Advising on Auto-Enrolment Pension Schemes
Rely on Master Accounting Limited for advice and guidance on all aspects of auto-enrolment pension schemes. Setting up an auto-enrolment scheme for your employees can be time-consuming, complex, and costly. That’s why we’ve put together the following information to help you find out what you need to know about your legal responsibilities as an employer. Get in touch today for more information.
About Auto-Enrolment
For many years, the British government has recognised that individuals are not saving enough for their retirement, and the basic state pension cannot be relied upon to maintain a reasonable standard of living. Following the publication of the Welfare Reform and Pensions Act 1999, Stakeholder Pensions were introduced on 1st April 2001.
These pension schemes were designed to be simpler and cheaper than traditional pension schemes at the time and were intended to encourage lower/moderate wage earners to save for their pensions. On 8th October 2001, it became law that all employers with more than 5 employees should offer their employees access to a stakeholder pension.
However, these early attempts to encourage more people to save have failed. The government realised that it was no good making it voluntary to join a pension scheme and that legislation needed to be introduced that compelled individuals to enrol in one.
Therefore, in October 2012, the Auto-Enrolment Pension scheme was introduced. This legally requires employers to automatically enrol their employees into a qualifying pension scheme. The scheme was to be introduced progressively over the next six years, starting with the largest employers first.
When Will Employees Be Affected?
All current employees need to be assessed and placed into one of three categories. Some will be automatically enrolled, and others can be voluntarily enrolled.
Once an eligible jobholder is enrolled, they can opt out within one month and have their and their employer’s contributions refunded. After that, they can stop paying contributions but any contributions the employee or employer has made will remain in the pension until the employee is at least 55.
All non-eligible jobholders or entitled workers are continually assessed each time they are paid and, if they then become eligible jobholders (due to age or earnings), they will be automatically enrolled.
The assessment process is complex, and the guidelines produced by The Pensions Regulator don’t cover how much contribution should be deducted and how much employers have to pay.
The three employee categories are as follows:
-
Eligible Jobholder
Automatically Enrolled, Pays Contributions, and Has Contributions Paid By Employer
- Works in the UK
- Aged 22 to State Pension Age
- Qualifying Earnings (2016/17: £5,824 per annum) above the Earnings Trigger 2016/17: £10,000 per annum
-
Non-Eligible Jobholder
Not Automatically Enrolled, but Can Ask to Join Pension Scheme, Pays Contributions, and Has Contributions Paid By Employer
- Works in the UK
- Aged 16 to 21, or State Pension Age to 74
- Qualifying Earnings (2016/17: £5,824 per annum) above the Earnings Trigger 2016/17: £10,000 per annum
- Also applies to people aged 16 to 74 who work in the UK with qualifying earnings above the earnings trigger of £10,000 per annum
-
Entitled Worker
Not Automatically Enrolled, but Can Ask to Join Pension Scheme, Pays Contributions, and Has Contributions Paid By Employer
- Works in the UK
- Aged 16 to 74
- Non-qualifying earnings below £10,000 per annum
Level of Contribution
As of October 2018, legal minimum contributions are set at 8% of staff’s earnings, including at least 3% paid by the employer, but you can choose to pay more. The important thing is that the total figure is met, including the minimum employer figure.
NEST and Pension Scheme Providers
Many of the major pension companies are providing qualifying pension schemes for auto-enrolment. They all will be charging for them, and, in the future, some may cease to provide schemes for small employers. The government has set up a specific pension scheme called the National Employment Savings Trust (NEST) which is free of charge.
Employers can choose to set up and administer their auto-enrolment scheme themselves or use a third party (pension advisor, accountant, financial advisor) to set up the scheme and administer it for them, but this can be very costly. If the employer already has a company pension scheme, these can be used too, provided they fulfil the requirements of auto-enrolment.
Conclusion
In our opinion, the idea behind auto-enrolment is sound in theory. It’s clear that many individuals will be heading towards financial difficulty in their later years if they don’t start saving. However, in practice, auto-enrolment is overly complicated and a burden on businesses, particularly small businesses.
Due to recent changes in pension legislation where pension pots become available to individuals as cash from the age of 55, auto-enrolment is an ideal way to save for the future and receive good returns for the employees, as employers contribute as well. For the pension industry (both providers and advisors) this has been a shot in the arm, and they are taking full advantage of the legislation by making high charges to employers.
But what, if any, are the benefits to business? The government maintains that employees would value an employer more when they provide a pension scheme but, as this is now compulsory, that’s hardly a selling point.
The other argument the government makes, given that employers cannot force employees to retire, is that an additional pension will incentivise employees to retire when they reach retirement age, rather than continuing to work into their late sixties and seventies. Time will tell if this is the case.
"Master Accounting Limited has been doing the House of Vantage payroll for some years now. When we received our letter from the Pensions Regulator, informing us of our staging date, we immediately contacted Mark at Master Accounting who came in and explained the auto-enrolment pension scheme to the senior management team.
He then came to see us again and spoke to both shifts, explaining auto-enrolment and answering the many questions asked by the staff. We had no hesitation in using Master Accounting to set up our auto-enrolment pension scheme to ensure our company was compliant. The set-up fee was extremely reasonable, and the process was easy and painless for us."
Thomas Mann
House of Vantage