Technical view: 10 tips for auto-enrolment based on employer experience so far

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By Rachel Brougham | January 10, 2013

At first blush, auto-enrolment appears straightforward. Many organisations already operate auto-enrolment-type arrangements whereby employees are enlisted into pension plans with the right to opt out at any time.

However, the devil is in the detail and care needs to be taken to avoid breaching the new rules.

These details have the potential to trip the unwary and now is the time for trustees, HR, finance and payroll representatives to take stock of their AE toolbox and prepare for the year ahead. To help, here are 10 tips based on the issues our clients have come across so far.

KEY POINTS

■ Employees need to be offered membership of a pension even if they do not qualify for auto-enrolment

■ Even if an employee earns below the earnings trigger of £8,105, they need to be auto-enrolled for any pay period that exceeds the proportionate equivalent of the earnings trigger

■ Employees who have reached their lifetime allowance are obliged to go through the process of being auto-enrolled and then opting out to avoid a tax penalty on their previous savings

1. Employers need to consider all employees, not just those eligible for AE

As well as automatically enrolling employees who earn above the income tax threshold into a qualifying pension plan, employers must ensure:

all employees are offered membership of a pension plan; and
those who earn above £5,564 a year are given the opportunity to opt in to membership of a plan that attracts statutory minimum contributions.

2. Employers must continually check for workforce eligibility

Employees’ eligibility for AE and opt-in rights should be assessed on the initial date on which AE applies and also on the following:

The first day of employment;
22nd birthday, since 22 is the minimum age for AE eligibility;
The first day of each pay-reference period, since changes in earnings during each pay period may trigger changes.

3. Employees who earn less than the earnings triggers may still have to be auto-enrolled

Employees who earn less than the earnings trigger of £8,105 a year must be auto-enrolled if their earnings in any pay period exceed the proportionate equivalent of the earnings trigger.

Similarly, employees who become eligible to opt in following a pay spike must be notified of their right to opt in. However, employers can delay for three months by using postponement.

4. Employers can postpone AE for up to three months

Some employers may wish to do this to smooth the administration of AE; so they can enrol groups of employees at the same time, buy time for short-term workers to leave, or manage pay spike implications.

5. Employers may have to estimate employees’ earnings to determine if AE applies

If an employee becomes eligible for AE at the beginning of or part-way through a pay month, the employer will need to estimate whether pay during the remainder of that pay month exceeds the monthly earnings trigger of £675.42.

6. Employees who have opted out of pension membership to avoid their pension savings exceeding the lifetime allowance will need to be auto-enrolled

Employees registered for fixed or enhanced protection, so they are not subject to penal tax charges on pension savings that exceed the lifetime allowance, will lose that protection if they are auto-enrolled into a scheme and do not opt out in time.

7. Employers need to review AE policies against discrimination legislation

Employers may want to put in place a less generous form of pension provision for employees who are not currently members.

However, this may breach discrimination rules if these workers are more likely to be of a particular age or gender.

Exercising postponement for some groups of employees (eg temporary workers) might breach rules on indirect age and gender discrimination.

Trustees are also required to ensure their plans comply with anti-discrimination laws.

8. Salary sacrifice arrangements need to be handled very carefully

In the words of the Pensions Regulator, pension salary sacrifice is not incompatible with AE. However, employers who seek consent for salary sacrifice as part of the pension enlisting process are likely to fall foul of AE requirements.

9. Trustees have duties

AE duties are owned by employers. However, third parties such as trustees may be subject to civil penalties or third-party compliance notices if they are responsible for an act or omission that causes an employer to fail to comply with its AE duties.

10. Check insurance cover

If membership of a scheme triggers cover for death or additional protection benefits, then the employer or trustees should check the insurer is able to provide cover that takes into account AE.

The employer may, of course, wish to review the benefits available as a result of scheme membership.

Rachel Brougham is head of the AE team and Jim Doran is a consultant, in Mercer’s retirement, risk and finance business