What is auto enrolment?
Legislation came into force on 30 June 2012 that will eventually require all employers in the United Kingdom to automatically enrol eligible jobholders in a pension scheme. Automatic enrolment commenced on 1 October 2012 and the new employer duties are being staged month by month over a five-and-a-half-year period, ending this year.
Employers can use an existing or new occupational pension scheme or personal pension scheme, provided the scheme meets certain statutory requirements. These are known as “qualifying schemes.” Alternatively, employers may enrol eligible jobholders in a NEST pension which is a central scheme set up by the Government. Once enrolled, employers will be required to pay a minimum level of pension contribution into the scheme. Eligible jobholders will be able to opt out of the scheme. Although employers must automatically re-enrol any eligible jobholders who are not active members every three years.
In determining who is an eligible jobholder, employers can broadly categorise their employees into the following three categories:
- Eligible Jobholders: those aged 22 to state pension age who earn over £10,000. Eligible jobholders will be automatically enrolled;
- Non Eligible Jobholders: those who are aged 16 to 21 years and £10,000 or more, those who are aged state pension age to 74 year olds and earn more than £10,000, and those who earn over £5,284 up to £10,000 and are aged 16 to 74 years. Non Eligible Jobholders will not be automatically enrolled into their workplace pension scheme, but can ask to join; and
- Entitled Workers: Those who earn less than or equal to £5,284 and are aged 16 to 74 years. Entitled Workers will not be automatically enrolled into their workplace pension scheme but can apply to join a company pension scheme.
Employers can defer automatic enrolment eligible jobholders by up to three months from their staging date (the “Postponement Period”). This postponement allows employers to avoid automatic enrolment of individuals who are only likely to be employed for a short period of time. This is particularly beneficial for businesses within the sector, who take on temporary employees during peak seasons. Employers should however be advised that during the Postponement Period, an eligible jobholder will be entitled to voluntarily opt in to the employers scheme.
The sector has high youth employment. Specifically, 34% of the workforce is under the age of 25. From these statistics we cannot comment precisely which category these employees fall within, it is likely that a significant number may be classed as eligible job holders.
In December 2016 the Department for Working Pensions announced that it will be undertaking a review of auto-enrolment throughout 2017. The review is said to be covering various topics which include a review of auto-enrolment coverage and the needs of those not currently benefitting, for example, employees with multiple jobs and those who do not meet the criteria for auto-enrolment in any single job. This particularly relevant to the sector given that many employees work part-time or second jobs.
With regards to compliance, employers must ensure they are prepared for their staging date and have made necessary arrangements with their scheme provider. Additionally, employers must ensure that the minimum contributions are being made. Under a defined contribution scheme, this will be a minimum of 3% of the eligible jobholders qualifying earnings into the scheme each year. The overall contributions to a DC scheme must be no less than 8% of the jobholder’s qualifying earnings (meaning that jobholders will be required to contribute 5% of their qualifying earnings). For employers that use a defined benefit scheme, they must ensure the benefits provided by the scheme meet certain minimum criteria.
The sector traditionally has a high turnover. Employers must continually assess whether the individuals they engage are workers and continue to make assessments of who within their workforce is eligible for auto-enrolment. This can be a complex task for employers who engage with individuals that are low earners on short-term contracts.
For more information contact our employment team on 0345 070 6000.