Pensions and auto-enrolment

Workplace pensions

Following the introduction of the 2008 Pensions Act, all businesses with at least one eligible member of staff must operate a workplace pension scheme. Workplace pensions are regulated and protected by The Pensions Regulator which is part of the UK Government.

Automatic enrolment was introduced as part of the Act and requires (almost) all staff to be enrolled in the workplace pension scheme and contribute towards it. Since that date the mandatory minimum contributions have been increasing slowly and as of 2022, the total that must be contributed is 8%, of which 5% must come from the employee and 3% from the employer. Employers and employees are of course free to contribute more but may not contribute less.

Eligibility / opt-out

Not all staff members will be eligible for auto-enrolment, and not all may wish to be part of the pension scheme. Eligibility is based on a number of changing criteria set out by HMRC which should be regularly reviewed to ensure compliance. Broadly the two main reasons for ineligibility would be an employee being below the mandatory auto-enrolment age, or an employee having an insufficient level of earnings.

All staff that meet the criteria must initially be auto-enrolled. Everyone has the option to voluntarily “opt-out”, however even if they express this wish when they start at the business, they must still initially be added to the scheme and then subsequently removed upon request.

As an employer you must not encourage employees to opt out of the workplace pension scheme and you may not dismiss or discriminate against them for participating.

Pension contributions – employer perspective

The basic cost of employing a staff member will be their agreed gross salary, plus the prevailing rate of Employer’s National Insurance, plus at least 3% for the mandatory minimum that employers must pay into the workplace pension scheme. Many employers will offer a higher percentage contribution, particularly to senior staff, as an incentive to entice them to work for their business over a competitor.

Pension contributions are handled via payroll with payments due to the pension provider monthly. It is therefore much like paying PAYE and National Insurance contributions to HMRC and your payroll software will calculate the liability to be paid.

Pension contributions – employee perspective

Many employers will operate a “salary sacrifice” scheme which (usually) enhances the amount of money that goes into their staff pension pots. The concept is simple – the employee agrees an amount to pay each month and the employer also puts in the agreed amount, however because under the salary sacrifice scheme the employer does not have to pay National Insurance on the employee’s pension contribution, that saving is usually added to the pension pot. This means that the employee’s contribution is enhanced by an additional amount equal to their contribution multiplied by the rate of Employer’s National Insurance. This will be a significant increase to the pension pot over time and is well worth having.

The downside to contributing in this way is that the employee’s salary for the purposes of assessing things like life insurance or mortgage applications is reduced by the amount of the pension contributions. For example, if an employee earns £30,000 and pays 5% into their pension under a salary sacrifice scheme, their earnings for a mortgage application would be assessed as £28,500 (£30,000 less 5%). For many people this ‘downside’ is not a deal breaker and they can contribute under salary sacrifice to receive the uplifted contribution, but for some it will be best not to contribute this way.

Pension scheme re-enrolment

Following the initial assessment of which staff are eligible to enrol in the pension scheme, any ineligible staff or those that have opted out should be recorded and must be considered for re-enrolment after a period of three years.

At the appropriate time, each staff member must be reassessed against the current eligibility criteria for workplace pensions and re-enrolled if the requirements are met. They may choose to opt-out again but they can only do this once re-enrolled.

Where staff are initially below the minimum eligible age or earnings but then cross the threshold they can request to be enrolled in the scheme. They can actually request to be enrolled at any age or earnings level, however the employer is not required by law to make any contributions until they reach the eligibility criteria.

Compliance

In order to demonstrate compliance with their legal duties, an employer must complete a ‘declaration of compliance’ for auto-enrolment. This can be done online by following the checklist provided by The Pensions Regulator.

Following this initial declaration, a re-declaration of compliance is required every three years. A very similar checklist provides guidance on how to complete the declaration.