Although the Government has tried to publicise the auto-enrolment of pension schemes, it is surprising how few people are aware of what it means exactly. The problem may be one of simple communication, but failure to understand all of the implications that auto-enrolment brings appears to be widespread. Many small business owners admit to be lacking in knowledge about the process. Although the auto-enrolment programme focussed on larger employers in its first stages, the additional time afforded to SMEs to put their house in order has, in many cases, not been taken advantage of. We are still in the roll-out period, but the law demands that all employers, large or small, offer their staff a pension scheme in which they can save for their retirement. However, by 2017 everyone should have fallen into line and there are punitive fines which will undoubtedly follow for companies who have not taken the appropriate steps.
Here we ask and answer some of the key questions relating to auto-enrolment:
Who is Affected?
Most employed people must be enrolled into an employer-led pension scheme. This means employees on the payroll, no matter whether they work full or part time. Anyone aged between 22 and retirement age earning more than £833 per month must be auto-enrolled. Those earning less will usually have the right to opt in, as will younger workers and those beyond retirement age, but under 75. All UK companies will need to comply by the end of the roll-out programme. However, those employees who are offered auto-enrolment but who expressly choose to opt out will not be in the scheme. This will put an additional process into every month’s payroll run – for those firms without an existing pensions scheme, at any rate.
What’s the Rush?
It has been widely reported that many firms which should have begun auto-enrolment have not done so. In some reports from autumn 2014, in the region of 12,000 companies employing between 62 and 89 employees had not begun auto-enrolment, nor had they sought a three month extension from the authorities. Businesses of this size were supposed to have begun auto-enrolment on 1 July, last year. Any company that misses its final deadline could face fines from the Pensions Regulator, so the need to take action is growing ever more pressing. Remember that even if you don’t employ people eligible for auto-enrolment, you still have to make a declaration to the regulator stating so.
What About Employer Contributions to Personal Pensions?
In some cases, businesses make contributions already into some of their staff’s personal pensions, usually senior members of the team. However, such a measure will only count as part of the auto-enrolment scheme if the personal pension in question is deemed to be qualifying. Many schemes are not. If the scheme does not qualify, then you ought to stop paying into that particular pension and find one that is suitable. Employees who have a contract that requires you to pay in a certain amount of contributions to their personal plan will need to have their contracts renegotiated unless you are to be locked into that level of contribution, whether it is part of auto-enrolment or not.
Do Employers Need to Pay Into Their Employees’ Pension Schemes?
Under auto-enrolment, a three per cent level of contribution is considered to be the minimum payment required in order to comply until October 2017. The auto-enrolment rules state that employers must pay a minimum of one per cent, meaning that employees would need to contribute the remaining two per cent. Nonetheless, there is nothing to stop a fifty-fifty split with the employer and employee paying one and a half per cent each, for example. However after October 2017, the total minimum contribution will rise to five per cent, with employers being expected to put in two per cent. A year later, these figures rise to eight per cent and three per cent, respectively.
What is Salary Sacrifice?
Many employers do not realise that they can reduce business costs by promoting salary sacrifice under auto-enrolment. With this system of pension contributions, an employee pays into their pension scheme from their gross pay, before it is taxed. By using salary sacrifice arrangements, employers are able to reduce their employers National Insurance contributions, currently cost 13.8%.
What If I Do Nothing?
The fines for non-compliance under auto-enrolment regulations are potentially very high, so get some expert advice if you think you may not be compliant. The Pension Regulator has a range of penalties at its disposal. These include fines that go up the longer that non-compliance continues. Even criminal prosecutions are possible for the worst offenders.
We are urging clients to make sure that they speak to a pensions adviser as soon as possible. We have specialist advisers who are able to assist.
Please contact Matthew Burge or your usual Beavis Morgan partner.