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Automatic enrolment for workplace pension schemes came into effect in 2012 to encourage more people to save for their retirement. It is intended to ensure that employers establish pension schemes for their employees, thereby encouraging more people to save for their retirement.
Using the idea of automatic enrolment as a basis for setting up such schemes typically results in far higher participation rates than when individuals are left to opt-in to schemes voluntarily. This means that more employees than ever are making proper provision for having a work-based pension.
While staff may be automatically enrolled, there is significant work for employers in dealing with automatic enrolment. For many employers, particularly small and micro employers, the introduction of automatic enrolment can be a challenging process.
How to choose a scheme
Employers who do not have a pension scheme or want to change from an existing scheme will need to find a suitable provider. Proper due diligence should be used to ensure that any scheme providers identified are well run and meet all the necessary legal requirements.
The Pensions Regulator (the public body that protects workplace pensions in the UK) has identified a number of pension schemes that are open to small employers.
The following are some points the Pensions Regulator suggest should be considered when choosing a pension scheme for your employees:
- The pension scheme you use for automatic enrolment must meet certain rules, for example it must not require staff to do anything to join the scheme or to choose their own investments.
- Some schemes may only accept employers with a minimum number of staff or who have staff that earn a certain amount. Check if you can use the scheme for all your staff.
- The type of scheme most likely to be available to you is one run by a large, specialist provider that is designed for many different employers to use. These generally cost less and require employers to do less, compared to other schemes.
- Check if the scheme is either regulated by the Financial Conduct Authority or has been independently reviewed to help the provider show that they meet a good standard of administration (known as 'master trust assurance')
It is also important to understand how much the pension scheme will charge the employer and the employee. For example, some pension schemes charge an ongoing monthly charge or a one-off up-front charge for the life of the pension scheme. Employees signed up to a pension scheme will also face costs to cover the cost of managing their pension savings.
Contributions for automatic enrolment
Under the automatic enrolment rules the employer and the Government also add money into the pension scheme. There are minimum contributions that must be made by employers and employees.
Both the employer and employee need to contribute. There is a minimum employer contribution currently in 2021-22 of 3% and employee contribution of 4%. This means that contributions in total will be a minimum of 8%: 3% from the employer, 4% from the employee and an additional 1% tax relief. The contributions are based on qualifying earnings brackets that change each tax year.
Employers are required to enrol all employees that:
- Are not already in a scheme;
- Are aged between 22 and the State Pension age;
- Earn more than £10,000 a year; and
- Work in the UK.
There are special rules for employees earning less than the minimum earning threshold and those aged under 22 who wish to join the scheme. Employers (or the pension provider) will need to be careful to ensure that proper monitoring is in place to ensure that those eligible are included within a pension scheme.
Employees can opt out of joining a pension scheme if they so wish but cannot be encouraged to do so.