Auto Enrolment Pensions Explained: What Employers Need to Know

What is automatic enrolment?

📚 Quick definition: Auto-enrolment, is a government initiative that requires employers to automatically enrol eligible workers into a workplace pension scheme.‍

The basic idea behind automatic enrolment is to help more people save for their retirement by making pension saving the default option for eligible employees.

Under automatic enrolment, eligible jobholders are automatically enrolled into a workplace pension scheme by their employer.

Both the employer and the employee contribute to the pension scheme, with minimum contribution levels set by the government.

Employees have the option to opt out of the pension scheme if they choose not to participate, but they must be automatically enrolled first.

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Understanding employee eligibility: who is eligible for automatic enrolment?

There are 3 types of worker categories for auto enrolment purposes...

Eligible jobholders: Employees who are between 22 and state pension age and earn over £10,000 per year

Non-eligible jobholders: Employees aged between 16-21 or State Pension Age and 74, who earn over £10000 per year, or are between 16 and 74 and earn over £6240 per year but under £10000

Entitled workers: Employees earning below £6240 a year and are aged between 16 and 74

The key difference between eligible jobholders and entitled workers is that eligible jobholders meet specific criteria and must be automatically enrolled. Entitled workers do not meet the criteria but still have the option to join a pension scheme without an employer... if they do join, you don't have to contribute unless the scheme rules determine there needs to be an employer contribution.

And when it comes to Non Eligible Jobholders, they can choose to opt into the pension, and if they do, you will have to contribute to the scheme.

What about employees with variable pay?

You may have some employees whose earnings are usually below the threshold for auto-enrolment, but due to one-off payments like bonuses, may become eligible.

For these employees, you can use postponement to delay the assessment for up to 3 months. If they’re still over the threshold after this period, they have to be enrolled.

In this case, you have to write to tell affected employees - you'll have six weeks from the date the postponement starts to write to them.

You can do this using The Pension Regulator's email template.

You can postpone for up to three months (although if you're postponing for multiple  employees this postponement period doesn’t have to be the same for all of them).

If you choose to use a postponement period, employees still have the right to join the scheme before the end of the postponement period.

*Note: You can't use back to back postponement. So if an employee was postponed for 3 months(e.g if they were a new starter, then hit a spike in earnings in month 4), they’d have to go into the pension regardless of whether or not the spike in earnings is only for one month.

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The legal obligations of employers: your duties towards eligible jobholders

Employers in the UK have a few mandatory duties when it comes to eligible jobholders. These are outlined by The Pensions Regulator and include the following:

Assess your employees' eligibility

First, you need to determine which employees are eligible jobholders under the auto enrolment criteria. This assessment should be carried out for each pay reference period.

Enrol eligible jobholders into a pension scheme

Eligible jobholders must then be automatically enrolled into a qualifying workplace pension scheme. You'll need to provide the necessary information to the pension provider and deduct contributions from employees' earnings.

Communicate with your employees

All workers need to be kept informed about automatic enrolment - including details about the pension scheme, contributions, and the right to opt out. This information must be provided within specific timeframes and in writing.

Initial communication: Let eligible jobholders know about auto enrolment and their rights within six weeks of their auto enrolment date. This communication should include details about the pension scheme, contributions, and the right to opt out.

Joining window: Once employees have been auto enrolled, they have one month from the date of auto enrolment to opt out of the pension scheme if they choose. You'll need to process opt-out requests promptly and refund any contributions deducted from the employee's earnings.

Opt-out notice period: If an employee opts out of the pension scheme within the opt out window, you must cease deductions from the employee's earnings and refund any contributions deducted. This must be done within one month of receiving their opt-out notice.

Ongoing communications: Eligible jobholders must be kept in the loop with regular communications about their pension scheme, including statements of contributions and updates on their pension savings.

Re-enrolment communications: Every three years, you need to re-enrol eligible jobholders who have opted out of the pension scheme. Before re-enrolment, you'll need to provide any eligible jobholders with information about their re-enrolment rights and the option to opt out again if they choose.

Make contribution payments

As an employer, you're responsible for making contributions to the pension scheme on behalf of eligible jobholders. These contributions must meet the minimum levels set by law, including both employer and employee contributions.

Re-enrol eligible jobholders

You need to regularly monitor the status of eligible jobholders and re-enrol any eligible jobholders who have opted out of the pension scheme every three years. This ensures that eligible jobholders continue to have the opportunity to save for retirement.

Be sure to keep records

You're required to keep records of all auto enrolment activities - including assessments, communications, and contribution payments.

Stay on top of compliance and reporting

Make sure you report your compliance to The Pensions Regulator. You'll need to submit a declaration of compliance and notify the regulator of any changes to your workforce or pension arrangements (more on this below).

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Submitting your auto enrolment declaration of compliance

📚 Quick definition: The Auto Enrolment Declaration of Compliance is a fundamental requirement for employers in the UK who have enrolled their employees into a workplace pension scheme.

The declaration, submitted to The Pensions Regulator (TPR), confirms that you have met your auto enrolment duties and complied with legal obligations.

Here's how to submit your declaration:

Access The Pensions Regulator's online service: Go to TPR's Declaration of Compliance tool. You'll need to register an account if you haven't already done so. You’ll need to have the following to hand: scheme name, reference number, number of workers who were on your payroll on your re-enrolment date, workers who were already in a pension, workers who were re-enrolled and those who fell into other categories.

Complete online form: You'll be asked to enter information about your business, pension scheme, and employees as well as the number of employees enrolled, contribution levels, and any postponement periods used. Submit and you're done!

Update as needed: If there are any changes to your pension scheme or workforce, such as new hires or changes in contribution levels, ensure that you update your Declaration of Compliance accordingly.

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Minimum contribution requirements: What are the minimum contribution levels?

📚 Quick definition: Auto enrolment pension rates refer to the minimum contribution levels that employers and employees must contribute to a workplace pension scheme under auto enrolment regulations in the UK.

Total Minimum Contribution: The total minimum contribution is currently set at 8% of the employee's qualifying earnings.

Employer Minimum Contribution: Of the total minimum contribution, you're required to contribute at least 3% of your employee's qualifying earnings.

Employee Minimum Contribution: The remaining portion of the total minimum contribution, (5%), must be contributed by the employee.

These are the minimum rates for a standard qualifying earnings auto enrolment scheme...

There are different types of auto enrolment pension schemes (banded earnings tier 1, 2 and 3) which all have different minimum contribution rates.

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Pension age and retirement options

Here in the UK, the pension age is 66 (for both men and women).

For those born after 5 April 1960, there will be a phased increase in State Pension age to 67, and eventually 68.

You can check your pension age on HMRC’s website.

Upon reaching the pension age, individuals have several options for accessing their pension savings 👇

Take a tax-free lump sum: Retiring employees can typically take up to 25% of their pension savings as a tax-free lump sum.

Annuity purchase: The remainder of the pension savings can be used to purchase an annuity, which provides a guaranteed income for life or a specified period.

Flexi-access drawdown: Employees who reach pension age can choose to transfer their pension savings into a flexi-access drawdown account, where they can withdraw funds as and when needed while leaving the remainder invested.

Cash withdrawals: There's the option to make cash withdrawals directly from the pension savings, subject to income tax.

Delay taking pension: And there's also an option to delay taking the pension, which may result in higher pension payments when someone eventually starts drawing their pension.

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Choosing a workplace pension scheme for auto enrolment

There are a few different types of pension schemes to choose from, below are just some of the most common ones...

Defined Contribution (DC) Pension Scheme

This is the most common type of pension scheme used for auto enrolment.

In a DC pension scheme, both you and the employee make contributions into the pension pot, which is invested to build up a retirement fund.

The final pension income is based on the value of the fund at retirement and the annuity rate available at that time.

Defined Benefit (DB) pension scheme

A Defined Benefit (DB) pension scheme means that retirement income is predetermined based on factors such as the employee's salary and length of service.

In a DB scheme, you guarantee to provide a specific level of pension income to the employee upon retirement, regardless of investment performance.

Master trust pension scheme

Master trust pension schemes are set up to provide pensions for multiple employers.

They pool the pension contributions from various employers and invest them collectively.

*Note: Master trusts are often used by smaller employers who do not want to set up their own pension scheme.

Group personal pension (GPP) scheme

A GPP scheme is a type of pension scheme where each member has their own individual pension pot.

The scheme is set up by you, the employer, who selects a pension provider to administer the scheme.

Employees can choose their own investment options within the scheme, and contributions are typically made through payroll.

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⚖️ Things to consider when assessing providers

Each pension scheme comes with its own advantages and drawbacks. There isn't necessarily a right answer since this'll be based on your specific circumstances.

Here are a few factors you might want to consider when weighing up your options:

• Demographics and preferences of your employees: Are they predominantly young or older employees? Do they have specific retirement goals or investment preferences?
• Reputation: Look for providers that are well-established, reputable, and compliant with The Pensions Regulator's requirements.
• Features and benefits: Some may offer things like contribution flexibility, better fund performance, retirement options or communication support.
• Admin requirements: What does the enrolment, record-keeping, and compliance reporting process look like?
• Costs and charges: Are there setup fees, annual management charges or transaction costs?

Monitoring and reviewing your pension scheme

We'd strongly recommend building a monitoring plan to keep an eye on your pension scheme. Here are some of the things you might want to start tracking...

Scheme performance: Regular reviews of your scheme's performance will give you an idea of investment returns, fund performance, and service provider performance. You can then assess whether or not the scheme is meeting its objectives and delivering value for you and your employees.

Contribution levels: Monitor contribution levels to ensure that they meet statutory minimum requirements and remain adequate to fund retirement benefits for employees.

Employee engagement: Start tracking things like participation rates, opt-out/opt-in trends and feedback from employees. This'll allow you to Identify any barriers to participation.

Investment options: Assess the performance of investment funds, diversity of options, and suitability for different employee needs and risk profiles. You may need to make adjustments to the fund lineup as needed to optimise returns and manage risk.

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Handling contributions and payroll processes using payroll software

Pento was purpose-built to automate workflows, remove deadlines and deliver award-winning support 🇬🇧

We're dedicated to helping you stay on top of HMRC compliance with minimal admin. Pension legislation can be tedious and difficult to understand, so we've removed as much of the manual work as possible!

• Ensure pension compliance from the get-go
• Calculate pension contributions
• Automatically notify any employees without a pension provider

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Auto enrolment pensions FAQ

What is an auto enrolment pension?

An auto enrolment pension is a workplace pension scheme where eligible employees are automatically enrolled by their employer. Both the employer and the employee contribute to the pension scheme so that employees can save for retirement.

When does an auto enrolment pension start?

Auto enrolment pension typically starts for eligible employees when they meet certain criteria set out by the government. This usually includes being aged between 22 and state pension age, earning over a certain threshold (£10,000 per year in the UK), and working in the UK.

What are qualifying earnings for automatic enrolment

Qualifying earnings for automatic enrolment in the UK include an employee's salary, wages, commissions, bonuses, overtime pay, and certain other payments. These earnings must fall within a specific range defined by the government, which is typically between £6,240 and £50,270 per year

What is the pension auto enrolment age?

The pension auto enrolment age starts at 22 years old and extends up to state pension age. This means that employees aged 22 or older, but under state pension age, who earn above £10,000 per year are automatically enrolled into a workplace pension scheme.

When should I write to employees?

Once an employee has been assessed, it is a legal requirement to write to them individually to explain how automatic enrolment applies to them. This must be done within six weeks of their first assessment or the point at which they become an eligible jobholder if this is different to their first assessment date.

What ongoing duties do I need to keep on top of?

Each time you pay your staff you must monitor changes in their age and earnings to see if they need to be put into your scheme. You will also need to manage requests to join or leave the scheme.