How Do Auto-Enrolment Contributions Work?

How Do Auto-Enrolment Contributions Work?

In order to encourage people to save more for their retirement, the government has made key changes in the way workplace pension’s function.

Back in the day, it was completely the workers decision whether or not they wanted to join the employer’s pension scheme.

But, by 2018 it is mandatory for all employers to automatically enrol their eligible employees/ workers into a workplace pension scheme unless the workers choose to opt out.

Because of this scheme, an increasing number of people will be able to accumulate more savings and this will go a long way in covering their retirement needs.

When does automatic enrolment begin?

Automatic enrolment is gradually being introduced in stages and this will continue up until 2018.

This began with the largest employers first adopting and incorporating the scheme in their respective organisations, followed by medium-sized and small employers.

If you haven’t been enrolled in a scheme yet, your employer is likely to inform you regarding the exact date of the commencement of auto enrolment and whether or not you are eligible for the scheme.

Who will be enrolled automatically?

Both part time and full time workers are to be enrolled by their respective employers in a workplace pension scheme if:

  • The employee works in the UK
  • The employee is not already registered in a suitable workplace pension scheme
  • The employee is at least 22 years of age, but under the State Pension age
  • The employee makes more than £10,000 annually (specifically for the tax year 2016-2017)

As an employee, if you meet these criteria you will be covered under the scheme even if you are on a short-term contract with the employer. Same will be applicable if an agency pays your wages or if you are away on maternity, adoption or carer’s leave.

If you make less than £10,000 but above £5,876 in the tax year 2017-2018, your employer does not have to automatically enrol you into the scheme. However, you can still sign up for the scheme, in which case your employer cannot refuse and must make the required contributions on your behalf.

Do You Have Any Choice About Being Enrolled?

You have the liberty to opt out of your employer’s workplace pension scheme after you have been enrolled.

But, think really hard before you opt out, as you will lose out on your employer’s contribution towards your pension. Not only this, but you will lose out on the government’s contribution in the form of tax relief.

If you have made up your mind to opt out, you can ask for an opt-out form from the people who handle the pension scheme for your employer.

You must then submit your completed form to your employer and not to the people who handle the scheme.

If you decide to opt out within a month of being enrolled, any contributions that you have made towards your pension pot during this time will be reimbursed to you.

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How Do Auto-Enrolment Contributions Work?

How Much You Must Pay

How much you are required to contribute into your workplace pension plan is dependent on the type of pension scheme you have chosen and the rules that govern the scheme. If the scheme you have chosen is also going to be your auto-enrolment scheme, you are required to make minimum contributions towards it.  The minimum contributions you will be required to make into your auto-enrolment plan are as follows:

  • For Employers whose staging date fall before 5 April 2018, the total minimum contribution is 2% of which the employer has to make a minimum contribution of 1% and the remaining 1% has to be contributed by the employee.
  • For Employers whose staging date fall between 6 April 2018 and 5 April 2019, the total minimum contribution is 5% of which the employer has to make a minimum contribution of 2% and the remaining 3% has to be contributed by the employee.
  • For Employers whose staging comes after 6 April 2019, the total minimum contribution is 8% of which the employer has to make a minimum contribution of 3% and the remaining 5% has to be contributed by the employee.

Minimum Employer Contribution

Contributions that are made into a workplace pension plan are usually expressed as a fixed sum or a percentage of the earnings. If the pension contributions are expressed as a percentage, then you as an employer will have to confer with your pension provider/trustee and your payroll provider (if you have outsourced your payroll) on a regular basis before you make your minimum contributions into the workplace pension plan.

You will also have to determine which elements of an employee’s pay package are used to calculate the minimum contributions that are needed to be made as per the terms of auto-enrolment. Some employers may decide that only the basic pay is pensionable, while some might consider the bonus and/or overtime payments along with the basic pay to be pensionable.

Automated Payroll

If you process your employee’s payroll information with an automated software, your provider will have to ensure that payroll software makes correct pension deductions from staff pay.

Also, it is important to ensure that the payroll system you employ is compatible with the pension scheme you have chosen for auto-enrolment. If you are unsure about this, make sure that you verify it with your payroll provider. You need to inform your payroll provider about the amount that is due in terms of rate of contribution and which element of the pay package should be used to calculate the minimum contributions.

When Should An Employer Make Their Contributions?

You should make your minimum contributions to your workplace pension plan (which includes calculating and subtracting contributions from your employee’s salaries) on time. The dates for the payment of these minimum contributions should be pre-agreed with your pension plan provider.

Legally you are obligated to pay your minimum contributions into the workplace pension plan no later than the 22nd day of the next month (19th if the salary is paid by cheque); from the date you made the deductions from your staff’s pay.

Failure to pay your minimum contributions into the auto-enrolment pension scheme on time might lead to a fine being levied by the Pension Regulator. Generally, it is much easier if you make your minimum contributions on the same day you are deducting from your staff’s pay. However, it is also possible for you to agree on an earlier date to make your pension payments with the pension provider/trustee.

Should I stay in or opt out?

If you are having this doubt, then remember that it is a great idea for most of the people to stay in a workplace pension, particularly if an employer is contributing towards it. This is because; workplace pensions are the best way to save for retirement.

However, there might be certain circumstances wherein, it might seem to be beneficial for you to stay out of the workplace pension plan. For example, if you are dealing with unmanageable debts.

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What Will Employers With Existing Pension Schemes Have To Do?

Employers who are already operating a workplace pension scheme for some or all of their workers now have to make a decision about whether they want to continue with the current pension scheme to meet their obligations towards their current employees (and the ones joining later who will be required to be auto-enrolled).

The employer is also tasked with the responsibility of figuring out which category of worker the current members of the workplace pension scheme fall into.

Employers will need to consider whether they want to use their existing pension scheme (which already has eligible members) as a qualifying scheme for eligible members who are already enrolled into a workplace pension plan. This means that the employer does not have to auto-enroll these employees, but will merely have to provide them with the requisite information.

Understanding the qualifying scheme criteria will give an employer better chance of making this decision. This way they can be satisfied that the workplace pension plan they have chosen meets or can be modified to meet the qualifying criteria.

All employers will also need to decide whether they have duties to auto-enroll workers who are not part of the existing workplace pension plan. They should be able to figure this out by completing an initial assessment about their work force, which is an important part of ‘getting ready’ to implement auto-enrolment in the workplace.

If you as an employer have the responsibility of auto-enrolling your employees, you will have to decide whether you want to:

  • Continue with the existing workplace pension plan for auto-enrolment
  • Start with a new pension scheme so as to ensure that all the criteria for auto enrolment are met.

Again before you make a decision you will need to have a greater understanding about the auto-enrolment scheme criteria. This way you can be sure that the plan you have chosen either meets all the auto-enrolment criteria or can be amended to meet all the criteria.

Employers Who Do Not Have A Workplace Pension Plan In Place

If you do not have an existing workplace pension plan in place in your organisation and you need to put the scheme in place as part of your auto-enrolment obligations, you will need to ensure:

  • That you select a workplace pension plan

And

  • Be in position to auto-enroll eligible workers by the time your staging date approaches.

Before you do this it is important to understand which schemes qualify as auto-enrolment schemes and by which date you will have to make the scheme you have chosen active.

All Employers

All employers will be tasked with the responsibility of understanding which schemes qualify for auto-enrolment and the date by which they have to make the plan is operative i.e. their staging date.

As part of their auto-enrolment obligations, employers can choose to use their existing workplace pension plan as their qualifying scheme or instead decide to use a new personal or occupational pension scheme.

Irrespective of whether the workplace pension plan chosen by the employer is new or an existing one, they will have to make sure that it meets all the qualifying criteria for an auto-enrolment scheme, before they implement it.

An employer should also keep in mind that all the auto-enrolment criteria mentioned is a minimum requirement that the pension scheme is supposed to have. In most cases there will also be other important factors that an employer will have to take into consideration before they choose a workplace pension plan.

It depends on each individual employer on how they wish to implement auto-enrolment in their workplace. Some might choose to seek guidance from experts while others might come to decision on the basis of information received from a plethora of sources.

Location Of The Workplace Pension Scheme

Where the administration of the workplace pension scheme is located is a very important factor that an employer needs to consider while evaluating various pension schemes.

As long as it satisfies all the relevant eligibility criteria, a pension plan whose administration is based in the UK or any region in the EEA can be used as part of auto-enrolment and also as a qualifying scheme for other eligible workers.

Any pension scheme whose primary administration is located outside the UK or EEA cannot be used as part of a company’s auto-enrolment responsibilities.

Auto-Enrolment and Qualifying Schemes

For any scheme to be considered an auto enrolment scheme, it needs to fulfill the following three requirements:

  • Auto-enrolment criteria
  • Qualifying criteria
  • Minimum requirements

Minimum requirements can differ based on the type of pension scheme chosen. The minimum requirements expected from an employer to initiate auto-enrolment consist of certain qualifying criteria along with other requirements.

Auto-Enrolment Criteria

For any scheme to be considered an auto-enrolment scheme, it must meet the qualifying criteria and also must not contain any stipulations that:

  • Prevent the employer from auto-enrolling eligible workers into a workplace pension scheme or that prevents them from either allowing a non-eligible worker to opt-in or re-enroll an eligible worker after they had opted out initially.
  • Require the employee to provide any information or make a choice in order to continue being an active member of the workplace pension plan.

If the workplace pension plan chosen is a money purchase scheme, it must not consist of any stipulations that permit either:

  • Deduction of an amount from an employee’s pension pot, contributions or
  • Reduction of the value of an employee’s pension rights by any amount,

If that amount deducted is used to pay off a third party consultant that the employer had separately consulted, unless the third party is the employee themselves or a scheme provider or scheme manager/trustee. This is also known as a consultancy charge.

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Additional Criteria From Non-UK Pension Schemes

Pension scheme whose primary administration lies outside the UK, but within the EEA are eligible to be used as an auto-enrolment scheme as long as they meet the following criteria:

  • They must be a personal pension scheme regulated by a competent authority within its home state and operated by a person with the requisite legal authority or it is an institution providing occupational retirement provision
  • They must be subjected to the following eligibility criteria:
  • A minimum of 70% of the employee’s money purchase benefits should be used to provide them with a post retirement income
  • The benefits should not be paid earlier than age 55. Possible exception can arise in the event of the employee suffering from ill-health

It is important to keep in mind that pension schemes whose primary administration lies outside the EEA cannot be used for auto-enrolment

Auto Enrolment Criteria- What Does It Mean In Practice?

The auto-enrolment criteria state that the rules of the pension scheme chosen by an employer as part of its workplace pension scheme cannot:

  • Contain any obstacles in the path of eligible candidates being auto-enrolled into the scheme. For example, if the pension scheme chosen has an age limit of 21, the employer can use it as their auto-enrolment scheme but, then they will have to implement another auto-enrolment scheme in which eligible applicants who wish to opt in to the work place pension scheme can be enrolled.
  • Require a job applicant to provide any information or their consent to be enrolled into the workplace pension plan. For example, an applicant should not have to give their consent or fill out an application form to be auto-enrolled into a workplace pension plan
  • Require an employer to give out information about a potential new employee as a condition of being enrolled into the workplace pension scheme, unless the employer is able to provide this information within a specified time frame that is short enough, so that it does not affect the auto-enrolment of that employee
  • Require an employee to make a decision about whether they wish to join or remain in a workplace pension scheme. For example, the employee should not have to make a choice about how their share of contributions will be invested, before they are auto-enrolled into a workplace pension plan. The employee does however have the right to express their choice voluntarily as long as the rules of the pension scheme chosen allow for it.

Now, if an employer has to pay an adviser for further guidance about a money purchase scheme that they want to use as their auto-enrolment scheme, they will not be allowed to enter into any agreement wherein they deduct this money from the contributions or entitlement of an employee, under the terms of the workplace pension scheme.

Employers that decide to opt for pension schemes whose primary administration lies outside the UK but within the EEA, will also have to determine from the administrator or trustee of the pension scheme whether they have to adhere to any cross border requirements with regards to its UK members.

Auto-Enrolment Qualifying Criteria

Any pension scheme that you want to choose as your auto-enrolment scheme must first fulfill the qualifying criteria.

Any workplace pension plan that was already in place prior to a company’s staging date will also have to meet the qualifying criteria for an auto-enrolment scheme, if the employer decides to continue using the existing plan for employees who are already active members of the plan.

A qualifying scheme can be a:

  • UK based pension scheme or
  • A non-UK based pension scheme

 A UK based pension scheme should meet the qualifying criteria with regards to an employee:

  • It must be a personal or occupational pension scheme
  • It must be tax registered
  • Fulfill all the minimum requirements of a workplace pension plan. These minimum requirements can vary based on the type of pension scheme chosen by the employer

 A non-UK based pension scheme should meet the qualifying criteria with regards to an employee:

  • It must be an occupational pension scheme. Also, the country in which its primary administration resides, there must exist a regulatory body for such schemes and also for the providers of such schemes
  • It must be a personal pension scheme and in the country in which its primary administration resides, there must exist a regulatory body for such schemes and also for the providers of such schemes
  • Satisfy the provision that a part of the benefits of the pension scheme should be used to provide the employee with an income for life

Additionally, non-UK based pension schemes must ensure the following:

  • That it meets one of the below mentioned conditions:
  • It is a QOPS (Qualifying Overseas Pension Scheme)
  • Employee’s receive tax emption on their contributions into the workplace pension scheme because of the presence of double taxation agreement
  • Employee’s receive tax emption on their contributions in accordance with Chapter 2 part 5 of the Income Tax (Earnings and Provisions) act of 2003
  • The plan chosen is a money purchase pension scheme wherein the employees enrolled in the plan do not receive any tax exemption in their contributions towards the pension plan. However, the employer will have to include an additional amount that is equivalent in value to the proportion of tax relief the employees should have received as part of the pension plan, if it was registered in the UK
  • Satisfy all the minimum requirement criteria of a UK based pension scheme

Minimum Requirements Based On The Type Of Pension Scheme Chosen

As mentioned previously the minimum requirements vary based on the type of pension scheme chosen by the employer as its auto-enrolment scheme. These minimum requirements apply to pension schemes based in the UK as well as to those based outside the UK, but within the EEA. An employer only has to take into account the minimum requirements that are related to the plan they have chosen as their workplace pension plan.

Minimum requirements of both Defined Contribution (DC) and Defined Benefit (DB) pension schemes that fulfill certain criteria must set minimum contributions entitlement. There might be some additional minimum requirements that will have to be taken into account, if the pension scheme chosen is a contract based one for example, a personal pension scheme.

The minimum requirements for both DC and DB pension schemes include relevant certification that states that the pension scheme fulfills certain minimum criteria for money purchase pension schemes.

The minimum requirements of Defined Benefit pension schemes set a guideline of the kind of benefits the employee is entitled to or for the estimated cost of providing the employee with those benefits.

  • Defined Contribution Occupational Pension Schemes

The minimum requirements for a defined contribution Occupational Pension Scheme (and defined benefit scheme) that fulfills certain criteria depend on the rate of contribution and also require the following under the terms of the scheme:

  • The employer has to make minimum contributions towards the employee enrolled into the workplace pension plan
  • The total minimum contribution no matter how it is calculated must stand at a minimum of 8% of the employee’s qualifying earnings in the relevant pay period
  • The minimum contribution of the employer towards the workplace pension plan, no matter how it is calculated should stand at a minimum of 3% of the employee’s qualifying earnings within the relevant pay period

‘Qualifying earnings’ refer to the earnings in the range of £5,876 and £45,000 and can comprise of any of the following components:

  • Salary
  • Wages
  • Commission
  • Bonuses
  • Overtime
  • Statutory sick pay
  • Statutory maternity pay
  • Statutory adoption pay
  • Additional statutory or ordinary paternity pay

It is up to the employer to assess what component of employee earnings constitutes their qualifying earnings. A separate and more unique assessment involves determining how much an employee’s basic pay is for the purposes of a pension scheme, that is meeting certain minimum requirements as part of its auto-enrolment qualifying criteria through a certification.

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Defined Contribution Personal Pension Schemes

In addition to the contribution rate, the minimum requirements of a personal pension scheme also include requirements that are related to the mechanism which governs how those contributions and pension benefits are given to the employee.

To be a qualifying pension scheme, a personal pension scheme must meet the following criteria:

  • It should be regulated by the FCA (Financial Conduct Authority)
  • It should be operated in the UK by a person who is not only authorised to do so but is also exempt under section 19 of the Financial Services and Market Act of 2000
  • It should provide money purchase benefits to the employee
  • It should have in place certain agreements between the employer, the employee and the company providing the workplace pension scheme

These agreements are as follows:

Agreement Between The Company Providing The Pension Scheme And The Employer

The agreement between the provider of the workplace pension plan and the employer must state that:

  • The employer is required to make minimum contributions into the workplace pension plan for each employee enrolled in it
  • The employers minimum contribution should stand at a minimum level of 3% of the employee’s qualifying earnings within the relevant pay period

The presence of an agreement ensures that the employer is legally obligated to make minimum contributions for each and every member enrolled into the workplace pension plan. The chances of an existing workplace pension plan having such an agreement between the employer and the pension provider is extremely slim.

Agreement Between The Pension Plan Provider And The Employee

Such an agreement is only required if the employer’s contribution is less than the stipulated 8% of the employee’s qualifying earnings within the relevant pay period, which means that the employee has to make certain contributions into the pension scheme.

If this is indeed the case, the agreement between the provider of the workplace pension plan and the employee must state that:

  • The employee must make minimum contributions into the workplace pension scheme irrespective of how its calculated and it should be equivalent to the difference between:
  • 8% of the employee’s qualifying earnings within the relevant pay period
  • The employers’ contribution as per the agreement between the pension provider and the employer.

The employee can also decide to make a greater contribution than the shortfall, if they desire.

Direct Paying Arrangements

There should be direct paying arrangements between the employer and the employee. In such arrangements the employer or someone acting on their behalf pay’s the contribution into the workplace pension plan. The contributions made by the employer should be either:

  • On the employers own choice, but with regards to the employee’s contributions or
  • On behalf of the employee made out of deductions from the employee’s salary

These arrangements should also state the due date of paying these contributions. Direct paying arrangements do not necessarily have to be a written agreement drafted on a single document. Such agreements exist only where:

  • The employer makes its minimum contributions in a personal pension scheme
  • The employer deducts the contribution payments from the salary of the deceased person and then pays it into the workplace pension scheme
  • The employer does both of the above

There might be a combination or other verbal or written agreements between the provider of the workplace pension plan, the employer and the employee that resemble direct paying arrangements. 

Defined Benefits Pension Schemes-Minimum Requirements

The minimum requirements of such schemes are usually determined by the how much the employee is entitled to in terms of benefits during the time of their retirement or the costs involved in providing those benefits.

Before ‘contracting out’ was abolished (on 6th April 2016) many defined benefits pension schemes fulfilled the minimum requirements expected if the employer of the business had been issued with a contracting out certification and all the employees were employed on the basis of a ‘contracting out’ agreement. However, now defined benefits schemes are required to meet the test scheme standard or one of the alternative defined benefit minimum requirements.

Test Scheme Standard

This is a hypothetical scheme that is used as a guideline. A pension scheme will fulfill the test scheme standard if it provides benefits similar to or better than the benefits provided by the test scheme standard.

The pension scheme does not have to be an exact match to the test scheme in terms of its structure but it is required to be equivalent or better in terms of the benefits offered. The important features of a test scheme standard include:

  • Entitlement to pension from the age of 65, which gradually increases to 68 and continues for life
  • An annual pension amount which comes to about 1/120th of the average qualifying earnings of the employee in the three years prior to the end of pensionable service, multiplied by the total number of years of pensionable service, which can extend for up to 40 years
  • Schemes that provide average salary lump sums:
  • A lump sum that comes to 16% of the qualifying earnings of the employee in the pensionable period multiplied by the total number of years of pensionable service, which can extend for up to 40 years with revaluation in service determined based on the yearly increase in the CPI (Consumer Price Index) or the RPI (Retail Price Index)
  • A lump sum that comes to 8% of the qualifying earnings of the employee in the pensionable period multiplied by the total number of years of pensionable service, which can extend for up to 40 years with revaluation in service determined based on the yearly increase in the CPI (Consumer Price Index) or the RPI (Retail Price Index) capped at 2.5% in addition to more 3.5% per annum and revaluation in deferment of 3.5% per annum along with revaluation of benefits accrued in accordance with the terms of Pension Schemes Act of 1993

The comparison between the benefits provided in the defined benefit pension scheme and test scheme will usually be carried out by the scheme actuary.

Alternative Defined Benefit Requirements

The government introduced two alternative tests on 1 April 2015 to determine whether a defined benefits scheme meets the qualifying criteria for auto-enrolment.  One test is based on the costs of the DB scheme chosen of the future accrual of current members benefits. The other test is designed to allow DB pension schemes that fulfill certain criteria and also that fulfill the minimum requirements of Defined contributions occupational schemes that are used for auto-enrolment.

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Average Salary Pension Schemes-Minimum Requirements

Like DB pension schemes, the minimum requirement for Average salary pension schemes should fulfill one of the alternative defined benefit requirements or be equivalent or better than the standard test scheme, these schemes must also fulfill certain additional conditions with respect to benefits accrued, in order to satisfy all its minimum requirements and be accepted as an auto-enrolment pension scheme.

The additional condition is that any benefits accrued by the employee during the time of their pensionable service must be revalued as mentioned below:

  • By the yearly increase either in the CPI or the RPI capped at a minimum rate of 2.5% or
  • If under the terms of the scheme the benefits accrued need to be revalued at any moment in time at less than minimum rate for example, due to the fact that revaluation is brought about by increase in the employee’s average earnings rather than inflation of any kind or if there is a discretionary power that allows the revaluation of accrued benefits under the terms of the scheme, such as:
  • The funding of the workplace pension plan is based on the supposition that benefits accrued will be revalued at the minimum rate or above it in the long term
  • According to part 3 of the Pensions act of 2004, this funding must be provided in the statement of funding principles of the workplace pension plan or in an equivalent funding statement if this particular workplace pension scheme is not subjected to part 3 of the Pensions act of 2004

Hybrid Pension Schemes-Minimum Requirements

Hybrid pension schemes is neither wholly a DB nor DC scheme but contains within it elements of both the schemes. Based on the type of hybrid pension scheme it will be required to meet:

  • The exact same minimum requirements as stipulated for a defined benefit pension scheme or a modified version
  • The exact same minimum requirements as stipulated for a defined contribution pension scheme or a modified version, which includes the option of employing the certification process
  • A combination of the above

What is Salary Sacrifice?

Some employers choose to make minimum contributions into a workplace pension plan through a salary sacrifice arrangement. In such an agreement, there will exist a contractual agreement between the employer and the employee, which states that the employee has agreed to sacrifice a portion of their salary in return for the employer making regular contributions into the workplace pension plan.

Such arrangements exist separate to the provisions stipulated by auto-enrolment, but in some scenarios the employer might choose to run both of them in parallel while also complying with its employer duties.

An employer can ask an eligible auto-enrolment candidate whether they would be willing to enter into a salary sacrifice arrangement. However, the candidate should not be made to feel that them accepting a salary sacrifice arrangement is crucial part of him/her being enrolled into a workplace pension plan.

If the candidate decides to not enter into the salary sacrifice arrangement, the employer is still obligated to enroll the candidate into a workplace pension plan with a different method of deducting contributions.

The employer and the employee can enter into the salary sacrifice arrangement either before or after the expected auto-enrolment date of the employee. If the employer decides to enter into an agreement prior to the date, they can also opt to postpone their staging date. If the employer decides to enter into an agreement after the date, they will have to use an alternative mode of payment for the initial contributions due from the date of the employee’s auto-enrolment.

If the employer has chosen a DC scheme as its work place pension plan, the qualifying earnings that are used to meet the minimum requirement are at the post-sacrifice level of the salary.

How Can An Employer Ensure That Their Workplace Pension Scheme Continues To Meet With The Auto-Enrolment Qualifying Criteria?

Employers should always keep checking rules, agreements and other important documentation governing the workplace pension scheme.

If the employer is not using certification or is not certifying that the workplace pension scheme they have implemented is meeting the minimum contributions requirement and at the same time the rules, agreements and other important documentation about the pension scheme states that:

  • The pension plan chosen, requires a total minimum contribution of 2% made by the employee from its qualifying earnings in the relevant pay period
  • No increase in contributions has been included. Therefore, the minimum contribution factor needs to be equaled or bettered

Then the rules or agreements of the workplace pension plan need to be modified for 6 April 2018. This will ensure that your plan continues to adhere to the qualifying criteria.

If the employer has decided to certify that scheme implemented is adherent to the alternative minimum requirements (under set 1) and at the same time the rules, agreements and other important documentation about the pension scheme states that:

  • The pension plan chosen, requires a total minimum contribution of 3% of pensionable pay (of which a minimum 2% contribution should be made by the employer) and the pensionable pay at the very least is equivalent to the basic pay
  • No increase in contributions has been included. Therefore, the minimum contribution factor needs to be equaled or bettered

Then the rules or agreements of the workplace pension plan need to be modified for 6 April 2018. This will ensure that your plan continues to adhere to the qualifying criteria.

Likewise, if the employer has decided to certify that scheme implemented is adherent to the alternative minimum requirements (under set 2) and at the same time the rules, agreements and other important documentation about the pension scheme states that:

  • The pension plan chosen, requires a total minimum contribution of 2% of pensionable pay (of which a minimum 1% contribution should be made by the employer) and the pensionable pay at the very least is equivalent to the basic pay
  • No increase in contributions has been included. Therefore, the minimum contribution factor needs to be equaled or bettered

Then the rules or agreements of the workplace pension plan need to be modified for 6 April 2016. This will ensure that your plan continues to adhere to the qualifying criteria.

Finally, if the employer has decided to certify that scheme implemented is adherent to the alternative minimum requirements (under set 3) and at the same time the rules, agreements and other important documentation about the pension scheme states that:

  • The pension plan chosen, requires a total minimum contribution of 2% of earnings (of which a minimum 1% contribution should be made by the employer) and that all the earnings is pensionable
  • No increase in contributions has been included. Therefore, the minimum contribution factor needs to be equaled or bettered

Then the rules or agreements of the workplace pension plan need to be modified for 6 April 2018. This will ensure that your plan continues to adhere to the qualifying criteria.

If the rules, agreements and other important documentation need to be modified and are not, the scheme ceases to be a qualifying one for all the employees enrolled into it. This means that the employer has failed to meet with their employer responsibilities after the statutory increase in April 2018.

It is important to remember that the responsibility of ensuring that the workplace pension plan is a qualifying one falls on the employer. But, in most cases the responsibility of altering the rules, agreements and other important documentation related to the workplace pension scheme falls on the scheme managers or trustees, especially if the scheme is master trust or contract based one.

Situations Where An Employer Must Consult On Plan To Increase Member Contributions

The employer will have to consult members who have been affected, with a plan to increase contributions from each member, if the conditions mentioned below are met:

  • The employer wants to modify scheme rules, agreements and other important documentation after the date when auto-enrolment was first initiated or any other qualifying scheme as part of its employer duties and
  • As part of the modifications the employer wishes to increase the contribution of each member towards the workplace pension plan and
  • The auto-enrolment scheme that has been implemented by the employer
  • Is not a public service pension scheme
  • Has more than one member
  • Is not a small occupational pension scheme
  • The proposed increase in member contribution is not equivalent to the alternative requirement or statutory increase in minimum contribution requirement
  • The proposed change in member contribution was not part of the workplace pension scheme initially when the auto-enrolment scheme was first implemented, so that their employer duties were met

If any of the above mentioned situations do not arise, the employer will not be required to consult. That means if the proposed modification to the increased member contribution was already included in the scheme rules, agreements and other important documentation, the employer is not required to consult.

Regardless of what the statutory increase in member contribution is or the relevant alternative requirement, the employer does not have to consult in such a situation.

If the proposed modifications to the scheme rules, agreements and other important documentation are being made to ensure that plan remains a qualifying one, again the employer is not required to consult.

Just because the employer is not legally obligated to consult, it does not mean that they will no do so, especially if the matter affects the growth of their employee’s pension rights.  In situations where the employer is required to consult, it is important to remember that the consultation period is for 60 days. This timing should be taken into consideration and be built into the time required to make modifications to the scheme rules, agreements and other important documentation.

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Auto-Enrolment- What Information Should You To Provide To Your Workers?

Any worker that has already been auto-enrolled into a workplace pension plan will need to be informed of the same. The enrolment information given to an employee as part of their auto-enrolment should contain information pertaining to the alternative requirements or statutory increase in member contributions.

Now, if an employee has opted out and has been re-enrolled, they will need to be provided with such increases in enrolment information.

Auto-enrolment does not dictate any additional duties towards an employer regarding advising members of the workplace pension plan about the increase in member contributions at the time the changes are actually made.

It is also important to keep in mind that any worker who has been automatically enrolled, re-enrolled or who has manually opted in will have been informed as part of the auto-enrolment information that statutory increase in member contributions is stated to occur on 1 October 2017 and 1 October 2018 respectively. Therefore, it would be advisable to inform your employees around 6 April 2016 and 6 April 2018. This way you can minimise the number of queries you are likely to receive.

It is also important to remember that certain scheme rules and agreements might allow a member to continue at a lower contribution rate or reduce their amount of contributions even after the statutory increase takes place.

If a member does not wish to make the increased contributions, which are due in April 2018 and 2019 and if the rules of the scheme permit them to do so, they will continue remaining a part of the workplace pension plan. However, as the contributions being made are below the minimum level stipulated by law, the scheme becomes a non-qualifying one for that member.  This means that if the member becomes eligible again at a later date, they will have to be re-enrolled into the workplace pension plan.

If the workplace pension plan you have chosen offers its members such an option, you can communicate with your employees about the potential changes and the options that are available to them because of the terms of the current plan.

The Penalties an Employer Can Face For Not Fulfilling Auto-Enrolment Responsibilities

Enforcement policies initiates with informal action involving issuing of guidance and instruction via telephone, email, letter and in person. After this, it uses statutory notices, which can direct a business to comply with duties or/and pay any contributions it has missed or delayed in paying. The Pensions Regulator can also estimate and strike an interest charge on unpaid contributions while directing an employer to calculate and pay any unpaid contributions. However, again, upon failure to comply after the declaration of compliance date, the process moves straight to a Compliance Notice reiterating what the employer is obligated to do.

Penalty notices are an alternative way of punishing “persistent and deliberate non-compliance”. A fixed penalty notice might be issued if an employer fails to comply with statutory notices or if there’s enough evidence of a breach of the law. This fine is fixed at £400 which should be paid within a specific period.

In case of failure to comply with a statutory notice, an escalating penalty notice is issued. This has a daily rate ranging between £50 and £10,000, depending on the number of staff an employer has.

Where there is sufficient evidence of a violation of the safeguard to prevent an employer advertising or offering a job with the condition that a recruit opts out of the pension scheme, The Pensions Regulator can issue a Compliance Notice and eventually a prohibited recruitment conduct penalty notice. This penalty has a given rate of £1,000 to £5,000 depending on the number of staff the employer has.

As a last option, civil action through the courts can be taken to recover penalties. Companies which willfully fail to comply with duties may be penalised. The Regulator states “We aim to fully recover all the penalties that we issue. We can also confiscate goods where there is a criminal conviction and restrain assets during criminal investigations with the assistance of other specified agencies.”

Employers have a right to appeal these enforcement notices, but this must be made within 28 days of the notice being issued to them.

It is worth noting that these aren’t just tough words as action has and is being taken against errant employers.

Matter of fact, according to the latest official auto-enrolment compliance and enforcement, there has been over 11,099 compliance notices relating to an employer’s contravention of one or more auto-enrolment duties by March 2016. Also, there have been 3,045 fixed penalty notices and 165 escalating penalty notices over the same period of time.

With smaller employers now meeting and planning for staging dates, The Pensions Regulator has revealed that the number of notices has increased.

The most recent compliance and enforcement report stated: “Our research shows that most employers want to do the right thing by their staff on time but that smaller employers are more likely to leave things to the last minute. They therefore require a ‘nudge’ to encourage them to meet their duties. So, as expected we have seen an increase in the number of compliance notices. A minority of them still doesn’t comply after receiving such a notice, but many of them do after receiving a fixed penalty of £400.

3 Reasons Why Auto-Enrolment Makes Outsourcing Payroll Even More Important

It is Mandatory

Even if you have 1 member of staff you are still required to implement auto-enrolment. Irrespective of whether your company is small, medium or large, you must comply with auto-enrolment before your staging date approaches according to the regulations.

This makes it necessary for you to be aware of the staging date and not delay as the date could come sooner than you think. Using your PAYE reference you can come to know about this date.

Workplace Pension Plan can be difficult to manage

You may have to set up a lot of things before your staging date comes closer. It involves finding out the eligible candidates in your staff, selecting the right workplace pension for them and informing them of your choices.

Another important decision which should be made without further delay is concerned with the separate pay components that contribute to the employees overall earnings. Ideally this preparation should be initiated at least 6-9 months prior to the staging date.

However, if all the preparations are complete then you shouldn’t relaxed just because the staging date has passed. Passing of the staging date doesn’t mean the end of your responsibilities. There will be additional tasks to be handled at the end of each payroll cycle such as reassessing the eligibility, contributions of your employees, add in opt-ins and remove opt-outs.

You may have to keep records of everything and report it as it is important to maintain a clear transaction trail. It is a massive responsibility and given the severity of the task you should consider hiring an experienced payroll provider. There are many companies who seek a postponement of their staging date and the common reason cited by them is that they are overwhelmed by the amount of work involved in the process of setting up auto-enrolment.

Setting up auto-enrolment doesn’t relieve you of other payroll responsibilities

The salary related responsibilities still need to be fulfilled by your payroll clerk, business manager or accounts clerk along with regards to implementing auto-enrolment. Being overwhelmed by the auto-enrolment process doesn’t mean that your employees do not have to be paid. Thus payroll management is a full time job in itself and there are many responsibilities such as:

  • Production of pay slips
  • Salary processing
  • In-year and year end reporting
  • SMP, SPP and PAYE payments

These responsibilities when combined with the auto-enrolment process can be a lot for your payroll clerk to handle by himself. You should also factor in the possibility of your payroll clerk applying for a sick leave at such a crucial time. In that case the entire burden may have to be handled by an inexperienced staff and this could have serious implications.

Interested In Auto Enrolment?

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How Payroll.co.uk Can Help You With Auto Enrolment?

Why should you let us deal with all your payroll and auto-enrolment requirements? Here are some reasons that spring to mind immediately.

  • Greater risk management
  • Automatic emergency planning
  • Lower operational costs
  • Better cash flow
  • Compliance assurance
  • Scalability
  • Value added support

By delegating this huge responsibility to somebody within your existing staff you may stretch your already thin human resources department. Therefore, it will be a good idea to let us shoulder this responsibility for you.

At payroll.co.uk we believe in making the entire payroll and auto-enrolment process as easy as possible for our clients. We will set up an auto-enrolment scheme on any device in a matter of minutes. Also, we will continually assist you with regards to your auto-enrolment requirements in the following ways:

  • By enabling you to input all your employee data into our payroll software, or on any other easy format.
  • Automatically assessing how many workers in your company are eligible for auto-enrolment and how many are not.
  • Generating letters with your company logo containing detailed information about auto-enrolment, your responsibilities and the pension scheme chosen, so that you can give it to your employees.
  • Handling any opt outs or optins into the workplace pension scheme on your behalf or by enabling your employees to manage it themselves using the payroll software.
  • Many other easy to use value added services and features.

Contact us to know more about how you can easily benefit from our state of the art payroll and auto-enrolment software’s.

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