Thomas Westcott Financial Planning

Auto-enrolment is the new duty on all UK employers to make a minimum contribution into a qualifying pension scheme for all workers who meet specific age and earnings criteria. If you own or run a business, you will need to ensure all eligible workers are enrolled into a qualifying scheme automatically from your staging date. All employers have been issued with a staging date and have a compulsory obligation to be auto-enrolment ready by this date, or face the prospect of penalties, escalating fines, inspection of business premises and potentially even prosecution by The Pension Regulator (TPR).

I run a business; when will auto-enrolment affect me?

The largest companies have already transitioned into auto-enrolment, with the next wave of responsibility falling onto medium sized companies from early 2014, and smaller companies gradually being phased in up until 2017. If you are an employer, you should have already received a letter advising you of your staging date, however if not, you can find this out by going to www.thepensionregulator.gov.uk and entering your company's PAYE reference.

It is a common misconception among SMEs in particular that auto-enrolment will not affect them, or that they can put off preparing for auto-enrolment until closer to the staging date.

Shocking statistics recently reported in the press indicate that almost one third of SMEs are unprepared. The mistaken belief by some employers that their auto-enrolment responsibilities are optional could lead to serious financial problems later on, and the timescale required to put the necessary arrangements in place is frequently underestimated.

What happens if I don't comply?

The repercussions of neglecting to arrange a suitable qualifying scheme can be severe and The Pensions Regulator (TPR) is taking a hard line stance against employers who do not comply.

Bill Galvin, Chief Executive of the TPR has stated that "for those employers that do not engage, we want to make it clear there are consequences. We'll apply the law fairly and where we find consistent or wilful non-compliance we will use our powers, so employees do not miss out on contributions they are due".

Where the TPR decide that an employer has intentionally and persistently not complied, the employer will be issued with a fixed penalty of £400, plus an escalating penalty at a daily rate. For employers of 50 to 249 employees, this is £2,500 per day, decreasing to £500 per day for businesses with 5 to 49 employees, and £50 per day of those companies employing less than 5 workers. If these penalties prove unsuccessful in enforcing an employer's auto-enrolment responsibilities, the consequences can even be as serious as prosecution.

These escalating daily penalties are specifically set at a level to fine an employer the cash flow benefit they are getting by not complying.

How long will it take to get ready for auto-enrolment?

Auto-enrolment is mandatory from an employer's staging date and so it is imperative that employers take this responsibly seriously and take action early on. The Pension Regulator (TPR) recommends that employers start to prepare for their responsibilities 12 -18 months before the staging date. Whilst many employers may feel this to be a little over zealous, the majority of private schemes specify a lead in time of around 6 to 9 months. Employers seeking to meet their obligations with a few months to go until their staging date are likely to face significant disappointment.

I have a scheme in place already

Employers who have a scheme in place already are often shocked to hear that this alone is not sufficient to ensure compliance. All schemes must meet the auto-enrolment qualifying criteria in order to be deemed compliant. Among other criteria, this means having a default investment option and not requiring employees to complete an application form. All employers should check with their existing provider at least 6 months before their staging date to ensure their current scheme can be converted into an auto-enrolment ready solution.

Who do I have to automatically enrol?

Employers will have different duties depending on the types of worker they employ. Automatic-enrolment requires the employer to split all UK employed workers into 3 categories: Entitled Workers, Non-eligible Jobholders and Eligible Jobholders. Whilst only Eligible Jobholders must be automatically enrolled, the employer will still need to meet certain responsibilities for both Non-eligible Jobholders and Entitled Workers.

How much are the contributions?

Employers are only required to partially meet the total minimum contributions, with the workers and tax relief making up the shortfall. Minimum contribution levels will be phased in, starting from the staging date and increasing each year until 2018.

Provided the minimum criteria have been met, employers have discretion to choose the type of arrangement they put in place, and the level of contributions they pay.

Employers wishing to make the minimum contributions only can base these on 'Qualifying Earnings'; this is a percentage of earnings between a set band. For 2013/14 this Qualifying Earnings band is £5,668 and £41,450. This provides the lowest cost solution in terms of contributions, with total minimum contributions as follows:

DateTotal must be at leastEmployer must contributeMaximum required by worker (including tax relief)
Staging date to September 20172%1%1%
October 2017 to September 20185%2%3%
October 2018 onwards8%3%5%

An employer can exceed the minimum if they choose to, which in turn means a lower minimum payment for the employee.

Another option available to employers is use Certification. This more generous option involves basing contributions on either 'all earnings' or 'pensionable salary'; there is no band and the contributions are based on the first pound of earnings upwards. There are numerous options available, the most popular being phased contributions working up to 7% of total earnings, with 3% being met by the employer and the remaining 4% being made up of worker contributions and tax relief.

Employers can also split the workforce and arrange a different contribution level or basis for different workers if they choose to.

How much will this cost the business?

For an employer wishing to transition into auto-enrolment on the lowest cost basis, it is likely that contributions would be based on Qualifying Earnings. As contributions are based on earnings between a set band only, the maximum amount of contribution is capped.

In addition to the contributions themselves, employers should also factor in the associated administrative costs of arranging and managing the scheme.

How will the company pay for this?

Recent research from Institute of Directors (IoD) revealed that 42% of employers said they would meet contributions from profits and 21% of employers would freeze or cut salaries. Whilst the initial panic response may be to cut the existing work force's pay or benefits to help meet the additional costs, employers are strongly advised to seek legal advice before proceeding with this approach. Any employer wishing to make any changes to an employee's existing arrangements, be it salary, existing pension contributions or other benefits, must follow a consultation process with the employee. Failure to adhere to these rules could result in significant legal issues for the employer.

What if employees don't want to join?

Whilst these new rules are mandatory for all employers, workers can choose to opt out if they wish. Opting out is only permitted after the worker has initially been automatically enrolled into the scheme and the employer must still automatically enrol all eligible workers, even if they have specified they do not wish to join.

The onus is therefore very much on the worker to opt out and the employer is not permitted to handle any of the opting out administration, nor provide the opt out forms directly to the worker. In addition, the worker cannot be coerced or incentivised by the employer to opt out of an auto-enrolment pension under any circumstances.

The TPR is providing a confidential whistle blowing facility to enable workers to report non-compliant employers and will actively encourage workers to report such employers.

How can we help you?

Implementing a new compliant scheme, or ensuring that an existing scheme complies with the new roles, can be a complicated and confusing process.

Thomas Westcott provides an integrated service solution for employers, including a range of options from support, guidance and presenting you with your options, to establishing a new scheme and arranging payroll.

We can analyse your workforce and provide a breakdown of your employer responsibilities for each category, and we can provide a full cost analysis and breakdown to clearly identify the total cost of contributions each year. We can also put the necessary infrastructure in place to administer the scheme going forward.

Our aim is to ensure that you understand the key requirements for your business, and that you have the necessary arrangements in place in time.

To arrange an initial no-obligation consultation contact Rachel Allen or Iain Andrews on 01392 288550 or by email at This email address is being protected from spambots. You need JavaScript enabled to view it.

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