If you are an employer, there is a strong chance that you will have encountered Workplace Pensions (also known as Auto Enrolment Pensions). These are the mandatory pension schemes introduced by the Government in 2012. They have been successful in introducing millions of employees to pension schemes over the last 6 years.
To date, the minimum contributions have been quite modest. Employees have had to contribute 1% of their qualifying earnings (earnings above £5,876 p/a) whilst benefitting from tax relief. Employers have also had to contribute 1%.
However, the contribution rates are increasing. With effect from 6 April 2018, the employer’s contributions will increase to 2%, whilst the employee’s contributions will treble to 3%.
That's not all. In addition, the contribution rates are set to increase again from 6 April 2019. Employers will have to contribute 3% and employees will have to contribute 5%. For employees, that's a five fold increase from current levels.
So far, there have not been many employees who have opted out. This has been heralded as a success of Workplace Pensions. However, it is anticipated that employees may change their minds when the contribution rates rise. Although they will actually benefit from higher employer contributions, they will see a drop in their take home pay from their higher contributions.
The initial letters which you will have sent out should have highlighted the fact that contributions would increase. However, it would be a good idea to remind employees of this fact. This would allow them to take action sooner rather than later.
We have done a lot of work over the last 6 months in respect of Auto Enrolment (also known as Workplace Pensions), predominantly in (a) how it affects our clients, and (b) what service we can provide to our clients. Whilst Auto Enrolment started in 2012, the initial focus was on large employers. However, it will start to affect employers with less than 50 employees from this month:
One area which has attracted a lot of attention, particularly as the focus shifts from large employers to small employers, is the situation regarding small limited companies where the only people working for the company are directors.
The key concept behind Auto Enrolment, as the name suggests, is that employers MUST set up a pension scheme for their employees who qualify, and MUST automatically enrol those employees into the scheme. If the employees then decide they wish to opt out, that is their decision, not the companies. Indeed, it is illegal to try and persuade qualifying employees from not wishing to join a scheme.
However, this is a bit ridiculous where the only employee is a director. In those circumstances, if a director wants his company to pay into a pension scheme for him, then he would simply set up a pension scheme. If he doesn’t, then it would be very onerous to set up a scheme which isn’t required.
Therefore, the Pensions Regulator has created a simplified procedure if:
Essentially, if the company considers that it does not have any employees who could potentially ask for a pension under Auto Enrolment, and it wishes to avoid the scenario of setting up a pension which will not be used, it can simply send an email to the Pensions Regulator confirming that it doesn’t qualify. Of course, if the company’s circumstances change in the future, it will have to let the Pensions Regulator know.
Further details, including an email template to send to the Pensions Regulator, can be found here. If you need help, please get in touch.
