By Jonquil Lowe, Lecturer in personal Finance at The Open University
Automatic enrolment is a government policy to improve the nation’s saving for retirement. To overcome people’s tendency to put off saving and confusion about pension choices, the Pensions Act 2008 makes employers responsible for automatically enrolling most of their employees into a suitable workplace pension scheme and paying towards their pension.
The policy started in October 2012 with large employers and is now trickling down to employers with 60 or fewer employees. You can check the date that applies to you by using the Pensions Regulator’s interactive tool at www.thepensionsregulator.gov.uk/employers/what-is-my-staging-date.aspx. You will need your PAYE reference.
Unlike previous pension legislation, there is no exception for small employers — if you have even just one employee, you will have to comply. (However, one-person owner-director firms are excused.)
Unsurprisingly, small and medium-sized employers, already coping with a myriad of regulations and acting as unpaid collectors of VAT and PAYE taxes, are less than impressed. In a 2010 government report, a Midlands manufacturer voiced a common view: ‘I don’t consider that our function is collecting taxes and I don’t consider our function is providing pensions. Our function is to employ people to manufacture parts, which we sell. That is what we are here for.’
So what are your obligations as an employer? Briefly, you will need to:
• Check whether you have any workers who are covered by the new automatic enrolment rules. They are:
o Employees aged 22 to state pension age who earn £10,000 a year or more (in 2014-15). You must automatically enrol them into your workplace pension scheme and pay contributions for them. Employees have the right to opt out, but you’ll need to repeat the automatic enrolment process every three years
o Employees aged 22 to state pension age earning £5,772 to £10,000, or aged 16 to 74 and earning at least £5,772. You don’t automatically enrol these workers but they can choose to opt into the scheme, in which case you must pay contributions for them
o Employees aged 16 to 74 earning less than £5,772. They can ask to be enrolled into a pension, but it doesn’t have to be the automatic enrolment scheme and you don’t have to pay any contributions.
• Offer a suitable pension scheme through your workplace. If you already have a scheme, you’ll need to check it meets minimum standards. If you don’t, you’ll need to sort one out.
• Adjust your payroll systems to collect pension contributions from your employees’ pay and pass them through to the pension scheme along with your contributions.
• Send written information to your employees according to a set timetable.
There are full details of what you need to do on the Pensions Regulator’s website at www.thepensionsregulator.gov.uk/doc-library/automatic-enrolment-detailed-guidance.aspx.
The table shows the amount you’ll need to contribute on behalf of your eligible employees. You are responsible for paying in the total shown in the second column. But you ask your employees to contribute part, reducing what you pay to no less than the percentage in the third column.
For example, in 2014-15, if you have an employee earning £10,000 a year, the maximum you’d have to pay would be (£10,000 - £5,772) x 2% = £84.56 a year or £7.05 a month. If you arrange for your employee to pay their full share, the cost to you falls to £3.52 a month.
How much you’ll have to pay*
Date Total that must be paid in Minimum you as an employer must pay
Oct ‘12-Sept ’17
Total that must be paid in - 2% Minimum an employer must pay - 1%
Oct ’17-Sept ’18
Total that must be paid in - 5% Minimum an employer must pay - 2%
Oct 2018 onwards
Total that must be paid in - 8% Minimum an employer must pay - 3%
*As a percentage of earnings between £5,772 and £41,865 (2014-15 limits)
The contributions start at a low level and only reach the full 8 per cent total contribution from October 2018 onwards to give both employers and employees time to adjust to the cost.
Even by 2018, the total contributions are modest — and arguably insufficient to solve the nation’s under-saving problem. The greater burden especially for small employers is likely to be the administration involved. On the plus side, providing your employees with a pension scheme just might help you to recruit and retain good staff.