By Luigi Nicoletta, Senior Manager,
Since 2012, the largest employers in the United Kingdom have been required to automatically enrol nearly all of their employees in a pension and to make minimum contributions. Over the next several years, this requirement will be imposed on all employers in the UK, with significant consequences for employers and employees alike.
In the past, employees were required to make an affirmative decision to participate in a pension program. This resulted in moderate to low private sector pension participation rates, which stood at only 32% in 2011. Once the law is fully enacted, most employees will be automatically enrolled. The government hopes this will help workers better prepare for retirement. The Department for Work and Pensions explains the logic: “Rather than taking action to save, an employee has to take action not to save.” Put another way, the requirement shifts the onus from the employee to the employer and is likely to cost upwards of £3 billion in direct contributory expenses and more in compliance expenses.
In short, the new regulation requires that employers automatically enrol employees in a pension to which both the employee and employer make contributions. The requirement applies to the vast majority of employers and employees working in the UK. Those employees who are not mandatorily enrolled include those making less than about £10,000 per year and those under the age of 22 or between the State Pension age and 75. It is important to note, however, that those “exempt” employees are still entitled to participate in the pension program should they so choose, in which case their employer must make corresponding contributions.
The date by which employers must comply with the automatic enrolment requirement varies based on the firm’s workforce size — the more employees the earlier the staging date — but all must comply by February 2018. Employers can find out their staging date well in advance of the deadline by consulting the Pension Regulator. There are limited exceptions to the staging data; most important is that newly hired workers within a probationary period not to exceed three months do not have to be automatically enrolled. In addition, workers are free to opt out of enrolment. This must be done affirmatively and every three years. It is worth emphasizing that despite these few exceptions the overwhelming majority of workers are covered by the requirement. And, it is critical that employers comply, as penalties for non-compliance could total as much as £10,000 per day. In addition, employers are prohibited from discouraging employees to opt out, either through incentives, perks or other means.
The minimum total amount that must be contributed from each employee, as well as the minimum contribution from the employer, will rise over time through October 2018. After that, the minimum total contribution will be 8% of qualifying earnings, of which the employer will pay at least 3%. The pension program to which employees are enrolled is chosen by the company. It may not incur a commission fee paid to financial advisers and the Annual
As of this blog’s posting date, many employers are still many months if not years away from their staging date. Nevertheless, it is advisable that UK employers begin to think about compliance now. An employer should: determine their staging date; identify those workers who must be automatically enrolled; identify and procure (if necessary) software to facilitate compliance and proper record keeping; and proactively communicate with employees. Once the staging date has arrived, employers must automatically enrol qualifying employees, provide the Pension Regulator a declaration of compliance within five months, and fulfill ongoing responsibilities including making contributions and enrolling new employees, and maintaining records for up to six years that document compliance.