Auto-enrolment: 12 myths businesses need to get their heads around
With the deadline for workplace pensions looming, we look to clear up some of the confusion surrounding auto-enrolment…
Auto-enrolment anxiety is spreading among the UK’s small businesses with many business owners worried that they will not be ready to put a workplace pension scheme in place to meet government timeframes.
More worrying: despite this fear, a large proportion of small business owners are failing to prioritise their auto-enrolment planning , and are instead “continuing to procrastinate”.
If either of these statements resonates with you then it’s time for a reality check and you need to act now before it’s too late.
Auto-enrolment applies to ALL employers, regardless if you have one employee or 50,000. Under the Pensions Act 2008, EVERY employer must put eligible staff into a pension scheme and contribute towards ‘automatic enrolment.’
With UNIQUE staging dates for everyone and the time it takes to comply, automatic enrolment can no longer remain on a backburner.
In order to demystify auto-enrolment, clarify some of the misconceptions, and help settle anxieties, this article will outline key auto-enrolment myths and give you the facts you need to know…
#1 The government will drop auto-enrolment for smaller businesses
REALITY: The government requires all employers, of all sizes and all sectors, to assess which staff are affected by auto-enrolment – even those business owners without a PAYE scheme in place.
Regardless of whether you run a busy hair salon with 20 staff or you employ one personal assistant to help you with your small business, auto-enrolment applies to you.
To work out what you need to do for auto-enrolment, when you need to do it, and to make sure that you comply with the legislation, use The Pensions Regulator’s free Duties Checker tool.
*Businesses without PAYE schemes will be subject to the AE duties from April 1 2017.
#2 You don’t have to auto-enrol
REALITY: If you employ at least one person you are an employer and you are legally obliged to enrol staff if they meet the age and earnings criteria set out in the law into a workplace pension scheme [into which both you and the worker will contribute]. If you fail to automatically enrol staff and/or fail to declare your compliance with The Pensions Regulator, you may face non-compliance fines of up to £500 a day.
This can escalate to potential fines of up to £5,000 and may result in court action.
Mike Galvin, co-founder of business management platform Geniac, says “entrepreneurs must avoid sleepwalking up to the deadline as this could cost them dearly, particularly fledgling companies with limited budgets.”
#3 Auto-enrolment doesn’t apply to you if you only have seasonal workers or zero-hours contract workers
REALITY: Auto-enrolment still applies to you even if you only employ seasonal workers or zero-hours contract workers.
Employees aged between 22 and the state pension age, working in the UK, and earning over £833 in monthly gross earnings – £10,000 per year – must be enrolled in a pension scheme.
Those aged from 16 to 74, and earning between £486 to £833 in monthly gross earnings have the right to join a pension scheme to which the employer must make contributions. Someone with earnings of more than £833 a month but aged 16 to 21 or state pension age to 74 also falls within this category.
For more advice on checking which members of staff need to be enrolled, click here.
#4 There are ways to avoid auto-enrolment (e.g. telling The Pensions Regulator that nobody wants a pension)
REALITY: There are no ways to “avoid” setting up a workplace pension scheme if you have staff to automatically enrol. Even if you believe your employees won’t be bothered about being enrolled in a pension scheme, you still have to set one up and enrol your eligible staff into it.
In cases where you haven’t understood your employer duties or you have been unable to comply, then The Pensions Regulator has pledged to work with you to get you compliant.
However, if you deliberately ignore your auto-enrolment duties, then you are at risk of fines and The Pensions Regulator may take civil action through the court to recover penalties. Worse, it is a criminal offence to deliberately fail to automatically enrol eligible staff or others who opt in, or knowingly provide false or misleading information when you inform The Pensions Regulator about your compliance with auto-enrolment. You may be prosecuted and, if there’s a criminal conviction, the court may confiscate any monies you have saved from failing to comply.
You could also face penalties from The Pensions Regulator if you encourage your employees to opt out of a workplace pension scheme.
Find out more on what happens if you don’t comply with auto-enrolment here.
#5 The staging date for your business is years away
REALITY: For most small businesses (those with 30 employees or less) the auto-enrolment staging date is, in fact, less than a year away.
If you have 30 staff or fewer, you will have a precise staging date allocated to you between now and April 1 2017, by which you will need to have enrolled your staff into a workplace pension scheme.
The Pensions Regulator will write to you at least 12 months before your staging date, but it’s a good idea to know when your staging date is as early as possible.
#6 You can leave auto-enrolment to the last minute
REALITY: To avoid compliance and enforcement measures being taken your business needs to prepare now. The Pensions Regulator suggests that it can take between six and 12 months to put everything into place.
Once you have met your legal duties for auto-enrolment, you must complete a declaration of compliance within five months of your staging date; you haven’t completed your auto-enrolment duties until you submit your declaration to The Pensions Regulator. You can authorise someone to complete your declaration on your behalf.
#7 You don’t need to communicate the process to employees
REALITY: Once you have assessed which staff to put into a pension scheme, you are legally obliged to communicate how the auto-enrolment process applies to all your staff; this can either be by post, email, or given by hand in hard copy. You must write to every member of your staff within six weeks of your staging date.
“A number of payroll solutions and/or pension provider systems can offer support to employers with the statutory communications,” offers Matthew Pitchacaren, corporate consultant at financial planning specialists Argentis. “We would always suggest that the employer identifies what support the payroll/pension system can offer and what the additional costs may be incurred.”
Displaying a poster in your workplace, attaching a URL, or signposting a website does not qualify as communicating the auto-enrolment process to staff.
You can find letter templates for writing to your staff here.
#8 It costs a lot of money to set-up an auto-enrolment pension scheme
REALITY: There may be some one-off costs to set up an auto-enrolment scheme, and you will of course have to use some of your time, but The Pensions Regulator conducted research with small employers who had already met their duties and 60% of those employers with up to four staff said they had incurred no overall set-up costs.
You can choose to auto-enrol staff yourself or you may choose to pay for advice or support from an accountant, financial adviser, payroll provider, or business adviser. The Pensions Regulator estimates that, if you do opt to pay for advice, the average cost will typically be around £440.
“Small employers tend to have one individual wearing many hats without being able to rely on internal departments to deal with HR, legal and finance matters,” says Pitchacaren. “Each of these areas may be impacted on by the auto-enrolment duties so it is important that the employer does consider whether they require external support.”
Obviously, the costs of set-up are separate from the costs of you paying into the pension scheme. Once enrolled, you must pay a minimum contribution of 1% gross pay within a specific band in 2016, which will increase to at least 3% by 2019. It’s mandatory for staff to contribute too.
The Pensions Regulator website has more information on the cost of setting up auto-enrolment and the minimum contribution businesses will need to make here.
#9 You can’t bring your staging date forward
REALITY: You can bring your staging date forward if you wish. You can use this online form to tell The Pensions Regulator that you want to bring your staging date forward.
You can bring your staging date forward if you already have an existing staging date.
But, as Sally Holland of PPS Chartered Accountants points out, by setting up early “you will incur the cost of contributions to your employees’ pensions before you’re legally required”. Nevertheless, you may wish to do this if your staging date coincides with a particularly busy period for your business and you are keen to ensure the process does not ‘distract’ you from day-to-day running of your company at this time. It’s also a big benefit for your staff – and could help with employee relations if you are proactive about starting the scheme early.
Read The Pensions Regulator’s guide to bringing your staging date forward here.
#10 Your business is compliant if it already has a pension scheme
REALITY: Pension schemes can only be used for auto-enrolment if they meet certain criteria which have been set out by the automatic enrolment legislation.
Even if you have an existing pension scheme in place that is better than the minimum standard, you still have duties to comply with under the automatic enrolment legislation. You will need to check with your provider whether your scheme is a qualifying one under auto-enrolment.
Even if it is, you will have to automatically enrol eligible workers who are not currently members of the scheme, ensure contributions meet the minimum levels set by the government for employers and employees, and declare your compliance within five months of your staging date. You must assess your existing staff and any new people you employ and then write to them letting them know how auto-enrolment will impact on them.
Bill Monty, independent financial adviser for Sable, says: “Unless you are able to convert your current pension scheme to be used for automatic enrolment,then your scheme will not be compliant. It’s best not to assume here and get clarification on this sooner rather than later.”
There are a number of pension providers that [provide schemes which meet the necessary criteria] and have told The Pensions Regulator that they are open to any employer, you can find them listed on The Pensions Regulator site here.
“Typically,” says Argentis’ Pitchacaren, “most pension providers are either now charging fees or placing restrictions on offering a qualifying workplace pension scheme (QWPS) for small employers so it is important to consider this when selecting a suitable pension provider. NEST was introduced to offer a QWPS that any employer can use and is completely free for employers to use.”
The Pensions Regulator has guidance on finding and checking pensions schemes here.
#11 Every payroll software provider can handle auto-enrolment
REALITY: Not all payroll providers yet have auto-enrolment functions available to help businesses meet their duties of complying with auto-enrolment. You will need to check with your payroll provider to find out if they handle all the requirements of auto-enrolment.
#12 Once you’ve staged for auto-enrolment, you don’t need to do anything else
REALITY: This is not the case. As previously stated in this article, you MUST complete a Declaration of Compliance five months after your staging date, which can be found here. It is absolutely crucial that you do this in order to comply with the law.
In addition you will need to continually assess your workers to ensure that anyone who becomes eligible is put into a pension scheme. Further down the line, you must re-enrol certain eligible staff into an auto-enrolment pension scheme if they were previously automatically enrolled and opted out or ceased active membership more than 12 months from your re-enrolment date every three years after your staging date. You are able to choose a re-enrolment date that is convenient for you but it must fall within a six-month window which starts three months before the third anniversary of your staging date and ends three months after it.
You will need to identify eligible staff, re-enrol them on your chosen date and start contributing to their pensions from that date. You must write to staff that are being re-enrolled individually, within six weeks of your chosen re-enrolment date, to tell them how automatic re-enrolment applies to them.
For full details on automatic re-enrolment click here.
Make sure you don’t base your auto-enrolment strategy on myths, visit The Pensions Regulator for more advice on setting up an auto-enrolment pension scheme, staging dates and more.