Plan well ahead to manage auto-enrollmentOriginally published: April 2017 | Last reviewed: May 2018
If you're starting up a new organisation or considering taking on your first employees, do you know what to do about their pensions?
In the UK all employers — including nonprofits — must now automatically enroll their employees into a workplace pension scheme, unless employees opt out. This includes every employee age 22 or older who earns a yearly salary of £10,000 or more. And it includes part-time, fixed term and agency staff.
The new requirement to factor in employer contributions has had a big impact on charities, many of whom have had to restructure, dig into reserves or raise additional funding to ensure they'll be able to meet these increased costs. If you're just starting out, you'll need to know your responsibilities.
Know which employees are eligible
Employees — including contractors, agency staff and apprentices — are eligible for auto-enrollment if they meet the following criteria:
- Earn more than the current minimum wage
- Are between age 22 and the state pension age
- Work in the UK
Volunteers and unpaid staff aren't eligible.
Follow the essential steps
Failing to set up and contribute to workplace pensions can lead to steep fines. To avoid these, be sure to register with the Pensions Regulator. (Make sure you have your PAYE reference number to hand.) This will help you understand what you need to do — and by when.
In general, you'll need to:
- Provide a pension scheme
- Enroll workers into the scheme
- Educate workers about the scheme
- Pay your contributions
Your minimum contributions
Employers must pay a minimum of 2 percent of an employee's qualifying earnings until 6 April 2019, and after that, 3 percent.
Qualifying earnings are defined as earnings above a certain threshold, which may vary. In the 2018/19 tax year, the threshold was £6,032 — so you pay the 2 percent of anything earned above that amount, up to £46,350.
Choose the right pension provider
NEST, or the National Employment Savings Trust, is the workplace pension set up by the government, but there are many others. Shop around for the one that best suits your needs. Anjelica Finnegan of the Charity Finance Group (CFG) suggests considering the following factors:
- Tax treatment. Different schemes apply different tax relief arrangements: either relief at source or net pay arrangement. Check which is best for your staff.
- Investment options. Look for investment options that fit the needs of your staff and your organisation, including ethical options that align with your organisation's charitable objectives.
- Compatibility with payroll software. If you use payroll software, check if it's suitable for automatic enrollment and if it'll work with your desired pension scheme.
- Additional services. Extra services — such as working out who needs to be included in the scheme, processing requests to join the scheme or communicating with individual staff members — may be available. Weigh costs against such services, which may make automatic enrollment easier in the long run.
Manage employee opt-outs
Employees are free to turn down a workplace pension, as long as they opt out within one month of being enrolled. If this happens, you'll need to deduct the first pension contribution from the employee's earnings and make the refund within one month of receiving the opt-out notice (or on your first payday following this one-month period). Employees who leave the scheme can opt back in later if they wish.
Note that it's illegal to encourage employees to opt out of a workplace pension. Employers aren't obliged to contribute to another scheme, however, should an employee decide to open his or her pension elsewhere.
Responsibilities to other staff
Writing in the Guardian, Claudia Cahalane explains: "Employees who earn less than £10,000 can still ask to be enrolled in the firm's pension scheme, and employers must comply. But they do not have to contribute if the staff member earns less than £5,824 [the lower limit at the time of writing] — although, again, they can choose to do so."
Watch out for freelance workers and casual or temporary staff, too. This can be a "grey area," writes Cahalane. In general, those with a contract who aren't self-employed but earn more than £833 per month should be enrolled.
Ongoing pensions management
Once you've set up your pension scheme, be aware of your ongoing responsibilities. For example, you'll need to:
- Deduct contributions from employee pay
- Assess new employees when they start work and enroll them as necessary
- Assess any existing employees who become old enough or start earning enough to require enrollment
- Keep all employee records up to date, including birth dates, salaries and national insurance numbers
- Continue to communicate appropriately with all employees about their pensions, including any changes to their policy (such as switching to a different provider)
- Process any requests to opt out (noting that you'll need to go through the auto-enrollment process every three years, since anyone who has opted out but remains eligible will be re-enrolled by default — but then may opt out again if they wish)
- Ensure pensions are part of your long-term financial planning (bearing in mind that the government may well increase employers' minimum contributions in the future)
Get fully informed
This article draws on the expertise of YourPeople, a UK-based firm that provides outsourced human resources services across all sectors.