Are Companies Sleepwalking Into Pension Auto Enrolment?
The other day I co-presented a seminar at the Biopark in Welwyn Garden City, in conjunction with Beechwood Financial Services in an event organised by Welwyn & Hatfield Chamber of Commerce. The subject of the evening was pension auto enrolment and how it will affect smaller businesses from 30 June next year.
Awareness about pension auto enrolment still seems to be very low, despite a long running Government campaign to raise its profile, using celebrities such as Karren Brady. Pension auto enrolment has been in force since 2012 but only for bigger companies. From next June smaller companies of under 50 employees will be required, depending upon their PAYE reference numbers, to introduce a pension scheme which will automatically enrol employees into it. There are significant penalties for those employers who fail to comply.
The reason for this is that, as we all know, very few of us are making adequate provision for our old age. Consequently the Government has introduced this scheme whereby employers will be required to contribute to their employee’s pensions and, unless they opt out, employees will also have to pay something in towards their retirement. There is currently a sliding scale of contributions which starts at mutual contributions of 1%, rising to 3% from the employer and 5% from the employee by 2018. However, nothing is ever that simple and the administration of these schemes will prove to be a challenge for smaller employers. Not all employees will be automatically eligible, although the vast majority will be. The scheme depends upon a person’s age and also their earnings and those on the very lowest earnings, below £10,000 per annum, will not automatically need to be enrolled. However, for most employees earning above that figure between the ages of 22 and State Pension age will have to be enrolled. For those who refuse, they are able to opt out, but must be re-enrolled once every 3 years. Even if a business has a current pension scheme, that may well not be compliant with the terms of pension auto enrolment and the employer may need to set up another scheme which is compliant.
From the point of view of small businesses, difficulties are going to arise particularly in relation to those employees on variable earnings who may go above the minimum threshold one month and then be below it the next. Employees on zero hours contracts are a good example of this. Employers will need to constantly monitor their employees’ earnings to ensure that they do not fall foul of the penalties under the scheme.
A significant number of employers we come across often provide their employees with contracts of employment that state that they will pay a certain percentage of earnings into a pension scheme of the employee’s choice. That will usually be a contractual commitment, which means that those employers face the potentially difficult task now of either having to amend those contracts or having to pay double by paying not only the pension contribution they have contractually agreed to provide, but also having to pay a contribution under pension auto enrolment. In other words, there is a double whammy in those situations.
One man band businesses i.e. those that are owner managed and run, are not required to enter into the scheme, but as soon as they employ one or more people they will be required to do so. To find out when your business will be brought into the scheme you need to find your staging date and that is a date linked to your PAYE reference number. The simplest way to find it out is to go to the very useful site of the Pension Regulator at www.thepensionsregulator.gov.uk. That will provide a link to your staging date and also other useful information regarding the scheme.
If you would like further information on pension auto enrolment and your obligations as an employer please do not hesitate to contact us.
Michael Scutt - Employment Law