Offering Work Place Pensions is now compulsory for the majority of businesses in the UK.  These are also known as ‘auto-enrolment pensions’ and aim to improve the way that workers save for their retirement.

The Government were concerned that many people did not appear to be saving adequately for retirement, and so introduced a statutory saving scheme.  These schemes became compulsory for all new businesses from 1st October 2017.

The Pensions Regulator, together with Financial Conduct Authority, is responsible for overseeing the process.  You will need to make a declaration of compliance within five months of your duties starting.

What will it cost?

Most employers will being setting up defined contribution schemes, and the minimum cost of the pension will eventually be 8% of an employee’s salary, with a minimum of 3% contribution from the employer.  The contributions started at 2%, with 1% from the employer, rising to 5% from April 2018, with 2% from the employer, before reaching the 8% target in 2019.

The parts of an employee’s wage than need to be pensionable can vary, and the percentage can be based on qualifying earnings.  If you do not use qualifying earnings you generally will need to certify that you meet one of the following the criteria:

“Tier 1
A total minimum contribution of at least 9% of pensionable pay (at least 4% of which must be the employer’s contribution), or

Tier 2
A total minimum contribution of at least 8% of pensionable pay (at least 3% of which must be the employer’s contribution), provided that pensionable pay constitutes at least 85% of earnings (the ratio of pensionable pay to earnings can be calculated as an average at scheme level), or

Tier 3
A total minimum contribution of at least 7% of earnings (at least 3% of which must be the employer’s contribution) provided that all earnings are pensionable.”

(From The Pension Regulator Detailed Guidance 4. Pension Schemes)

Some pension companies may levy a charge from the company, whilst the administration of the scheme will also have a cost.

Choosing a Pension Scheme

You need to use a qualifying scheme for auto-enrolment and The Pension Regulator has guidance for choosing the correct scheme.  It is important to get this right, and it is the responsibility of the employer to do so.  It is possible to seek advice from a financial advisor.

Writing to your Employees

When auto-enrolment pensions were first introduced, the statutory communications requirements were complex and burdensome. Thankfully these were simplified from April 2015 and the requirements are still under development at the time of writing.  There are three main letter types with a lot of repetition between them:

  1. You are in the Pension
  2. You are not in the Pension
  3. You have been postponed

The Pension Regulator has some templates available, as well as more detailed guidance.

Automatically Enrol Employees

Employees that meet certain Criteria will be automatically enrolled onto a qualifying pension scheme, and at least the minimum contributions should be made.  An employee cannot ‘opt out’ until they have been enrolled.

1. Automatically Enrol Aged 22 – SPA, earning over £833 per month
2. Has the Right to ‘Opt In’ to the scheme Aged 16 -74, earning £486 – 832 per month or
Aged 16 – 21, earning over £833 per month or
Aged SPA – 74, earning over £833 per month
3. Has the Right to join a scheme
(but the employer does not need to make contributions)
Aged 16 – 74, earning less than £486 per month

SPA = State Pension Age

If an employee chooses to ‘Opt In’, and is in category 2, the employer must make regular contributions to the scheme.

Keeping Records

Generally records will need to be kept for at least six years.  You should keep records of all stages of the process, as well as ongoing records.  Also remember to keep records of correspondence sent to employees.  The Pension Regulator again has some guidance.

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