MONTHLY FOCUS: AUTO-ENROLMENT - EMPLOYERS' RESPONSIBILITIES

Basic principles

What is auto-enrolment and who is it for?

Simply put, auto-enrolment is the process that employers must follow to give their employees the opportunity to become a member of a workplace pension scheme. Where membership is required by auto-enrolment both the employer and their employees must pay contributions at least to a minimum level. However, it is possible for employees to opt out of joining the workplace pension, in which case neither they nor their employer will be required to make contributions.

The auto-enrolment process is compulsory for all employers whether they are in business or not. It therefore applies to charities and other non-profit organisations and even to those who employ domestic staff such as a nanny, cleaner or gardener.

Following a staggered rollout, all employers are now required to meet auto-enrolment obligations from the day they first take on an eligible employee.

 

Who has responsibility for auto-enrolment?

The employer always has the responsibilities under auto-enrolment - they will at the very least have to assess the status of persons who work for them to establish if they are “workers” for the purposes of auto-enrolment and whether they need to take further steps.

The employer’s role may be twofold: that of the employer and that of pension scheme administrator. However, they may, and often will, defer the latter role to a pension company or financial advisor.

Below is a brief description of who is responsible for various aspects of auto-enrolment.

 

1. Employers

Employers have an obligation to provide a suitable pension scheme and contribute to it for all eligible employees unless they have opted out. They must also manage or arrange for someone else to manage the scheme on a day-to-day basis.

 

2. The Pensions Regulator (TPR)

TPR has the role of overseeing schemes and ensuring that employers meet their obligations in running their pension schemes.

 

3. The Financial Conduct Authority (FCA)

The FCA’s role is to regulate most pension schemes offered by employers.

The FCA regulates the marketing and sale of most pension schemes and retains regulatory control of the joining process outside of auto-enrolment. Employers receive communications regarding auto-enrolment from TPR and may receive communication from the FCA regarding the pension scheme they choose or operate.

 

Can the employer use any employer pension scheme for auto-enrolment?

No, while most pension schemes for employers meet the auto-enrolment requirements, not all do. For example, if the only workers for the business are directors the company might not be required to have an auto-enrolment scheme and so an existing pension scheme for directors only might not meet the auto-enrolment requirements. If the business later takes on other employees and wants to use an existing pension scheme it must first:

• ascertain whether it can operate as an auto-enrolment qualifying pension scheme (QPS). The pension company, pension administrator or a financial advisor will be able to help with this; and
• assess whether the existing scheme is suitable for auto-enrolment. For example, while it might be a QPS, its rules might require the employer to pay contributions greater than are required by auto-enrolment/

Employers must be prepared to establish a new pension scheme if the existing one isn’t suitable.

 

What’s my first step in choosing a pension scheme?

An employer must have at least one QPS, which is ready to enrol employees as soon as they have an employee who is eligible for auto-enrolment. They must find a pension provider by themself or with the aid of a pension advisor. All major insurance companies offer schemes which comply with auto-enrolment.

The government-backed National Employment Savings Trust (NEST) pension scheme is a good DIY option and has grown in popularity, especially with small employers. However, it’s worth speaking to a financial advisor specialising in auto-enrolment pensions before making a decision about which scheme to use.

 

What are the basic auto-enrolment duties as an employer?

·         to assess the status of employees for auto-enrolment purposes, i.e. are they eligible to join or not?

·         to make qualifying employees members of a pension scheme

·         to pay contributions for and on behalf of employees

·         to deal with all employee auto-enrolment rights, such as their right to opt out or opt in to the QPS; and

·         to make all reports to TPR as required by legislation.

 

What is the cost of getting things wrong?

Having a suitable pension scheme will keep an employer out of trouble with TPR.

In the first few years of auto-enrolment TPR took a relatively soft approach to employers who didn’t meet their auto-enrolment obligation on time, but this is changing and it’s issuing penalties more frequently.

 

When do penalties apply and how much can they be?

TPR uses information from government agencies such as HMRC to find employers not already on its database. If employers fail to start the auto-enrolment process on time, or subsequently meet their duties, it can fine them. Before it does it will send warning notices which indicate what steps the employer needs to take to avoid a financial penalty. The final warning gives the employer 28 days in which to act. If they don’t respond a fine is likely.

The rate of the fixed fine for initial non-compliance is £400. Thereafter it can escalate to daily penalties depending on the number of employees there are. The minimum is £50 per day if there are up to four workers, and increases to £10,000 per day if there are 500 or more.

 

Overview

What should an employer be doing and when?

Employers who already have employees should already have assessed their auto-enrolment responsibilities. If none of the employees are eligible for auto-enrolment the employer is not required to have a pension scheme in place. However, they must keep the position under review so that if an employee becomes eligible, they’re ready to take the appropriate steps to notify them of their rights and auto-enrol them if necessary. This is also relevant if the employer takes on an employee for the first time.

If the employer employs someone who is between 22 and the state pension age who they expect to pay at the rate of £10,000 or more per year (i.e. £833 per month or £192 per week), one of the first steps is to decide on the level of contributions they want to pay in their role as an employer. They can either pay:

• the minimum pension contributions required by law; or
• a higher or flexible amount.

If the employer is unsure if any of their employees will meet the age or earnings requirements for auto-enrolment, they can leave choosing a pension scheme until after they have “assessed” the employees for eligibility (see below).

Having decided what they’re willing to pay, the next step is to find a suitable pension scheme. There are broadly three options: a financial advisor, a pension company or the National Employment Savings Trust (NEST). Each offers a differing degree of help with auto-enrolment. A financial advisor will probably be happy to take most of the process off the employer’s hands (for a fee, of course), while a pension company will set up a scheme and offer some help and advice. NEST is more of a DIY option, although it provides much of the documentation as well as all the information (via its website) that the employer is likely to need.

After a decision is made on a pension scheme the next step is to assess the workforce, i.e. identify which category workers fall into, e.g. eligible and non-eligible workers, entitled workers.

Employers aren’t limited to one qualifying pension scheme. They could, for example, have one scheme for shop floor workers and one for clerical staff and management. Bear in mind, however, that each additional scheme will increase the amount of administration required.

 

What should the employer do after assessing their employees?

Once the employees have been assessed, the employer will know which auto-enrolment category they fall into and will be ready to start putting the next stage into action. They must:

• within the next six weeks write to each employee telling them whether they are or will be auto-enrolled and explain their rights and the consequences for them of being in or out of auto-enrolment
• within the same six-week period enrol all employees who qualify and make them active members of the chosen workplace pension, unless they opt out; and
• within five months from when they first employed someone send a declaration to TPR giving details of the workplace pension and confirming they have complied with the rules.

The employer continues to have auto-enrolment obligations all the time they have workers, even for those who don’t qualify to join a pension scheme. For example, while a 16-year-old won’t be eligible to join the auto-enrolment workplace pension (because of their age), if they remain in employment they will eventually qualify. It’s easy to see why employers need to continually monitor their workforce because their auto-enrolment entitlements can change, even from one payday to the next.

 

Can auto-enrolment be deferred?

No, but the employer can postpone enrolling an employee in the existing pension scheme for up to three months. They might want to do this, for example, with temporary employees. This can mean that employers avoid having to deal with the admin and the cost of auto-enrolment for workers who are eligible for only a short time.

 

What should an employer do if they are late setting up auto-enrolment?

The employer should contact TPR and let it know and advise it when they expect to be in a position to meet their auto-enrolment obligations.

The employer could contact a pension company or financial advisor to enquire how long it will take to set up a suitable pension scheme. This will allow them to give TPR a reasonably accurate guide to how soon they can comply with the obligations.

Employers should remember that they will be responsible for paying their share of the pension contributions that are in arrears. They might also have to agree to fund arrears of employees’ contributions until the employer can recoup them from their wages.

 

Choosing a pension scheme

In order to fulfil the requirements of auto-enrolment the pension scheme chosen must meet certain standards, which are set out in legislation. Some existing schemes don’t meet the standards, but they may be able to be converted to meet them.

Alternatively, an employer can start a brand-new scheme that does meet the necessary standards. They may need to retain an old scheme for the benefit of employees who have already built up pension rights in it – they should consult a financial advisor or the pension scheme company administrator for advice on this.

 

What’s the position with existing employer’s pension schemes?

If the employer currently operates an employer’s scheme, e.g. a group personal pension, a group stakeholder pension or an occupational money purchase scheme, that they want to use for auto-enrolment, they must assess its suitability as soon as they have workers. The easiest way to do this is by consulting the pension company or scheme administrator.

Where an existing scheme meets auto-enrolment requirements, the employer won’t need to bother enrolling employees that belong to it in a new scheme. However, they will still have an obligation to explain auto-enrolment to all employees.

If the existing pension scheme is compliant with auto-enrolment, but its rules don’t allow for some employees to join, e.g. it isn’t available to junior staff, the employer will need another scheme which all employees can join. Alternatively, they can amend the existing scheme rules to fully meet the auto-enrolment requirements.

 

What type of scheme?

 

Defined benefit schemes

Generally, only the largest employers have defined benefit schemes open to all employees. Many have closed them to future and even current membership due to their high cost.

 

Defined contribution (money purchase schemes)

Most employers with a pension arrangement for their workers use defined contribution schemes. These only require that the employer, and the employee, pay in a specified amount of contributions usually expressed as a percentage of earnings. Employers are not responsible for overseeing how successful or not the pension investment is.

 

National Employment Savings Trust (NEST)

NEST is the government-created auto-enrolment-compliant pension scheme. It’s obliged to accept all applications from employers to use it.

 

What other pension options are available?

Like NEST, some pension companies also have a policy of accepting all applications irrespective of the individual or overall value of contributions. These are usually structured as “master trust” schemes. That means the pension company uses a single type of trust arrangement for all those who join it.

Other pension scheme providers may have business-related criteria such as the minimum number of employees or a minimum annual contribution.

 

What pension scheme charges are payable?

Under auto-enrolment no deductions can be made from an employee’s plan if that deduction is to be paid to a third party, e.g. in the form of a commission or fees payable to a pensions advisor.

Many plans do not make a charge other than the annual management charge (AMC). The government introduced rules to cap AMCs to 0.75% of the pension fund value.

The charge cap covers all member-borne charges and deductions, but excludes transaction costs. There are three permitted charging structures under the charge cap:

a) a single percentage charge - capped at 0.75% of funds under management annually

b) a combination of a percentage charge for new funds when they are contributed to the pot plus an annual percentage charge for funds under management

c) a combination of an annual flat fee plus an annual percentage of funds under management charge.

A few pension companies also levy an administration charge based either on a percentage of contributions or a fixed annual amount. Others levy charges for fund switches and certain administrative tasks. The companies are required to advise employers and employees of all potential charges before they sign on the dotted line.

An employer may have to pay scheme set-up charges. These can vary depending on factors such as the number of employees and the likely amount of contributions.

Charges that may arise include:

• setting up a bespoke scheme;
• setting up a company under an existing scheme, e.g. as offered by an insurance company
• an annual scheme administration charge
• other administrative costs
• auto-enrolment management software and support; and
• advisory charges.

The charges for using NEST are published online.

 

What if the existing scheme is a stakeholder pension?

An existing group stakeholder plan can be the auto-enrolment scheme. A stakeholder scheme where contributions are deducted from employees’ pay (and then paid by the employer to the pension company) can be used for auto-enrolment.

Although no inducement should be made to an employee to opt out or to cease pension scheme membership, employers could offer some incentive to stakeholder-contributing employees to switch to a new scheme in order to close a possibly small stakeholder scheme.

 

Assessing workers

How does the categorisation process work?

Assessing which category workers fall into is another vital job that the employer must undertake as soon as they take on an employee because it determines the auto-enrolment obligations for each worker.

Auto-enrolment categorises employees into four types. This determines, firstly, whether they are entitled to be auto-enrolled in the workplace pension and, secondly, whether or not the employer is obliged to pay contributions into that scheme.

However, before categorising, the employer must decide whether or not they are a “worker” for the purposes of auto-enrolment.

 

Who counts as a worker?

Under auto-enrolment all employees and office holders (broadly that means directors and company secretaries, but subject to special rules) are categorised as workers where they have:

• employment rights, i.e. they are an employee; or
• a contract to perform work or services personally and are not undertaking the work as part of their own business. For example, a self-employed window cleaner or a computer consultant who works through their own company.

As a rule of thumb, if a worker is an employee for tax purposes they count as a worker for auto-enrolment. However, there are special situations such as agency workers.

 

Agency workers:

An agency worker falls under the definition of a worker for auto-enrolment purposes under the second bullet point above as they will provide personal services which are not provided as part of their own business.

if the worker has a contract with the agent (say a recruitment agency) to provide services to a principal, i.e. the person or business they carry out the services for, the agent is responsible for the worker’s auto-enrolment

if the worker has a contract with the principal (instead of the agent) to provide services, the principal is responsible for the worker’s auto-enrolment; and

if there is no contract with either the agent or the principal, whichever is responsible for paying the workers is also responsible for auto-enrolment. If it cannot be determined who is responsible for paying the worker, e.g. if the contract or arrangement between the principal and agent did not specify which, then the one that actually pays the worker will be responsible for auto-enrolment.

 

Seconded workers:

Individuals working on secondment from another company usually remain workers for the company from which they are seconded. As a result, if an employer receives the services of a seconded worker they’re unlikely to have auto-enrolment obligations for that worker, but the employer who provides the worker usually will.

Where an employer provides or uses a seconded worker they should consider the contractual and pay arrangements for them and agree with the other party who is responsible for the worker’s auto-enrolment.

 

Seafarers:

Any person employed or engaged in any capacity on board a ship or hovercraft is to be treated as a worker of the person or business they work for, and they will be responsible for auto-enrolment.

 

Offshore workers:

Offshore workers working in the territorial waters of the UK or in connection with the exploration of the sea bed or subsoil, or the exploitation of their natural resources, in the UK sector of the continental shelf (including the UK sector of a cross-boundary petroleum field) must be assessed for auto-enrolment in the same way as other individuals.

 

What are the categories of worker and what are their auto-enrolment rights?

Where individuals count as workers the rules set out a procedure for categorising them for auto-enrolment purposes. This will determine how auto-enrolment applies to them and whether the employer should include them in the workplace pension scheme. There are two main types of worker: entitled workers and jobholders. The latter is split into two further types: eligible and non-eligible.

 

Type 1 - entitled worker

An entitled worker, i.e. one that’s entitled to be included in a workplace pension scheme, is any individual who:

• is aged between 16 and 74; and
• has earnings at or below the National Insurance lower limit and ordinarily works in the UK.

The employee can join the employer’s workplace pension (by giving the employer a joining notice) and pay contributions at the same rate and same terms as eligible workers. However, the employer is not obliged to pay into the pension.

 

Type 2 - jobholder

A jobholder is defined as a worker who:

•  is aged between 16 and 74
• works under a contract of employment; or
• has a contract to carry out work or provide services personally, which is not as part of their own business. This would, for example, include agency workers. In other words, individuals who are self-employed are excluded; and
• the employer pays qualifying qualify earnings to.

Jobholders fall in two subcategories. We’ve called them Type 2A and Type 2B workers and explained their position below.

 

Type 2A - non-eligible jobholder

A non-eligible jobholder is defined as a worker who is either:

• aged between 16 and 74 and paid earnings between the lower earnings threshold and the amount which TPR calls the “earnings trigger”, which is equivalent to £833 per month for 2020/21 (and probably later years); or
• aged between 16 and 21 or the state pension age and 74 and they are paid earnings which are greater than the earnings trigger (£833 per month for 2020/21, and probably later years).

Non-eligible workers are entitled to join their employer’s pension scheme if they wish by giving their employer an “opt-in” notice. Where the employee opts in they must pay contributions to the pension scheme and so must their employer.

 

Type 2B - eligible jobholder

An eligible jobholder is defined as any individual who:

• is aged between 22 and under state pension age; and
• are paid above the earnings trigger (£833 per month for 2020/21 and probably later years).

Employers must make pension contributions for eligible workers unless the individual opts out of auto-enrolment. The employee must also make contributions unless they have opted out.

The table below summarises the four worker categories based on their earnings.

Earnings - rate of pay	Age (inclusive)
	16 - 21	22 - State pension age	State pension age - 74
Equal or less than the earnings threshold	Entitled workers
More than lower earnings threshold*, but no more than the earnings trigger for automatic enrolment (£10,000 per year, £833 per month)	Non-eligible jobholders
Greater than the earnings trigger for automatic enrolment (£10,000 per year, £833 per month)	Non-eligible jobholders	Eligible jobholders	Non-eligible jobholders

* Earnings above the lower earnings threshold are known as qualifying earnings.

 

The table below summarises when employers and employees have to pay contributions to a workplace pension.

Category of worker	Obligation or right to pay into a workplace pension
	Employer	Employee
Entitled worker	No	No, unless they give their employer a notice to join the workplace pension
Non-eligible worker	Only if they have given an opt-in notice to the employer
Eligible workers	Yes, unless they have opted out of auto-enrolment	Yes, unless they have opted out of auto-enrolment

 

Are there special rules for directors and other officers of a company?

Yes. Directors (including non-executive directors) count as workers if they have an employment contract, sometimes called a service agreement, with their company. However, a director who is the only director of a company with a contract doesn’t count as a worker for auto-enrolment purposes and neither do his or her fellow directors who don’t have contracts.

 

Examples

A company has three directors and no other employees. Only one director has an employment contract. The company and the directors are not within the scope of auto-enrolment.

The same company takes on an employee. The company is now within the scope of auto-enrolment. The company now has auto-enrolment obligations and must determine if the employee qualifies for a workplace pension. It can choose whether or not to include the directors in the pension scheme, but is not obliged to do so.

Another company has three directors, but no other employees. All of them have contracts of employment. The company has auto-enrolment obligations for all three directors.

A company has two directors plus several employees. One director has a contract but the other does not. The company has auto-enrolment obligations for the employees and the director with the contract.

 

Employees: Rights to join, op in and opt out

What’s the difference between opting in and joining a workplace pension?

In essence, entitled workers can join their employer’s workplace pension, while non-eligible workers can opt in. The key difference between joining and opting in is that with entitled workers their employer doesn’t need to pay contributions into the workplace pension, but where a non-eligible worker opts in both employer and employee must pay contributions.

 

When can an employee opt out of a workplace pension?

Eligible employees must be auto-enrolled in a workplace pension unless they opt out. An employee who chooses to opt out can, at any time, change their mind and choose to be included.

Important note. Every three years the employer must offer the opportunity to become a member to employees who aren’t members of a workplace pension because they opted out of it. The employer has a six-month period starting three months before the third anniversary of their auto-enrolment start date in which to review and notify employees who opted out of the chance to opt back in - this is called re-enrolment.

Below is a summary of the circumstances which might apply to workers for joining, opting in and out according to the category they fall into.

 

Eligible workers

Eligible workers have the right to be auto-enrolled in the workplace pension. However, they can choose not to be included (opt out), but they may later choose to opt in. This might happen where, for example, they:

• leave a non-auto-enrolment-related pension scheme, which precluded them from opting in to the employer’s workplace pension; or
• opted out of an auto-enrolment scheme, but change their mind even before the three-year review period is up.

 

Non-eligible jobholders

A non-eligible jobholder has the right to opt in to a pension scheme at any time. They then become entitled to make contributions to the workplace scheme; the employer is also obliged to pay contributions.

When an employer receives an opt-in notice from one of their employees they must then enrol them and pay contributions on the same basis as required as if they had been an eligible worker. The employee must also pay contributions.

 

Can all employees choose to opt out of auto-enrolment?

All eligible employees have the right to opt out except in the rare circumstances that it is a contractual requirement of their employment to belong to their employer’s pension scheme.

Warning. An employer is not allowed to encourage their employees in any way to opt out. If they do TPR has the power to impose stiff fines and won’t hesitate to do so.

 

What’s the position for new workers?

All eligible new workers must be included in the auto-enrolment process. In effect, an employer can’t just assume a new worker doesn’t want to join their scheme just because they have indicated that to be the case. They are obliged to auto-enrol the employees if they categorise them as eligible unless they give the employer an opt-out notice.

As long as an employee gives the opt-out notice within one month of the date that they became an eligible worker, the employer does not have to auto-enrol them.

All contributions (employees’ and employers’) paid to the pension company in the one-month notice period for opting out are refundable, and the employee will be treated as though they had not joined the pension scheme.

 

Can contributions to the workplace pension be varied?

If an auto-enrolment workplace pension is a money purchase scheme, sometimes called a defined contribution scheme (most workplace pensions will be of this type), TPR requires two agreements to be in place.

The first agreement is one between the employer and the pension provider (insurance company) that a legally enforceable minimum contribution will be paid by the employer.

The second agreement is one between the employee and the pension provider that a minimum contribution will be paid by the employee.

An employee who asks to cease their contributions or reduce them below the minimum level agreed at the outset will, in effect, be opting out of the scheme. Therefore, they will not then be entitled to the employer contribution.

On the other hand, if scheme rules permit an employee to reduce or cease contributions, the employer could be compelled to make at least the agreed minimum contributions.

 

Exceptions

What are the exceptions to auto-enrolment duties?

In certain circumstances the employer’s duties in relation to an eligible jobholder, non-eligible jobholder or entitled worker are changed or do not apply. This is the case where the conditions for any of the exceptions from the duties are met. The safeguards continue to apply in relation to the worker as usual.

The exceptions include a worker who:

• has opted out or ceased active membership, e.g. because of retirement, of the workplace pension;
• has given or received notice or of the end of their employment;
• the employer has reasonable grounds to believe is protected from tax charges on their pension savings under HMRC’s primary, enhanced, fixed or individual protection requirements;
• is an officer of the company, e.g. a director, unless they and one or more other directors has an employment contract;
• is a member, i.e. a partner, of a limited liability partnership (LLP), unless they are a salaried partner according to HMRC’s salaried member’s rules;

The employer’s auto-enrolment duties vary according to the exception that applies. For example, in the case of workers who have “pension protection” employers have the choice whether to comply with an auto-enrolment duty or not. In other situations the duty is removed altogether, e.g. where the worker is a partner of an LLP.

 

Postponement or waiting periods

What is auto-enrolment postponement?

An employer can postpone the auto-enrolment of one or more of their employees, but only when one of the following events occurs:

• an employee’s first day of employment with the employer; or
• the day on which an employee first becomes an eligible jobholder.

The period between postponement and when contributions to a workplace pension commences is sometimes referred to as the waiting period.

 

When might postponement be appropriate?

There are practical reasons for postponing. Below is a list of the situations in which an employer might want to use it:

• when enrolling different employee groups, e.g. seasonal staff
• when they want to align workplace pension contributions with payroll dates, say, to avoid part-month contribution calculations
• auto-enrolling very short-term workers
• if an employee becomes an entitled worker shortly before they are due to leave employment; and
• to avoid having to send out auto-enrolment communications to all employees at one time rather than at different dates according to when they joined the workplace pension.

Postponement can be used for specific groups or individuals; it doesn’t have to apply to all workers.

 

How long can an employer postpone auto-enrolment for?

If an employer postpones auto-enrolment for an employee, they must decide how long for - the maximum is three months - and notify the employee in writing of the decision within six weeks.

TPR’s standard letter can be amended and used to tell employees that the employer has postponed auto-enrolment. Further guidance is available here.  

The employer does not need to notify TPR and no other paperwork is required, although they can, of course, keep whatever records of the postponement they wish to.

 

What are the postponement procedures?

Where an employer uses postponement they are required to inform the employees affected. Depending on the circumstances, they must give the employee(s) concerned one of four special notices within six weeks of the date of postponement. The notice must include the “deferred date” which is that on which the employee will be assessed.

 

What happens at the end of the postponement period?

At the end of the postponement period, known as the deferral date, the employer must assess their workers’ status as they would have done on the start date had they not applied postponement.

Example

Acom Ltd employs several temporary staff to cover seasonal increases in business. These employees are paid weekly. Typically, each temporary worker is employed for a total of between six and eight weeks.

Acom wants to avoid the hassle and cost of automatically enrolling the temporary workers and so uses postponement. They choose the maximum three-month postponement period for all the temporary workers. Acom is still required to provide the relevant information about auto-enrolment to the employees affected. Any workers still employed on the deferral date must be assessed and automatically enrolled if they are eligible jobholders.

Note. Those temporary employees who are jobholders can opt in during the postponement period and so be entitled to a contribution to the pension by Acom.