Automatic enrolment is looming large on the horizon for hundreds of thousands of small businesses across the UK.
With many small firms unfamiliar with company pensions, tackling auto enrolment (AE) can feel daunting, so this guide has been designed to help small business owners get to grips with the subject.
It outlines they key issues for small businesses, including what auto enrolment is, what’s happening, the implications for you and your employees and the steps you need to take to ensure you comply with the new rules.
What is automatic enrolment?
Automatic enrolment is the UK’s new workplace pensions initiative. The policy makes it a legal requirement for all employers to automatically enrol their employees into a workplace pension and makes contributions to that pension.
Which businesses have to comply with auto enrolment?
Automatic enrolment began in October 2012 when larger employers had to comply with the legislation. But, by 2018, it will apply to all employers – even those that only employ one person.
From 1 March 2015, businesses with fewer than 58 employees will start having to comply and by 1 June 2015, those with fewer than 30 staff will be captured by the AE legislation.
Why has it been introduced?
Over the past decade, saving in workplace pensions has been declining. To help reverse this trend, automatic enrolment has been introduced. By harnessing the power of inertia, it is hoped that a greater proportion of UK workers will save more, or start saving for their old age.
Around 10 million people are eligible for auto enrolment and 5 million have already been enrolled. Currently, just 7% of workers are opting out, which highlights that if it’s made simple for people to save with a pension, by and large they will do so.
When is auto enrolment happening?
All employers have a staging date based on how many employees were on their largest payroll on 1 April 2012.
Your staging date is the deadline by which you’ll need to have a scheme in place and be ready to enrol employees. It is assigned to your PAYE number and, in general, employers with more employees in their PAYE schemes will have the earliest staging dates and the smallest organisations will have the latest staging dates.
You can find out the staging date for your business by visiting The Pensions Regulator’s website.
The Pensions Regulator will write to you at least 12 months before you’re affected, but it’s a good idea to know when your staging date is as early as you can.
When do new business start-ups need to register for auto-enrolment?
New employers aren’t obliged to comply with the Auto-Enrolment pension legislation until 2018. New businesses will be contacted by The Pensions Regulator with more information.
How much is auto enrolment going to cost?
The cost of implementation, planning, payroll modifications, assessment, communications and record keeping will depend on the decisions an employer makes regarding suppliers and providers and their current internal structures.
There will also be the ongoing costs in respect of the compulsory contributions employers will need to make to staff pensions. These will depend on the average salary of members of the scheme and the contribution structure chosen.
Auto enrolment minimum contributions are as follows:
|Date||Employer minimum contribution (% of salary)
||Total minimum contribution (% of salary)
|Until 30 September 2017||1%||2%|
|1 October 2017 to 30 September 2018||2%||5%|
|1 October 2018 onwards||3%||8%|
Which employees are eligible for auto enrolment?
- All employees aged between 22 and state pension earning (currently 65) earning more than £10,000* per year are eligible for auto enrolment and must be auto enrolled.
- Employees aged between 16 and 74, earning more than £5,772/yr but less than £10,000, are not eligible and won’t be automatically enrolled. However, they can opt in, and if they choose to do so, then employers will be required to contribute.
- Those aged between 16 and 74 earning less than £5,772/yr will not be auto enrolled, but they can opt in. In this case though, employers will not need to contribute to the employee’s pension.
- Employees that earn more than £10,000, but are under 21 or over the state pension age are not eligible and won’t be auto enrolled. But they can opt in, and the employer will be required to contribute.
- Employees can opt out, but those that do will need to be re-enrolled every three years.
When should employers start planning?
The Pensions Regulator recommends that firms begin planning at least 6 months in advance of their staging date. It’s certainly true that auto enrolment isn’t without complexity and the sooner you start planning, the easier the transition will be.
How does an employer select a pension scheme?
If you need to open a new pension scheme, start by determining what you are looking for, and then compare offerings, costs and benefits.
Is a traditional group pensions provider appropriate or would one of the companies specialising in the auto enrolment market be best for you?
For help identifying a good quality scheme, the National Association of Pension Funds (NAPF) established the Pension Quality Mark (PQM). Schemes with this mark have attained the highest standards with regard to governance, low charges and good member communications.
A PQM accredited scheme is therefore a good one to look for as is a scheme that has the master trust assurance framework accreditation (AAF 02/07).
It’s also important to bear in mind that not all pension providers are happy to accept all companies and all employees on equal terms. Some pension providers will only accept your higher paid staff and some have decided that they don’t want to offer their schemes for auto enrolment at all. It therefore pays to do your research early to avoid being let down at the last minute.
If you need help, consider speaking to an independent financial advisor or accountant. The Pensions Regulator also has a useful guide to help employers select a good quality scheme for auto enrolment. You can access the guide here.
What are the common stumbling blocks?
One of the biggest stumbling blocks in the auto enrolment process is inaccurate or incomplete payroll data. Taking the time to ensure that payroll data is complete and entirely up to date, will help avoid problems during the implementation process and beyond.
Where possible, obtain e-mail addresses for all staff as issuing communications about auto enrolment via email is much cheaper and more efficient than post.
What happens to employers that miss their staging date?
If you are late, take action as soon as you can. Within five months of their staging date, all employers need to complete a declaration of compliance so that The Pensions Regulator knows that the auto enrolment duties have been met.
Employers that don’t complete their declaration by their deadline may be subject to enforcement action. The fixed penalty fines start at £400 but increase considerably.
What are the ongoing responsibilities of AE?
Your auto enrolment duties don’t stop once you’ve enrolled your staff. You have an ongoing responsibility to:
- Pay regular contributions into the pension.
- Monitor the age and earnings of all staff, and any new staff joining to ensure scheme eligibility.
- Process any opt in, joining or opt out requests.
- Keep and maintain accurate records.
- Re-enrol every three years.
All of the above should become part of ‘business as usual’.
This guide has been written for ByteStart by Morten Nilsson, CEO of workplace pensions provider NOW: Pensions who offer a high-quality, low-cost pension designed specifically with the auto enrolment market in mind. For more information visit this page of the NOW: Pensions website.
*The earnings threshold is subject to annual review by the DWP