Auto enrolment cannot be ignored; legislation clearly puts the responsibility firmly on the shoulders of employers to operate a Qualifying Scheme correctly for all their workers including some who would be otherwise self employed.
Why? Most people are not saving enough for when they retire, so the government has decided to make employers responsible for setting up a company pension for their staff.
Failure to comply will result in a series of penalties and fines. So, as an employer (whether a company employing thousands or a sole trader with a single employee), while the resulting actions may be different, the key questions are the same:
- When do I need to have a Qualifying Scheme in place?
- Who do I need to enrol?
- How much will this cost?
- What choices do I have in selecting a Qualifying Scheme and,
- Is there anything that can be done to reduce the cost?
When do I need to have a Qualifying Scheme in place?
The ‘staging date,’ is the date by which you must have established your Qualifying Scheme, it varies between October 2012 and April 2017 depending on the number of employees on your payroll as at 1 April 2012.
There is an interactive tool available from The Pension Regulator at www.thepensionsregulator.gov.uk which enables you to find out your staging date.
Who do I need to enrol?
All workers, whether part-time or full-time aged between 22 and State Pension Age who earn over the ‘earnings trigger’ in a pay reference period:
- £192.00 if employees are paid weekly
- £833.00 monthly and
- £10,000 annually for 2015/16) must be auto enrolled
Workers outside these parameters simply need to receive a communication about their rights to join the scheme.
How much will this cost?
The statutory minimum contribution into the scheme will initially be 2% (1% for the employee and 1% for the employer) increasing to 8% of a workers ‘qualifying earnings’ from October 2018. This will be made up of an employer’s contribution of at least 3%, personal contribution of 4% and 1% from the Government in the form of tax relief. The ‘qualifying earnings’ will be total earnings falling within an earnings band of £5,824 to £42,385 in 2015/16.
What choices do I have in selecting a Qualifying Scheme?
There are a variety of different pension schemes that can be used for auto enrolment, from defined benefits schemes to personal pension plans. Your ultimate strategy for auto enrolment could be a multi-scheme solution with your workforce segmented into different schemes.
Your solution will depend on the answers to the following questions:
- Do you have an existing scheme(s) in place for all your staff? If so, you can continue with this scheme as long as it meets the conditions for auto enrolment
- Do you only offer pension benefits to some staff, eg senior management? If this is the case you can continue with the scheme for these existing members (as long as it meets the conditions for auto enrolment) however you will need to set up a new scheme for all other workers
Defined benefit and personal pension schemes are designed to provide a specific level of income at retirement and so the amount you pay in, and your investment choices are reviewed regularly to ensure you are on track.
Defined contribution schemes are much more straight forward. The individual chooses how much to pay into the scheme and this pot builds up over the years to provide a pension income. The fund providers will manage generic pools of investments and generally the employee will be able to chose a low, medium or high risk mix to invest their funds in.
It is unlikely that you would want to start a new defined benefit scheme to satisfy your auto enrolment requirements.
- Employers of 10 staff or more: Where, on average, contribution levels are likely to exceed £100 per month per individual and you employ more than ten workers, you may be able to set up a group personal pension scheme with the mainstream pension providers such as Standard Life, Aegon or Scottish Widows.
- Small employers looking for minimum cost scheme: Alternatively, the offerings from government approved schemes such as:
All three schemes are defined contribution schemes, which means that the employee builds up their own pension pot throughout their working lives to provide an income when they retire. The employee and employer both pay in contributions that are then invested. How much the pot grows will depend on how well the investments perform and the scheme’s management charges.
Here is a very high level comparison between the three. We recommend you do your own due diligence before choosing the best option for your company and your staff.
|Nest||Now||*The Peoples Pension|
|Who is the provider||National Employment Savings Trust – workplace pension set up by the UK government||A collaboration with ATP of Denmark – one of the largest pension funds in Europe.||Operated by BC&E in the UK the People’s Pension is a multi-employer scheme with independent trustees and is operated on a not-for-profit basis.|
|Cost for employer||None||None||None|
|Management charge for employee||0.3%||0.3%||0.5%|
|For the Employer:|
|Online portal for employers?||Yes||Yes||Yes|
|Can the scheme assess your workforce?||No – it would have to be your payroll provider||Yes, but typically delegated to payroll provider||Yes, but typically delegated to payroll provider|
|Does the scheme provide letter templates to communicate with your staff?||Yes||Yes||Yes|
|– Prestaging date templates provided to company to share with staff||Yes||Yes||Yes|
|– Post staging date communications provided by pensions company||No, but provides templates that can be used by employer||Yes||Yes|
|For the employee:|
|Additional fees charged for monthly contributions||Yes||Yes 1.8% contribution||No|
|Can they transfer funds in?||No||Yes||Yes|
|Is there a fee?||N/a||In some circumstances||Yes|
|Can they transfer funds out?||No||Yes||Yes|
|Can they choose how their funds are invested?||No – the government decides how to invest it.||No – Now pensions has a single diversified growth plan. They decide how your money is invested.||Choice of 3 plans :
|Can they carry on contributing if they leave your company?||Yes||Yes if new employer offers Nest||Yes|
|Maximum annual investment||£4,600||No limit||No limit|
|Online portal for employees||Yes||Yes||Yes|
The schemes are all very similar and cover the requirements for auto-enrolment but we have chosen *The Peoples Pension as our own pensions provider for because they are a UK based not-for-profit. They only charge the management fee and not for each additional contribution, the flexibility of being able to transfer funds in and out and there is no limit on how much you can invest. Ultimately we believe this provides a more flexible pension for your staff.
For many employers, the cost of setting up the pension will far outweigh the cost of running the pension.
There may also be one-off costs to consider, such as setting up your scheme, getting payroll software to manage automatic enrolment and any independent advice you might decide to take.
From an admin perspective – it is as time-consuming to set up a pension for one person as it is to set one up for 20.
Your options might include:
- Do-it-yourself : if you run your own payroll, you may want to set up your own pension
- Bare minimum: if you only have 2-3 employees you may be able to set your pension up with the minimal involvement of your accountant and without taking advice from a financial adviser
- Formal review: if you have 5 staff or more, we would recommend the involvement of your accountant and taking advice from a financial adviser.
- Your accountant will set your scheme up and run it for you.
- Your financial adviser can come into your business and talk to your staff about their pension options.
- Now is also a good time to review your personal pension provisions and making sure you are putting enough away for your own retirement.
You will need to have an action plan in place – we cover this is a separate article.
If you are a Caseron client, we will have an action plan in place for you.
If you have any queries on this article, please raise a support call with [email protected].
Tom Grunsell: www.tomgrunsell.co.uk
The Pensions Regulator: https://www.thepensionsregulator.gov.uk/