Under the Automatic Enrolment pension regulations introduced in 2012, 1.4 million employers have enrolled 10 million eligible employees. Regardless of your industry and size, as an employer you must provide a workplace pension scheme for your staff. To help you understand how they work, we’ve put together a brief guide on what they involve and what your responsibilities are.
What is an occupational workplace pension scheme?
A workplace pension is money that employees will use when they retire. The majority of people will get a state pension from the government, but it is widely recommended to save some extra for retirement.
For a workplace pension, typically contributions are made with each pay cheque. A certain percentage of an employee’s salary will be paid directly into their pension pot. Contributions are also required from you as the employer if your employees meet the eligibility requirements set out below.
The different types of workplace pension schemes are:
- Defined Benefit schemes – Your pension is based on either pay at retirement (a “Final Salary Scheme”) or the number of years and the average pay over the years spent in the scheme (a “Career Average Scheme”). The pension received isn’t dependant on the stock market or other investments. Defined Benefit schemes are generally quite expensive and risky for the employer so are becoming increasingly rare.
- Money purchase schemes – Also known as defined contribution schemes. The employee and the employer will pay a percentage of wages into the employee’s individual pension fund. Those funds are then invested. At retirement, the employee can access their pension fund, and choose how they use it (take cash, draw an amount each year, or buy an annuity to provide a pension). The size of the pension is based on the amount of money paid in and on how the investments have performed.
Group personal pensions
These work in a similar way to money purchase schemes, with employees paying contributions directly from their wages. The difference is that the employer sets up the pension, but the individual employees have a contract directly with the pension provider.
You can find more information at the Citizens Advice Bureau.
Who is eligible?
You must enrol your employees into a workplace pension if they are:
- Aged 22 years or over
- Working in the UK
- Earning more than £192 per week, £833 per month or £10,000 a year
- Not already in a workplace pension
- Under state pension age
People can choose to opt out of the pension scheme if they wish. If this is the case, then you are not obliged to make contributions.
What do I have to contribute?
As the employer, you must contribute to your employees pension. Together with your employee you must contribute 8% of the employee’s salary. Your contributions must be at least 3% but you can pay more if you want to!
For more information on the contributions you must pay here.
Key dates to remember
There are some key dates to be aware of as an employer:
- Duties start date – The date your first member of staff begins working. From the next payday, you must start contributing to their pension.
- Declaration of compliance deadline – Within 5 months of your duties start date, you must tell the Pensions Regulator how you have met your legal duties for automatic enrollment. This is called a declaration of compliance. You can do this by completing their online form.
Your duties don’t end there, you must continue to do the following:
- Assess new staff to see if they are eligible to be enrolled into a pension scheme.
- Monitor the ages and wages of your current staff every time you pay them. This is to ensure everyone is enrolled into the pension scheme as soon as they qualify.
- Deal with requests to join and leave the pension scheme.
- Keep accurate and compliant records of what you have done.
- Re-enrolment – Every three years you need to assess staff not currently included in your pension scheme. All eligible staff, even staff that have previously opted out, must be re-enrolled into the scheme.
Get more information on your ongoing duties.
What happens if I don’t comply?
Overall the government approach is to educate and enable employers to comply with the legislation. If you continue to fail to comply then this could mean you:
- Could face enforcement action including compliance notices and penalty notices (fines)
- Are expected to backdate contributions to the day your employee first met the criteria for a workplace pension scheme.
- Your staff member is also required to pay theirs – but you may be forced to pay this on their behalf.
- If fines are not paid on time then the debts can be recovered in court.
How do I pick a scheme?
There’s a range of pension providers that cater for small businesses. They can help with auto-enrolment and make sure you are complying with the regulations. You can either pick a scheme yourself, or speak to an advisor.
All information is correct at the time of publishing. This article is for informative purposes only and should not be considered financial advice. Funding Circle is not authorised to and does not give financial, regulatory, legal or tax advice. If you have further questions please speak to an independent financial advisor.