Pensions legislation: the pitfalls of auto-enrolling staff too early
James Biggs, November 30, 2011
There’s been a lot of debate around automatic enrolment over the last 12 months. Will the policy work? Are pension charges too high?
And just this week, the government has announced that it will now delay auto-enrolment for small employers until after 2015. But there's no getting away from the fact that for many employers, it's time to get on and deliver auto-enrolment successfully.
From October 2012, employers (with more than 50 employees) will be required by law to automatically enrol their staff into a qualifying workplace pension scheme and make contributions on their behalf. Given the significant financial implications and the increased administrative burden that this will create, employers need to start acting now.
By making an early start, no matter how far away the staging date is, it may be possible to mitigate some of the costs and reduce disruption. However, simply enrolling staff into a scheme doesn't mean an employer is complying with the rules and they are ill advised to do so early without knowing the implications - including the potential of penalty fines and extra costs. Organisations are tackling auto-enrolment believing they are doing the right thing, but they could be heading for problems later on. Indeed, latest research from Lorica Employee Benefits shows that 13% of companies have already introduced auto-enrolment in preparation for the staged starting process beginning in 2012, while another 57% plan to introduce it from next year.
Responsibility for monitoring compliance and enforcing the Work and Pensions reforms lies with the Pensions Regulator (TPR). The TPR's enforcement powers include Warning Notices, Fixed Penalties and penalties of £50 to £10,000 per day, based on number of employees, for persistent offenders. Whilst these fines are designed for those who wish to ignore or knowingly fail to comply with the legislation, they could also catch out well intentioned employers who may have misinterpreted or misunderstood the rules.
So what are some of the common pitfalls around auto-enrolling early?
Communication with employees
A company can only start auto-enrolment if existing employees have been told of the changes, otherwise it affects their employment contract.
Enrolling non-eligible job holders
Whilst an employer can auto-enrol 'ineligible' employees now, these employees have to be given the opportunity to opt out at the appropriate date, either the employer's staging post or the employee's age or salary threshold.
- Entitled workers are those aged 16-74, working in the UK and earning below £5035.
- Non-eligible jobholders are those aged 16-21, working in the UK and earning above £7475 and jobholders aged 16-74, working in the UK and earning above £5035 but below £7475.
So for example, if a 19 year old is enrolled now and the company doesn't provide the opportunity for them to opt out at 22, that is in breach of the new rules. However, the employer must automatically re-enrol them within three years. Similarly if an employee opts out now but becomes eligible at the staging post date, the employer is obligated to auto-enrol them.
Qualifying scheme certification
Employers must ensure that the scheme meets the qualifying earnings definition and /or can certify their scheme to meet the minimum requirements at the required staging post. For many schemes, contributions are based on basic earnings but under the new rules 'qualifying earnings' will be total earnings including overtime, bonuses and so on (i.e. not restricted to base salary) which fall within an earnings band of £5035 and £33,540.
And what steps should employers take to avoid these pitfalls?
We've seen companies - all with good intentions - enrolling new starters, but problems can follow if good systems and advice aren't in place. The administration process really is the key to negotiating the pitfalls of auto-enrolment either before or at an employer's staging post. Developing a system that ensures that each employee is opted in or out at the correct time and on the appropriate contributions for their band earnings will give employer's piece of mind that they are meeting their obligations compliantly.
As with much legislation, the devil is in the detail. While some companies may think they've dealt with their obligations, this might not comply with the Work and Pensions Reforms requirements. By getting professional support and advice at the outset, employers can be sure that they are stepping on the right side of the rules and can avoid legal or financial repercussions further down the line.
James Biggs is head of corporate pensions (workplace savings) at Lorica Employee Benefits