee who opts out of salary sacrifice.
A more general point to note on salary sacrifice is that it should not be operated in respect of any employee if this would result in that employee earning less than the minimum wage.
9. Do we need to amend our employment contracts?
Strictly speaking, an employer does not need to amend employment contracts in order for auto enrolment to affect staff, because the auto enrolment legislation will be overriding.
However, assuming that a full information exercise will be undertaken with employees, this might be an opportune time to also amend contracts so that the principles of auto enrolment are crystal clear and the employer does not get, for example, (however unwarranted) complaints for breach of contract over the deduction of pension contributions from salary. It should be noted that if the minimum member contributions are deducted in order to comply with auto enrolment legislation then the deduction would actually be lawful, notwithstanding the provisions of an employee’s contract and any claim in this regard would fail.
10. What about employees with ‘fixed protection’ – can we opt them out of automatic enrolment?
No. An employer has no discretion whether or not to automatically enrol fixed protection earners (i.e. employees who fixed their lifetime allowance with HMRC at the higher rate when it reduced from £1.8m to £1.5m). An employer has an obligation to automatically enrol fixed protection earners under the legislation. The responsibility for opting out of an automatic enrolment pension scheme rests with the employee and not the employer, however, you could make clear to all new starters (and existing employees who have currently opted out of a pension scheme because they have fixed protection) that they will be automatically enrolled and that this will affect their fixed protection status unless they opt out within one month of being automatically enrolled and by giving the correct written notice to the employer.
A fine balance has to be achieved between providing sufficient information whilst not actively encouraging employees to opt out, which would breach the auto enrolment legislation. It is important to ensure that all information that is provided is factual.
If an employee opts out within the one month period of being automatically enrolled then they are treated as never having joined the scheme and they will retain their fixed protection status.
It is not sufficient for an employee when they first join the company to say that they do not wish to be in a pension scheme. This is because formal opt out under the auto enrolment legislation can only take place once automatic enrolment has occurred. An employee must therefore be automatically enrolled and then serve their formal opt out notice within the one month period.
Employees with fixed protection should also be made aware that they will be automatically re-enrolled into a scheme every three years, in line with legislation, and that this might affect their fixed protection status if they take no action.This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.