Part one - Automatic Enrolment – Guide for Payroll Bureaus

What is auto enrolment?

AE is about the legal requirement of employers to enrol their employees into a pension scheme. It started for larger employers in 2012 and all employers should be included by the end of 2017.

The date that an employer must enrol its employees is called the “staging date”. This date can be found on the Pensions Regulators website armed with the employer PAYE number. The Pensions Regulator will also write to employers at least 12 months before they are due to stage. Enrolment can be postponed for up to 3 months after the staging date. If postponement is used, it is important that employees are told within 6 weeks of the staging date.

Before staging, employers should register with a pension provider so that they can enrol their employees with this provider at staging. NEST will probably be the most commonly used provider as they are government backed and have a mandate to accept all employers and employees irrespective of size or level of earnings.

Assessing

At the staging date (and assuming no postponement), the employer must assess all employees based on their age and earnings level. All employees aged from 22 to state pension age and who earn more than the earnings trigger (£192 per week in 2015/16) must be enrolled. These employees are all referred to as “eligible jobholders” or, using the more recent user friendly jargon, “employees who must be enrolled”.

All other employees (aged from 16 to 74), who earn over the £112 per week, can ask to be enrolled. In AE speak these employees are called “non-eligible jobholders”. The remainder of employees (aged between 16 and 74) can ask to join a pension scheme but the employer has no obligation to contribute. This final group of workers is referred to as “entitled workers”.

The employer has no AE duties in relation to employees under 16 or over 74.

Other exclusions from AE include a sole director where that director is the only employee, a worker who is in their notice period, a worker who has previously ceased active membership of a qualifying pension, a worker with HMRC protected status for their pension savings or a worker who has received a pension winding up lump sum payment.

Deductions and contributions (EE and ER)

This is probably a good time to talk more about what enrolment means. It does not just mean signing up the employees to a pension scheme. It also means that the employer must administer the deduction of pension amounts and must also contribute to the pension pot. Legislation sets out the minimum deductions and contributions that must be made. Basically, until sometime in 2017, these minimums are 1% EE and 1% ER. Eventually, by 2018, these will increase to 5% EE and 3% ER. The employee deductions are made from net pay and 20% tax relief is obtained from the taxman. Therefore the initial employee deduction is 0.8%. The earnings that these percentages are applied to are all earnings (including SSP, overtime etc.) in excess of £5,824 and up to a maximum of £42,385 (2015/16 levels).

In some cases (depending on the rules of the particular AE scheme), the employee deduction is made from their gross and this enables the employee to get relief at the marginal rate on their contribution. This deduction from Gross is called a “Net Pay Arrangement”.

The Net Pay arrangement will not result in NI relief for either the employee or employer and salary sacrifice arrangements are being used to obtain this additional relief. I will deal with salary sacrifice later.

The pension deductions and contributions must be paid over by 22nd of the following month (at the latest) and must be shown clearly on the employees’ payslips.

So, this must be done for all eligible jobholders and for all non-eligible jobholders who opt in. For entitled workers, the employer must facilitate them in joining a pension scheme but, unlike the other employee categories, is not required to make an employer contribution.

Communications

Employee communications is a big part of the employer’s AE responsibilities. At staging, the employer must write to (or email) all the various worker categories telling them all they need to know.

Eligible jobholders must be told that they are being enrolled and how much is being deducted/contributed and how this will change up to 2018. They must also be told that they can opt out of auto enrolment if they wish. An employee may decide that they already have their sunset years covered and, as long as they opt out within one calendar month (of the later of achieving active membership of a scheme or receiving the notice of enrolment communication), any deductions will be fully refunded by the employer. If they leave it longer than that, it will be between them and the pension provider.

Non-eligible jobholders and entitled workersmust be told that they can ask to join a pension scheme and the procedure they need to follow to opt in.

If the employer uses postponement thenthe employer must inform all workers about the postponement. If the recipient of the communication happens to be an eligible or non-eligible jobholder at the time of postponement, he/she has the right to be enrolled prior to the deferred date.

There is also a communication used for employees who are members of a defined benefit hybrid scheme which tells them that a transitional period is being applied.

Enrolling

The actual enrolling procedure is usually set out by the pension provider. With NEST, the employer can log in to their account and type in all the required employee details. NEST also accepts an upload of a CSV file containing this information.

With The Peoples Pensions and NOW Pensions, the contribution file and enrolment file are merged.

On-going Monitoring, Assessment and AE Events

The employer’s responsibilities do not end at staging. Obviously deductions and contributions must be calculated, deducted and paid over to the pension provider each month. The pension provider will also require details after each pay period of what has been deducted etc. This slots alongside RTI as part of the list of “to do” items each pay period. The pension provider will use these details to work out the monthly payment which will normally be collected through direct debit. The periodic contribution file is uploaded as a CSV file.NEST and many other scheme providers are planning to offer API (application program interface) functionality enabling payroll software to communicate directly with the schemes, thereby avoiding a) the saving of files b) logging in to pension websites and (c the uploading of files.

Also, as part of the on-goings duties,the employer must monitor all workers (who are not currently enrolled) to see if any of them needs to be enrolled. This could be because they have reached the earnings trigger or because they have turned 22 years of age. New employees joining the company must also be assessed to see if they need to be enrolled.

In relation to employees who breach the earnings trigger but whose income would not normally be at this level, the employer can use postponement to avoid enrolling that worker. An employer may also use postponement to avoid enrolling workers who have been brought in on a short term (i.e3 month or less) contract.

The same communications as previously referred to are used for the above AE events.

There are many combinations of what can occur each pay period. Here are some examples:

• An entitled worker now earns more than £112 per week but less than £192 per week(becoming an non-eligible jobholder) – let him/her know that he can opt in to AE i.e. communicate

• An entitled worker or non-eligible jobholder earns above £192 per week (becoming an eligible jobholder) and postponement is not used – enrol, communicate and start deductions/contributions

• An entitled worker or non-eligible jobholder earns above the £192 per week (becoming an eligible jobholder) and postponement is used – communicate

• A worker who is already enrolled now earns below the £192 per week  – continue to calculate on amount in excess of £112 per week – their status does not change – no action required

• A worker who is already enrolled now earns below £112 per week  – zero deduction/contribution – their status does not change – no action required

• A non-eligible jobholder turns 22 and postponement is not used - enrol, communicate and start deductions/contributions

• A new employee starts and falls into the eligible jobholder category and postponement is not used - enrol, communicate and start deductions/contributions

• An employee who is already enrolled opts out within the opt out period – unenrol, stop deductions/contributions and refund all deductions to date. (One of the fundamental rules of AE is that an employee cannot be coerced to opt out!)

• An employee who is already enrolled opts out after the end of the opt out period – unenrol and stop deductions/contributions

The Pensions Regulator

The regulator will let the employer know when their staging date is coming up. They also provide a tool on their website for finding out the staging date well in advance.

The employer must register their compliance with AE with the Pension Regulator at the latest 5 months after their staging date by submitting a declaration of compliance.

Periods used for assessing and calculating contributions – pay reference periods

There are rules to figure out which pay period’s earnings to use to assess an employee’s status. There are also (separate) rules to figure out which period’s earnings you calculate deductions on.

So, let’s start with a few definitions:-

1. For assessment purposes, the relevant pay reference period is the pay reference period in which the assessment date falls e.g. the staging date or postponement date or date of starting employment or date of turning 22.

2. The first contributions that need to be deducted for a worker who’s automatically enrolled apply from the first pay day on or after the automatic enrolment date irrespective of when that pay was earned, however, contributions don’t need to be calculated until the first full pay reference period (subject to scheme rules).

Let’s look at an example to demonstrate the above.

Joe is a monthly employee of ABC Limited which staged on 1st November 2014. Joe’s 22nd birthday falls on 3rd September 2015. Salaries are paid on the last working day of each month.

Joe’s assessment date falls in the month ended 30/9/2015 so we look at what was paid to Joe in this pay period. The relevant pay day is 30th September 2015. Joe’s taxable pay on that pay day is in excess of the monthly earnings trigger. Postponement is not being used so Joe should be enrolled from 3rd September 2015 and the relevant letter sent to him.

The first pay day after the AE date is 30th September 2015. The relevant period that this pay day falls into is the month ended 30/9/2015. Because Joe’s birthday was afterthe start of this particular month, the period is not a full pay reference period and contributions would not be calculated because it is only a part period or put more correctly, the contributions for the first month (m/e 30/9/2015) are zero.

NEST – Groups and payment sources

If a company is using NEST (or indeed any other scheme), they can use different levels of contributions for different sets of employees e.g. the floor workers may be set up using the 1% and 1% levels whereas the managers might be put straight on to the “Quick Start” 5% and 3% levels (the minimum levels which apply in 2018). Various combinations of EE% and ER% can be used subject to the provisos that the employer must contribute at least 1% and the total must be at least 2%.

The different categories of workers should be attributed group names. E.g. Shop workers and Managers might be used as the two groups in the example just given. If all employees are treated the same, there will be just one group name.

NEST processes each contribution file validating that the contributions for each member are in line with the groups they were assigned to.

If the pension amounts for different groups are to be paid from different bank accounts (payment sources), then this must be input when setting up with NEST. Separate contribution files are required for different payment sources.

If there are weekly and monthly employees, these will also require separate contribution files.

Communications – who issues them?

Communications is probably one of the biggest sources of confusion so far. Not necessarily the letters/emails which need to go to the various classes of employee but who is actually responsible for doing the communicating.

NEST generally prefers the employer to issue the statutory communications but NEST will also double up on enrolment sending their own communications.

The Peoples Pension prefers to handle the communications for enrolled employees and for the employer to handle everything else.

NOW Pensions prefers to handle all communications.

Summary of legal duties

The employer must:

• automatically enrol all eligible jobholders

• communicate to workers providing timely and appropriate information

• allow non-eligible jobholders to opt-in and entitled workers to join

• manage opt-outs within the opt-out period and promptly refund contributions

• automatically re-enrol eligible jobholders every three years

• complete declaration of compliance with the Regulator

• keep records

• maintain payments of contributions

For further guidance on auto enrolment you can register for BrightPay’s auto enrolment webinars.

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