UK: Automatic Pension Enrolment - Do You Know The Cost Implications For Your Business?

Last Updated: 9 February 2012
Article by David Loosemore

The Issue

We were recently approached by the Finance Director of a small but prestigious group of hotels who was concerned that from 2012 all companies must automatically enrol their staff into a pension scheme. With over 1,000 staff and an average staff turnover of 36% per annum our client was particularly keen to understand how temporary staff should be administered, determine what the additional costs would be to his business and establish the Company's legal responsibilities.

Background Information

Our client's business is heavily reliant on students and temporary staff who normally work for them during the summer season and who on average stay within their business for approximately 6 months. An average staff turnover of 36% is good for the hotel/catering trade and our client is proud of its ethical standards and the relationship it has built with its workforce. The hotel group presently offers its staff access to a Money Purchase pension scheme and operates a closed Final Salary pension scheme. At present 85% of the group's employees do not belong to either pension scheme.

The Legal Position

The principle of automatic enrolment was introduced by the Pensions Act 2008 which set out reforms designed to make saving for retirement the norm for employees. What this means for employers of all sizes is that from October 2012 and phased in over a number of years, they will be obliged by law to pay contributions into qualifying pension scheme for most, if not all, of their employees.

Who?

A key challenge for our client will be identifying who they (the relevant "jobholders") have to auto enrol as not only are a large number of their staff temporary, they also tend to be younger in age. The requirements for all employers are as follows:

  • Workers aged 22 and over, but under State Pensionable Age will have to be auto enrolled if they have qualifying earnings (£7,475 in 2011/12) ("Eligible Jobholders"),
  • Workers between 16 and 21, and those between 65 and 75 who have qualifying earnings, may opt to become a member of an automatic enrolment scheme ("Non-Eligible Jobholders"), and
  • Those aged over 16 but under age 75 who do not earn the minimum qualifying earnings can demand membership who can demand membership of a pension scheme. ("Entitled Workers").

In particular our client will need to decide whether when employing temporary staff their earnings will exceed approximately £623 per month in 2011/12 and the likelihood that they will remain employed with the company for more than three months. In this instance if the employee is between 22 and at present 65, has earnings in excess of the qualifying earnings and is employed form more than three months the Company will have to contribute to his/her pension.

When?

The implementation of auto enrolment is being phased in by the government over at least four years starting on the 1st October 2012, with the staging being based on the number of PAYE employees an employer has. With over 1,000 employees our client's duty to auto enrol will commence from a date after the 1 October 2013, subject to confirmation from the Department of Work and Pensions that is anticipated in January 2012.

On reaching the staging date after 1 October 2013 our client must enrol the relevant jobholders, who are not presently within their group's money purchase scheme or final salary scheme into a qualifying pension scheme within three months of them becoming eligible.

One option is to admit these jobholders into their existing money purchase scheme as it meets the minimum requirement of providing employer contributions of 3% of qualifying earnings and in total at least 8% of qualifying earnings, the necessary level of contributions required once the enrol process has been completed by all employers. At present our client's money purchase scheme is more generous than this and it would prove expensive to move all new employees into this scheme.

Alternatives options (potentially less expensive than the existing scheme) are available and our client could consider auto enrolling those employees not in one of the existing schemes into a contract based group personal pension schemes, a trust based money purchase scheme or the National Employment Savings Trust ("NEST").

Do the Employees have a choice?

Our client's employees may opt out of the chosen pension within one month, but only after active membership has started. An opt-out within one month leads to an employee's membership being cancelled and the employer/scheme have to refund any contributions.

Irrespective of the employees view towards the pension benefits offered by their employer the emphasis is placed on the jobholder to opt-out as the employer is not allowed to provide any inducement to encourage the employee to opt-out.

Future Planning

Although, our client does not need to auto enrol his eligible employees until Oct 2013 at the earliest he is advised to plan now to ensure he fully understands the cost implications of auto-enrolment and the impact it will have on his employees and the business. He needs to decide whether the business can afford to enrol all of its eligible employees into the Company's existing scheme or whether cost savings need to be investigated?

In addition our client also has to ensure that he has an efficient system in place to administer the auto enrolment process, provide the correct information to its employees (17 items of data in total) and satisfy the Pensions Regulator who will be responsible for the effective compliance of employers. These administrative factors alone representing an additional cost that should not be underestimated.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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