Auto-enrolment began in October 2012 for the largest employers and is now a legal requirement that all UK employees are included or opted out. By April 2017, all employers will be required to auto enroll their employees into a qualifying pension scheme, with individuals then having one month to “opt out”.
A large number of the working population in the UK are not saving enough for retirement or taking advantage of private pension schemes that may be on offer. As people are living longer, with an increasing proportion of people of retirement age compared to those of working age, auto-enrolment is a Government initiative to increase private retirement savings and reduce reliance on the State.
Employers will have to auto enroll any eligible employee. An eligible employee is anyone aged between 22 and State pension age, whose earnings are over the income tax personal allowance.
If an employee aged between 16 and 22, or over the State pension age but under 75 and wants to opt in, then an employer will have to contribute if they earn more than the personal allowance threshold.
If an employee earns less than the personal allowance, they can still opt in, but the employer does not have to contribute.
The statutory minimum contribution will be 8% of band earnings of which the employer must pay a minimum of 3%.
Many existing schemes will have contributions based on a different measurement of earnings. In addition, certain existing schemes cannot undertake auto-enrolment. The Department of Work and Pensions uses a three-tier test and as long as the employer can meet one of the three tiers, the employer will be able to certify they meet the requirements. The three tiers are:
- Tier 1 – 9% of pensionable earnings (including 4% employer) where no reference to overtime or bonus is needed – i.e. base salary only
- Tier 2 – 8% of pensionable earnings (including 3% from the employer) providing pensionable earnings constitute at least 85% of total earnings
- Tier 3 – 7% of total earnings (including 3% employer), where 100% of earnings must be pensionable
You may decide to close your current scheme, however before you do, you must check the contractual rights of your employees and go through a consultation process with them.
Holden & Partners can assist you in establishing a scheme that meets the requirements, or adapt your current arrangement.