By law, all employers have to enrol their eligible employees into a pension scheme, with the first of several deadlines due in April 2017. This might sound daunting and you may be unsure as to what process to follow. Perhaps you’ve taken a look at it, but not yet made the commitment. If that sounds like you, don’t bury your head in the sand, let Alison Parmar, Development Manager for the Federation of Small Businesses (FSB) in Kent, allay your fears with her guide to auto-enrollment.
The process for signing up employees is called auto-enrolment. This became a law in October 2012 and it requires employers to make a pension provision for employees that meet the appropriate requirements. These requirements are that the employee is:
- Working in the UK
- Earning a minimum of £10,000 per year
- Aged between 22 and the state pension age.
The exact deadline for enrolment varies depending on the size of a business. Every business has its own deadline – known as ‘staging dates’.The deadline for each business to have set up auto-enrolment varies depending on the number of employees and its PAYE reference number.
You can look up your deadline on the Pension Regulator’s website. You will need to use your HR records to state how many employees you had on 1 April 2012 and also your business’s PAYE reference. It is your duty as an employer to ensure you have your staff enrolled in a workplace pension by the staging date. If you don’t, you may be eligible for a fine.
What do I need to do?
Once you know your staging date, it’s important to put all your pension provisions in place before that date. This involves making decisions and tackling a number of tasks, including:
Amending pay systems to accommodate changes. Employers have a minimum contribution they need to make to a pension. You need to ensure your systems are able to handle these payments, and that you’re able to process pension contributions correctly in order to be compliant with pension regulation.
Deciding how much you and your employee want to pay in. Both parties must abide by minimum requirements; currently, the total minimum combined contribution is 2%, with the employer making at least 1% contribution and the employee making up the rest. Minimum contribution levels rise to 2% (employer) and 5% (total) from April 2018. However, an employee or employer can choose to pay more into the workplace pension, which provides both with savings on tax and national insurance. The employee needs to be consulted before agreeing to this process.
Providing staff details. This means providing the details of all employees being enrolled in the pension scheme.
Keeping staff informed throughout the process. The process needs to be transparent. The start date for pension contributions or any delays to this date, changes to pension schemes, or withdrawal from a pension scheme have to be communicated to staff. This is best done in writing to provide both you, as the employer, and the employee with a record of all communications.
Completing your declaration of compliance with The Pensions Regulator. Once your eligible employees are enrolled and your contributions have begun, you need to inform the Pensions Regulator. This means you’re then registered as having fulfilled the duties set to you as an employer and helps you to avoid any undue penalties.
How to avoid a fine
Auto-enrolment is a legal requirement and the penalties for failing to meet your staging date can be severe. The Pensions Regulator can issue a range of penalties to a business. The first is a fixed penalty notice, which comes with a £400 fine. It’s easy enough to avoid it—make sure you have your auto-enrolment pension set up by your staging date, or even beforehand.
Penalties may move to more severe fines depending on the number of staff you employ. An escalating penalty is charged per day, costing anywhere from £50 to up to £10,000.
The different types of workplace pension
Occupational pensions are set up by an employer to provide their staff with access to a pension scheme. These fall into two categories: final salary schemes and money purchase schemes:
Final salary schemes—in this scheme your pension is tied to your salary. The amount is paid at retirement, depending on the employee’s current level of pay and the amount of time your business has been signed up to the scheme. With fixed salary schemes, staff pay a fixed percentage of their salary each month into the scheme, alongside a contribution from the employer. These schemes are becoming less common in relation to other types of workplace pensions.
Money purchase schemes—also called defined contribution schemes, these are a more common pension solution. These schemes, again, require staff to pay a set amount into the scheme from their salary. However, employers are not always required to do the same unless it is via automatic enrolment. These pensions are invested, with the aim being, to increase the amount employees are entitled to when they retire. The payout at retirement age is based on the amount of money paid in and how successful any investments have been.
Group personal pensions—this is an option for staff who are unable to be automatically enrolled onto a workplace pension. As with the other pension options, staff pay into their pension based on a fixed amount from their salary. The contribution is then invested in order to generate additional funds for retirement.
Stakeholder pensions—these function in a similar way to group personal pensions. Paying into this sort of pension allows more control over how funds are invested. However, if the scheme is being provided to staff by their employer the control will lie with them. Contributions from an employer aren’t always necessary with this form of pension. It depends on the terms of the pension agreed between them and their staff.
Auto-enrolment can feel like a minefield, with lots of areas to navigate, deadlines to meet and decisions to make. To help, FSB members have exclusive access to a Workplace Pensions service. This is a specially designed service that provides businesses with a fully compliant pension scheme that’s quick and simple to set up.
The service offers, among other things, access to leading pension provider, Legal & General; the option of a one-off set-up charge that covers all aspects of setting up your pension scheme, with guidance and assistance, starting at £399+VAT; and access to online information, education and admin tools for you and your employees.
You can find out more about auto-enrolment, and how FSB can help you with your pension scheme, in the Workplace Pensions section of the FSB website.
Or, for other resources and insight from the FSB, head over to their resource hub.