Pensions auto-enrolment might not be the most exciting HR topic but, as Angela Sharma explains, it should never be far from the top of any HR list of things to do.
I am not sure auto-enrolment would come in the top 10 list of favourite things for any HR professional. However, seven years on from when it was first rolled out, auto-enrolment should now be embedded in the operations of any employer – including new ones – and cannot be ignored.
So why does auto-enrolment keep coming up? Employers take on new workers all the time and when they do, they must also consider what auto-enrolment obligations apply to them. If you add to that the obligation to re-enrol every three years and the fact that the auto-enrolment regime itself is ever evolving, employers need to stay up to date with their requirements.
Furthermore, the Pensions Regulator, which makes sure employers comply with auto-enrolment obligations, is being very pro-active on checking up on employers and taking action to fine/penalise where it thinks that this is not being handled properly.
Auto-enrolment – a re-cap
Employers are legally required to auto-enrol certain workers into a qualifying pension scheme and make minimum contributions with respect to them. Other types of worker also have certain pension rights which should not be forgotten. Employers can postpone auto-enrolling a worker for up to three months, subject to giving that worker formal notice of that and them being able to opt in during the postponement period.
Only workers who satisfy certain criteria who have to be auto-enrolled – for example they have to be at least age 22, below state pension age and earning at least £10,000 per year (2019-20 tax year). It may be that someone who does not tick these boxes when they are first recruited might do so during their employment – this would trigger the requirement to auto-enrol them.
Also, employers have to re-enrol every three years so that will apply if any worker has opted out but then satisfies the relevant criteria at that time.
Certain exemptions may also apply – for example where a worker may have certain tax protections – and so this should be added to the mix when looking at which auto-enrolment obligations apply.
The key will lie in effective monitoring of the workforce in terms of auto-enrolment eligibility and management of payroll and it is worth checking with payroll providers from time to time that they are on top of the requirements.
For employers, the key financial obligation in auto-enrolment is the requirement to pay minimum contributions to a qualifying pension scheme.
So, one of the things a defined contribution pension scheme must satisfy so that it can be used for auto-enrolment is that at least certain minimum (employer and total) contributions are paid to it with respect to the worker as a percentage of “qualifying earnings” between £6,136 and £50,000 (for 2019-20).
On 6 April 2019, these minimum contributions were increased to their final – at least for now – level as set out below. The employee makes up any difference between the employer minimum and the total minimum contribution that has to be paid into the scheme.
|Date||Minimum employer contribution (% of qualifying earnings)||Minimum total contribution (% of qualifying earnings)|
|6 April 2018 until 5 April 2019||2%||5%|
|6 April 2019 onwards||3%||8%|
|NB There are other ways a pension scheme can qualify that are not covered here|
Opting out of auto-enrolment
Once a worker has been auto-enrolled they have one month from joining in which to opt out and get a refund of their contributions. They can opt out after that but the benefits they have accrued up until that point will remain in the scheme (unless drawn or transferred).
It is always a decision for the worker about whether or not to opt out and they would be wise to take financial advice about this if they are unsure. An obvious point about opting out (if there is no other employer promise to pay pension contributions) is that the worker will lose the benefit of at least the minimum pension contributions their employer has to pay in respect of them. Clear communications are key in helping workers understand this and the benefits of auto-enrolment, especially in the light of much recent media focus on the impact on workers’ pay of the April increase in minimum contributions.
One thing for sure is that legally employers must not do anything to induce their employees to opt out from the auto-enrolment scheme. There are also various other legal prohibitions on employers trying to avoid their auto-enrolment obligations.
What if we don’t do auto-enrolment or don’t do it right?
The Pensions Regulator has the power to impose significant fines for failing to comply with auto-enrolment duties and some breaches can be classed as criminal offences with the possibility of fines and imprisonment. These reasons alone are enough to want to get it right. However, it helps to do it properly as part of good HR management and to avoid any difficult HR issues, especially if pension contributions have not been paid when they should have been. The requirements are complex and it is always worth taking advice if employers are unsure about how they apply.
Looking further ahead
Auto-enrolment provides a way for workers to save for their retirement. The government is looking to make changes in “the 2020s” to widen the scope. This could include lowering the age in the qualifying criteria from 22 to 18 or making the qualifying earnings percentages apply from the first pound of remuneration earned. Regardless of any future changes, auto-enrolment is a requirement that needs careful management and deserves its place on the HR to-do list.