You will probably have heard about the upcoming requirements to enrol all UK employees in a pension scheme which includes those working for charities and third sector organisations.
The deadlines for this are starting to close in for smaller employers including many charities who will be required to assess what pension arrangements they currently provide for their employees and what they will provide for those employees not already in a pension scheme.
Pension arrangements that charities have historically used have been hit by various issues in recent times and have proved more expensive than expected, with this in mind charities need to start making decisions about the pensions arrangements they will use when the automatic-enrolment regime starts to apply to them.
Remind me of the basics.
The automatic-enrolment regime is the Government’s latest initiative to get people saving for their retirement. At some point before April 2017, all employers will have to enrol their eligible staff into a suitable pension scheme
To be an eligible jobholder currently you must be earning at least £9440 and be aged between 22 and state pension age. The earnings band on which contributions are based is from £5668 to £41450. Eligible jobholders must be automatically enrolled into a scheme of a certain quality and contributions made to this in respect of them.
Certain other employees have the right to join the scheme by opting-in and you will also have to make the scheme available to other employees who are not eligible jobholders, but will not have to contribute towards this in all cases.
Employees are allowed to “opt-out” of the scheme but you cannot encourage them to do so and every three years you are required to go back to them and re-enrol them giving them another chance to opt-out.
Should we be worried yet?
Employers with 250 or more employees have now passed the date from which they need to automatically enrol staff (their “staging date”) so should have automatically enrolled their employees who are eligible. Employers with 50 or more employees now have 18 months or less before their staging date by which they must have complied with the requirements so should at least be starting to prepare and consider their options by now.
The figures that the staging dates are based on are the number of employees in an organisation as at April 2012, if you have had any significant changes in staff numbers since then this will not have an impact on your staging date which remains fixed. There is an option to postpone your staging date in certain circumstances.
How big is the task?
A report from the Charity Finance Group notes that based on feedback they have received from charities that have already automatically enrolled staff, it seems that some underestimated the scale of the task.
The Pensions Regulator expects that preparation for automatic-enrolment should begin at least 12 months in advance of your staging date in order to give you sufficient time to complete all the tasks required to successfully and properly implement this.
There is a seven step process that has been set out by the Pensions Regulator that requires to be followed in order to achieve compliance with the regime:
- Know your staging date – the Pensions Regulator will contact you approximately 12 months in advance of your staging date to confirm this if you don’t already know it.
- Assess your workforce - you need to know what category each of your employees falls into so you can establish what you need to provide for them in terms of pension arrangements.
- Review your pensions arrangements - schemes to be used for automatic enrolment need to be of a certain standard so if your current scheme doesn’t meet the standards you will need to put an alternative arrangement in place.
- Communicate the changes to your workers - all employees need to be informed of what steps you are taking in relation to them, the communication you require to send them will differ depending on the category they fall into.
- Automatically enrol your eligible jobholders – this step must be achieved within the correct timescales.
- Register with the Pensions Regulator and keep records - after your staging date you have to register with the Pensions Regulator and give them details of the scheme(s) that you have provided for your employees. You must continually monitor your employees to check their ongoing eligibility and enrol/re-enrol them as and when required.
- Contribute to your workers’ pensions - you must contribute at least the minimum amount for employees you have automatically enrolled, this amount will increase over the next few years.
As the staging dates for compliance have been set out by the number of employees in an organisation there is expected to be a peak of activity which will start late in 2014 and continue into 2015 during which time over 25,000 organisations will reach their staging date.
There are reports that this may lead to a capacity crunch with providers and advisers not being able to meet the demand from potential clients. This warning highlights the fact that preparation really is key to achieving compliance as there may be factors outwith your control that impact on preparations including a high demand for advice and support you may require to meet your obligations properly.
What other issues do we need to think about?
As well as deciding on a scheme to use for automatic-enrolment, there are a number of decisions to be made including in relation to contribution levels for example which will require you to make a choice as to what you wish to provide for your employees.
The legislation sets out a minimum level of contributions that employers have to make to a scheme in order for this to be compliant, but you are free to contribute at a higher level than this in respect of your employees if you wish. You may wish to look at what contributions you make to your existing scheme for employees who already participate in this, if what you offer for auto-enrolment is much lower than this then you may run the risk of a discrimination claim.
You should also review and may need to update contracts for new and existing employees depending on what these say about pensions. There are also options for contractually enrolling new employees into a pension scheme rather than enrolling them under legislation.
What about employees on zero hours contracts?
There is potential for there to be significant fluctuations in the earnings of a person engaged on a zero hours contract. The result of this is that they may fall into different categories of worker for auto-enrolment purposes at different times so you must continually monitor these employees and if at any point they receive sufficient earnings to meet the requirements of being an eligible jobholder they require to be automatically enrolled.
There are a number of options that can be used to assist with dealing with employees who have fluctuating earnings including applying a 3 month postponement from the date they become eligible for automatic enrolment. There are also options to use contractual enrolment that can be explored.
Can we just use the scheme that we currently use?
There are a wide range of schemes on offer that can be used, but you must consider whether these are suitable and offer good value for their employees.
Many charities and third sector organisations have historically participated in industry-wide pension schemes that offer pensions to members on a defined benefit basis. These are structured in such a way that you can accrue liabilities over and above those which relate to your own members which are commonly referred to as orphan liabilities.
Schemes of this type are expensive and can have substantial funding deficits which have recently, in some cases, caused the insolvency of charitable organisations. There are equally reasons why you may wish to enrol employees into a scheme of this type that should also be considered.
Whilst considering auto-enrolment it may be a good time to review participation in schemes of this type to assess the risks in terms of financial liabilities and options you may have for dealing with these.
These issues are explored further in our article Defined Benefits: Managing the Cost of Pension Schemes for Charities.
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.