Adam Bernstein reports for HVP on the potential pitfalls of employee pension auto-enrolment.
The automatic joining of workers to a company pension scheme, known as auto-enrolment, celebrated its fifth birthday last October. Nathan Long, a Senior Pension Analyst at Hargreaves Lansdown, says it tackles a huge, impending social problem of people not having sufficient monies squirrelled away to support themselves in retirement.
“It is so important. In fact, the Pension Regulator has been unleashed to track down employers that are not complying with these new rules. It has issued fines to employers on more than 20,000 occasions,” he said.
These can run up to £10,000 per day for the largest firms, but even the smallest firms can see daily fines of £50 or £400. Firms in all sectors are being penalised, including those in the trades. For example, Castle Heating and Gas Services received a £2,000 fine, subject to a court order, and both JL Building Construction and Redhouse Building Supplies have £5,000 fines that are also subject to court orders.
Under auto-enrolment, all employers are tasked with ensuring their eligible staff are saving for retirement. Eligible staff are those aged between 22 and the State Pension age who earn over £10,000 per year. Pension contributions for these employees currently need to be at least 2% of ‘qualifying earnings’, with at least 1% coming from the employer. These ‘qualifying earnings’ are effectively all earnings between £5,876 and £45,000, meaning there is no need to pay pension contributions on the first £5,876 that an employee earns.
The problem for employers, as Nathan sees it, is that these minimum contributions are due to rise to 5% in April 2018 (with at least 2% coming from the employer) and 8% in April 2019 (with at least 3% coming from the employer).
He explained: “It may be job done for the government, but it’s one that is never truly complete for employers due to their ongoing responsibilities.”
These responsibilities can be broken down into several steps. The first, is to join staff to the company pension when they become eligible. You need to keep an eye out for newly eligible staff, especially new employees. Nathan says that providing they earn over £833 per month (or £192 per week), and are between 22 and State Pension age, you’ll need to put them in.
He added: “Be careful with those who weren’t enrolled first time round, as they didn’t earn enough or were too young, because when their circumstances change you’ll need to put them in too.”
Staff who receive a seasonal spike in earnings – a Christmas bonus or through extra hours – need extra care. As the eligibility is measured by pay period, even a short spike could mean you have to enrol members of staff, so remain vigilant. It is possible to offset this disruption by deferring entry to the pension by up to three months.
In addition, don’t ignore those who are not enrolled. If they ask to join, you’ll have to enable this, as well as pay contributions if they earn over £490 per month (£113 per week).
Another step to consider is the need to deduct the correct level of contribution from an employee’s salary, and pay this and the required amount from the company to the pension provider.
Nathan says this should be a matter of course for most employers, particularly if they outsource their payroll or use a provider’s payroll software. He advises firms to “be extra vigilant when pay changes or bonuses are paid, as these events could lead to change in the amount that needs to be deducted”.
Employers also need to comply with the increased contributions that will be in effect from April 2018 and April 2019.
Fit for purpose
You must also certify that your pension scheme meets requirements, at least every 18 months. Certification is simply an audit of your pension scheme to make sure you have paid the right amount, for the right people. There is no need to submit anything, it is self-certified, but you need to have your house in order should the regulator come calling.
Additionally, you have to re-enrol any staff who are not in the scheme every three years. Re-enrolment of those who have opted out or left the scheme previously must happen every three years, around the anniversary of an employer’s staging date (the start date for auto-enrolment). This ensures staff are continually given the opportunity to save for retirement. Once this exercise is complete, the results must be passed on the regulator.
Finally, you must make sure you don’t fall foul of any changes to the rules. The government has, arguably, done a pretty good job of improving the rules as they go along, but Nathan notes that “there is a ruthless determination to ensure auto-enrolment remains successful, and there are plans to make further changes to the regime”.
The key message for employers is that auto-enrolment is an ongoing exercise and, crucially, requires ongoing compliance with any rule changes.
More information can be found online at www.thepensionsregulator.gov.uk.