The introduction of auto-enrolment workplace pensions has finally affected the UK's small businesses. This step-by-step guide explains exactly what you have to do.
1. Auto-enrolment staging dates
These were reached by February 2018. Rules now take immediate effect.
2. Understand your auto-enrolment duties
Do this now
If you are not sure if auto-enrolment applies to you then you can find out what your duties are by using the Duties Checker on the Pensions Regulator website. Before you begin, make sure you have got this information to hand:
- your PAYE reference;
- the ten-digit letter code that appears on letters from the Pensions Regulator. If you haven’t received a letter, you can get your letter code here;
- the ages of all your staff;
- their earnings.
If you are exempt from auto-enrolment, you can declare this online once you have checked your duties. Sole traders are exempt and some small firms with one or more directors but no employees may also be exempt as long as no more than one of the directors has a contract of employment. If you’re not sure about this, check with your accountant before you tell the Pensions Regulator that you are not an employer.
3. Choose a pension scheme that complies with auto-enrolment
While your employees get to decide whether to opt in or out, it’s up to you to choose the pension scheme for your company and you'll want to balance your company’s needs with what's best for your employees.
If you have an existing workplace pension scheme you'll have to find out from your pension provider whether it is set up for auto-enrolment.
If you need to set up a new scheme, there are two main choices. Pension firms such as Aviva and Legal and General offer contract-based company pensions and company stakeholder pensions. There are also master pension schemes - including the Government workplace pension scheme Nest and private providers such as The People's Pension.
Key issues when choosing a scheme include costs as well as compatibility with payroll systems. Master trust schemes are popular with small businesses because they offer a relatively simple "off the shelf" solution. Nest is widely used because it is backed by the Government and is obliged to take all eligible employers.
Lesley Titcomb, chief executive of The Pensions Regulator, has said: "Our research shows that large multi-employer pension schemes such as master trusts and group personal pensions are better placed to meet the standards we believe are necessary for good outcomes for retirement savers."
However, risk is an issue. Many new master trust pensions have launched in the past few years and, according to the BBC, there are concerns about some of the new entrants to this market. Andrew Warwick Thompson, executive director for regulatory policy at the Pensions Regulator said: "There is a risk of these schemes falling over; there is a risk that members might lose their money."
Master trusts are overseen by the Pensions Regulator, with a lower level of supervision compared to the contract-based schemes from big pension providers that are regulated by the Financial Conduct Authority (FCA).
Of the master trust providers registered with the Pensions Regulator, only four have currently been given an official seal of approval in the form of a "kite mark". These are the Government-backed Nest scheme; NOW: Pensions, The People's Pension and Welplan.
4. Decide who's doing what to comply with auto-enrolment
Complying with auto-enrolment involves a number of business functions including IT, HR and payroll. It calls for expertise in planning, communication, finance and software management.
Lots of specialist firms offer auto-enrolment advice and support. Your own payroll bureau or accountant may also be able to help. And, of course, you may decide your own staff can handle both the set-up and on-going compliance. But you need to know who is going to handle the workload.
You also need to confirm who in your business (typically the employer, owner or most senior person in the company) will be the main point of contact for the Pensions Regulator. They are responsible for making sure the legal duties are met. You can confirm who this person is at the Pensions Regulator website.
5. Enrol your eligible staff
It's called auto-enrolment for a reason. You have to enrol everyone that is eligible. On your staging date, you must work out how much each member of staff earns and how old they are. Your employees are either "entitled", "eligible" or "non-eligible".
Eligible workers must be enrolled. They are aged between 22 and the state pension age; they earn at least £10,000 per year; and they are not already participating in a workplace pension scheme.
Non-eligible workers can be enrolled into the pension scheme should they wish to be and you as employer will have to pay pension contributions. They are workers aged between 16 and 74, earning as a minimum £6,136 per year (for 2019/20) but less than £10,000 per year; or they are aged 16 to 22 or between the state pension age and 74, earning more than £10,000 per year.
Entitled workers can be enrolled into the pension scheme should they wish to be, but the employer does not have to pay pension contributions. They are workers who are aged between 16 and 74 earning less than £6,136 per year.
6. Write to your staff about auto-enrolment
It is your legal duty to write to all your staff individually to explain how automatic enrolment applies to them. The Pensions Regulator offers letter templates for this. The letter can be sent via email.
You'll need to present details of the pension scheme you have chosen. You must tell staff that they have been automatically enrolled and that they have the right to opt out if they want to do so.
7. Declare your compliance with auto-enrolment
Do this within the five months after becoming an employer
You must declare your compliance online. Even if you are getting outside help with this, it is your legal duty to make sure that the declaration is completed on time and the information you have provided is correct. If not you may be subject to fines.
8. Keep complying with your auto-enrolment duties
Once you have completed these steps, there are ongoing duties you'll need to fulfil including dealing with requests to join and leave the pension scheme and keeping detailed records.
You need to assess your workforce every time you run the payroll. This involves checking ages and earnings, including overtime and bonuses. If an employee becomes eligible at any point they must be auto-enrolled immediately.
All of this can be made easier with auto-enrolment software and many pension providers offer this as part of the package. However, Nest does not offer this kind of support.
If employees opt out, you have to re-enrol them every three years and then ask them if they want to opt in or out. If a worker opts out within the first month of being auto-enrolled they will get a refund of contributions made. Employees can leave the scheme at any other time but will not receive a refund of contributions.
9. Pay your auto-enrolment contributions
You will, of course, have to contribute to your workers' pensions in line with the law. The combined employer/employee minimum contribution from April 2019 is 8% of qualifying earnings of which the employer must pay at least 3%.
If the employer makes only the minimum contribution, the employee has to make contributions of 5% of their qualifying earnings to bring the total to 8%. There is tax relief on employee contributions.
Qualifying earnings are classed as gross earnings (before income tax and national insurance contributions are deducted) between £6,136 and £50,000 per year. The qualifying earning levels are reviewed on a yearly basis inline with the lower and upper earnings limits for NIC purposes.