SMEs can learn the lessons of big businesses when embarking on pension auto-enrolment, says Graham Vidler, director of external affairs at the National Association of Pension Funds.
Automatic enrolment (AE) has changed the UK workplace forever. It is a major reform that will bring millions of people into employer-sponsored pension schemes and will require employers, and most employees, to save into a pension scheme.
The date employers must start to enrol employees is determined by the number of employees on the organisation's tax record at April 1, 2012. Employers set up since April 2012 will be required to start enrolling from May 2017. The Pensions Regulator will write to every employer, twelve months and three months before that employer's start date.
So far, more than five million employees have been automatically enrolled under the new legislation, but from June 1, 2015, it will be the turn of businesses with fewer than 50 employees to start enrolling staff into a workplace pension scheme, and it's important these employers know what is required of them by law.
Whether or not a business already offers a workplace pension scheme, it's important to be familiar with the minimum requirements for automatic enrolment.
Unlike the largest organisations, SMEs are less likely to have access to in-house pensions support to guide them through the administrative processes, which can be quite complex if it's the employer's first encounter with the workplace pension provision.
Thankfully, AE began with the largest employers, who have tried and tested the system and have some important lessons to impart.
The NAPF conducted research among some of the largest employers, Automatic enrolment: One year on, to explore the experiences of starting AE and to hear what employees who have been automatically enrolled think of their new pension rights.
Over the next few months The Pensions Regulator will be writing to more than 1.5 million addresses across the UK so that by the summer, employers should not be in any doubt about their duty to enrol employees into a workplace pension. This communication will be in addition to the normal 12 months advance warning the regulator already undertakes to provide to every employer prior to their staging date.
It's really important employers don't overlook the requirements as The Pensions Regulator can issue a penalty notice if it considers there has been a deliberate attempt to ignore the workplace pension saving rules.
Explaining to employees how pension saving will work is an important part of AE. In response to NAPF research, larger employers who had already begun the AE process suggested there was a link between good communications and low opt-out rates. Employees knew what was happening and were expecting to see the money taken out of their pay packets. Good communications can reduce costs for employers. A major concern of several of the research interviewees was that considerable resources would have to be diverted to answer queries about AE. Clear communications are an effective way of addressing those questions early and reducing the number of people needed on a helpline.
Communications have to be done in prescribed formats and signposting employees to informations on a website or a poster in the workplace is not allowed. Employees must give their employees “written” information, which means paper or email, and they can choose to give each employee a hard copy, delivered by hand or in the post, or send an email to the employee's email address. Separate communications may be needed for each scheme and if you use different types of schemes there may be additional requirements.
For some employees AE might be the first time they have ever saved for their retirement in a workplace pension scheme.
Under the new requirements, eligible employees who do not opt-out will be expected to contribute a percentage out of their pay packet each month, which is added to a contribution from the employer. NAPF research found many workers wanted to save but did not know where to start. The AE reforms are designed to harness this inertia and kick start the savings habit. Our survey asked employees whether it was a relief to finally be saving for a pension – 69 per cent said yes.
|Employer minimum contribution||Total minimum contribution|
|Before 30 Sept 2017||1.00%||2% (including 1% staff contribution)|
|1 Oct 2017 – 30 Sept 2018||2.00%||5% (including 3% staff contribution)|
|1 Oct 2018 onwards||3.00%||8% (including 5% staff contribution)|
Minimum contribution amounts (The Pensions Regulator)
AE offers the greatest chance of getting people into the habit of saving for their retirement, and so far more than five million people automatically enrolled into a workplace pension scheme in the UK, which is fantastic news. Their employers have taken the opportunity to breathe new life into their pension arrangements and employees have been overwhelmingly supportive, with opt-out rates much lower than we expected. But for SMEs just embarking on the process, the hardest part is yet to come.
For SMEs automatic enrolment may seem daunting, but there are lots of sources of help and information. Full details on AE, including a planning tool, can be found on The Pensions Regulator's website. The NAPF also has a suite of materials on its website, including a forum to share experiences with other employers or ask questions. And for employers looking to find out more information about choosing a good pension scheme there is help at hand on the PQM website.
Employers must choose the pension scheme they want to use. Existing schemes can be used but all schemes have to comply with certain conditions. For many SMEs, joining a master trust will be the best option for AE. Master trusts allow employers to delegate some of their responsibility for managing the scheme. Employers who are very engaged with pensions may still want to establish their own scheme but, if they choose to do so, they will also take on more responsibility for its management.
The government has set up the National Employment Savings Trust (NEST), a pension scheme employers can use to enrol their employees. Other providers are also available. NEST is one of the schemes that have achieved the Pension Quality Mark (PQM) Ready accreditation. Ready schemes have been independently verified as having good governance, low charges and clear member communications, so employers choosing one of these schemes can be assured they are selecting a good quality scheme for their employees.
There are particular rules employers must follow when deducting contributions and paying them to the chosen pension scheme. Employers must also meet the requirements for record-keeping and will have to register with The Pensions Regulator once the enrolment of employees is complete.
Some SMEs may already offer a workplace pension scheme, but for many firms this will be the first time, and it can feel daunting.
Employers need to assess their workforce to see who has to be enrolled automatically and who does not – not all employees have to be as some are exempt or only have the right to ask to join.
Each employee will fall into one of three categories, according to age and specific earnings as not all earnings count. If the employer uses an existing pension scheme, active members of that scheme need to be categorised as they must receive certain information.
All eligible employees must be automatically enrolled into the workplace pension scheme, unless they choose to opt out. Encouraging employees to opt out, called inducement, is illegal.
Employers should monitor opt outs as they must review their workforce periodically and re-enrol anyone who meets the requirements for AE but is not a member of the pension scheme.
Whether a business has one employee or a few hundred, employers need to find out what they have to do, where to go for more information and when to ask for specialist advice. And whatever the size of the business, making a plan and sticking to it is essential.
In preparation for implementation an SME may need to:
Cost may also be a significant factor to take into account when planning and decision-making. A number of factors may affect costs:
NAPF research: Automatic enrolment: One year on, published October 2013