Key Guide to Workplace Pensions

Nudge, nudge…
Automatic enrolment has ‘changed the UK workplace forever,’ according to the
Pensions and Lifetime Savings Association. Over six million people working for
over 200,000 employers have started to save via a workplace pension as a result
of automatic enrolment, with more to come between now and February 2018. No
employer – however small – can afford to ignore these changes.
This radical pension reform got underway in October 2012 and has already worked
its way through large and medium-sized employers. It is now focussed on small and
micro employers, and then on those which were established after April 2012.
The automatic enrolment of employees and certain other workers into workplace
pension schemes draws on ‘nudge theory’ – the notion that individuals can be nudged
into taking beneficial actions that they might otherwise avoid, such as joining and
contributing to a pension plan. Millions who might never have got round to applying
for a pension are now saving in schemes organised by their employer.
Alongside automatic enrolment, from 6 April 2016 the single-tier state pension of
£155.65 a week was introduced, applying to those now reaching state pension age
(SPA). This has replaced both the basic state pension and the state second pension
(S2P), but not for those who reached their SPA before 6 April 2016. The structure of
the new state pension reduces the risk that individuals could be better off opting out
of auto-enrolment and relying on means-tested benefits. The government confirmed
in the Budget 2016 that it will require the pensions industry to develop a ‘pensions
dashboard’ by 2019, which will allow individuals to view a single summary of all their
pension arrangements.
For employers, automatic enrolment brings extra cost and administration. For the
first time, employers have been obliged to pay into pensions unless employees opt
out after being automatically enrolled. If you already provide a pension and have not
yet reached your automatic enrolment start date, the number of scheme members is
likely to increase. There will be extra administration, involving communicating with
staff, dealing with pension providers and satisfying the Pensions Regulator that you
are meeting the requirements.
The process of introducing automatic enrolment into an organisation is not
something that can be left to the last minute.
Automatic enrolment – the basics
The easiest way to understand automatic enrolment is to work through a few simple
Who is affected?
Almost all employers are affected. An important exception is a company with only
a single employee who is also a director. The range of employers affected therefore
runs from multi-national companies to a family which employs a nanny.
The process of introducing
automatic enrolment into
an organisation is not
something that can be
left to the last minute so
make sure you have the
necessary procedures in
Action point
The change also affects all ‘workers’ over age 16 and under age 75 who work, or
usually work, in the UK. ‘Workers’ includes employees and others who are contracted
to work for you, except as part of their own business. Agency workers are included,
and you are likely to be responsible if you pay them directly.
Workers will be ‘eligible jobholders’ if they:
l are aged 22 or over;
l are under state pension age (a moving target, these days); and
l earn more than a minimum income, which is £10,000 a year (£833 a month, £192
a week) in tax year 2016/17.
Eligible jobholders must be automatically enrolled into a suitable pension scheme
unless they are members of an existing qualifying scheme. You cannot assume that a
current scheme will necessarily be suitable for automatic enrolment, because it may
not meet the requirements for payment levels and charges or include an appropriate
agreement with the pension provider.
There is a second group of workers known as ‘non-eligible jobholders.’ They are
workers who:
l earn more than £5,824 a year in 2016/17; and
l are not eligible jobholders.
Non-eligible jobholders must be offered a pension on the same basis as eligible
jobholders, but they must apply to join rather than being automatically enrolled.
The final group is of those over age 16 who earn less than the minimum for noneligible
jobholders, and who are known as ‘entitled workers.’ You have to offer them
access to a pension scheme, but you do not have to pay into it.
When must you act?
Every employer has a ‘staging date’. Your date is determined by the size of your PAYE
scheme at 1 April 2012, your PAYE reference number or, for businesses started since
1 April 2012, when you first paid PAYE income. Only new companies and most with
a PAYE scheme membership of under 30 have not yet been required to implement
auto-enrolment. The Pensions Regulator will write to you well before your staging
date to remind you of your duties, or you can check the date at
In theory there is nothing to prevent an employer bringing forward its automatic
enrolment staging date, although in practice it is hard to see why it would, given
that it would bring forward the need to make contributions. There is also an option
to defer automatic enrolment for up to three months after the staging date, but
employees can opt in during that period.
After the staging date, employees who become eligible jobholders must be
automatically enrolled, although the employer can defer enrolment for up to three
months. And every three years an employer must automatically re-enrol those who
have chosen to opt out.
Every employer has a
‘staging date’ so make sure
you know when yours is.
Action point
Because there is a significant amount of effort involved in assessing the workforce
and ensuring that appropriate pension arrangements are in place, the Pensions
Regulator recommends that you decide on your contact person for the regulator now
and make your choice of pension provider six months before your staging date.
How much must you pay?
Auto-enrolment requires a minimum overall level of pension contribution to be made
for eligible jobholders as a percentage of their ‘qualifying earnings.’ These include
overtime, commission and bonuses and several statutory payments. In 2016/17 this
covers a band between £5,824 (the national insurance contributions (NICs) lower
earnings limit) and £43,000 (the NICs upper earnings limit). The thresholds are
reviewed each tax year.
There is a minimum employer contribution and a minimum overall contribution, both
of which are being phased in as follows following planned revisions announced in the
Autumn Statement:
The minimum total contribution includes basic rate tax relief (currently at 20%) on
any employee contribution.
*The proposed dates are subject to Parliamentary approval
Some employers are happy to pay in more than the minimum as an additional benefit
for staff. They may also want the cost of their pension payments to be the same each
month, rather than to fluctuate with overtime, commission etc. To allow this, the
employer can certify that contributions meet one of three alternative contribution
bases. For example, contributions from October 2018 can be at least 9% of basic pay,
There is a significant
amount of effort involved
in automatic enrolment.
The Pensions Regulator
recommends you decide on
your contact person for the
regulator now and choose
your pension provider six
months before your staging
Action point
Minimum employer
contribution % of
qualifying earnings
Minimum total
contribution % of
qualifying earnings
Before 05/04/2018 1 2
06/04/2018 – 2 5
06/04/2019 onwards 3 8
Example – Auto enrolment contributions
Arctic Haulage Ltd has passed its staging date and has established a pension
scheme based on qualifying earnings, with the employer contributing 3% and
employees 5% including tax relief. For someone earning £25,000 in tax year
2016/17 (so with qualifying earnings of £19,176) the total yearly contributions
will be:
Employer contribution 3% £575.28
Employee net contribution 4% £767.04
Tax relief on employee contribution 1% £191.76
Total 8% £1,534.08
with at least 4% paid by the employer. This is more likely to allow existing schemes
to continue unchanged. Under the alternative bases, almost all staff will receive
contributions at least as high as under the standard basis.
Contribution rates
The setting of contribution rates is one of the most important decisions you have to
make as an employer. Paying more than you have to obviously comes at a cost to both
employer and employees. However, experts agree that the minimum contribution
level is not nearly enough to provide a satisfactory retirement income, even after
adding in the value of the single-tier state pensions. One option to incentives staff
might be to set a minimum contribution level, but offer to pay in, say, an extra 0.5%
of salary for every 1% individuals choose to pay on top of this, up to an overall
maximum amount. Or you could consider a contribution level that increases gradually
over time.
There are potential financial penalties of up to £10,000 a day for employers who
fail to implement auto enrolment. There are also other penalties for those who
encourage employees to opt out, for example by recruiting only those who agree
to opt out immediately once their employment begins. The Pensions Regulator has
already fined one business £22,900 for non-compliance.
Which pension scheme?
Each employer must have one or more ‘qualifying’ pension schemes. A qualifying
scheme must include a formal agreement that the employer will pay at least the
minimum contributions, including passing on any from the employees. In addition,
employees who are automatically enrolled must not be required to make any
decisions, which means there must be a suitable default investment option, and there
is a maximum charge for members equivalent to 0.75% of the value each year.
There are many ways to meet the requirements, including:
l a new in-house scheme, designed to meet the new rules;
l an existing in-house scheme, although this may need changes to satisfy the
l a group personal pension (GPP) under a contractual arrangement with an
insurance company or other product provider;
l a master trust scheme, covering the employees of a number of employers.
The setting of contribution
rates is one of the most
important decisions
you need to make as an
employer and most experts
agree that the minimum
contribution level is
not nearly enough for a
satisfactory retirement
income so consider offering
to pay more than you have
Action point
Example – Contribution rates
ABC Plumbers Ltd employs 28 staff and has an automatic enrolment staging
date of 1 November 2016. Employees tend to work significant hours of overtime
at various points in the year, and the company is keen to have some stability
in its pension bill. After consulting a financial adviser, the company decides to
establish a pension scheme with an employer contribution of 4% of basic salary
and a 5% employee contributions, including tax relief. Although this is likely
to cost more overall than if the employer (ultimately) paid 3% of qualifying
earnings, it provides more consistency in contribution levels.
In-house schemes can be tailored to the requirements of the company and its staff,
but they require considerable administration, such as appointing trustees and
maintaining records. They are now mainly set up by large companies or they are used
in order to provide highly flexible pensions for high-earning directors and employees
of smaller companies. Most companies choose a scheme run by a pension provider,
which deals with the bulk of the administration.
GPPs are generally run by large insurance companies and offer a wide range of
investment options as well as support in setting up and communicating your pension
arrangements, generally with the help of a financial adviser. Although you make
the arrangements, each employee has their own contract with the provider and can
continue paying in if they leave your company.
Master trusts are similar to in-house schemes, but cover many companies and are
administered centrally. Some master trusts have been set up specially to provide
a simple, low-cost option for automatic enrolment. These include the National
Employment Savings Trust (NEST), which was established by the government to ensure
that every employer has access to at least one pension scheme. Key features of NEST
l NEST is run by a non-departmental public body, the NEST Corporation, and the
scheme’s set-up costs were funded by a loan from the DWP that is to be repaid
from future NEST charges. NEST is not a government pension scheme, although
the government does appoint the chairman and other trustee members of NEST
l NEST is a master trust occupational pension scheme that is obliged to accept
any employer wishing to use it to meet their auto-enrolment requirements. The
scheme has the same low charges for all members – 1.8% of each contribution
and an annual management charge of 0.3% of each member’s fund. By default,
contributions are allocated to a ‘target date fund’ based on the year when the
member is due to reach state pension age. This is designed to manage investment
risk and to reduce the likelihood of losses when members are starting out or are
nearing retirement. However, there is the option to invest in any of five other
funds or select a different target date. There is an overall contribution limit of
£4,900 per member in 2016/17, and no transfers into or out of NEST are generally
allowed. These restrictions are due to be removed in April 2017.
l NEST offers a simple, low-cost option for employers, but it is not a default for
automatic enrolment. GPP charges are often based on an employer’s particular
characteristics, such as number of employees, average earnings and staff
turnover. This means that charges can be comparable to, or even lower than,
NEST and can also provide added value features. Some of the other master trust
schemes offer different investment options, while individual company schemes
give an employer and staff more control over their scheme and its features.
A combination of different schemes may be appropriate for some employers. For
example, it might be appropriate to enrol junior staff into NEST or a similar master
trust scheme, while more senior employees could be enrolled into a GPP. Another
possible approach would be to use a master trust for the majority of staff and a small
self-administered scheme (SSAS) for shareholder directors. The Pensions Regulator’s
view is that “well-run multi-employer master trusts and GPPs are the best choice for
small and micro employers preparing to meet their workplace pension duties.”
A combination of
different schemes may
be appropriate for some
employers: it might be
appropriate to enrol junior
staff into NEST or a similar
master trust scheme, while
more senior employees
could be enrolled in a GPP.
Action point
What do you need to do?
Complying with your auto enrolment obligations is a complex process, and it is
important that you develop an action plan. Things you must do include:
l Find out your organisation’s staging date.
l Confirm to the Pensions Regulator whom you have nominated as your point of
l Assess your workforce, so that you know how many fall into each category and
can estimate the cost of auto enrolment.
l Review any pension arrangements you have and consider how you can best meet
the automatic enrolment requirement.
l Consider any changes you need to make to your payroll processes.
l Communicate with your staff and arrange auto enrolment. This will include
processes for managing opt-outs and refunding any contributions these
employees have made. If you take advantage of the ability to defer for three
months you will save money, but there will be extra administration.
l Declare your compliance to the Pensions Regulator and ensure that you keep the
necessary records.
There is then the ongoing process of ensuring that you automatically-enrol all
employees as they become eligible and repeating the process every three years for
any who have opted out.
How we can help
Auto enrolment imposes new duties and, probably, additional costs on your business.
There are many decisions to be made and potential pitfalls at every stage. Businesses
that fail to comply can suffer substantial financial penalties. The Pensions Regulator
has produced detailed guidance and pension providers can help to some extent, but
many companies value the expertise of an adviser who can look at their particular
circumstances and recommend solutions.
We make it our business to stay up-to-date with the latest developments in auto

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