SME Pension Obligations: What You Need to Know
Following changes to the Pensions Act in 2008 and 2011 large organisations with 250 or more employees were obliged to automatically enrol all their eligible employees in a workplace pension scheme in the year leading up to October 2013. The changes are being phased in for all employers and are not expected to be complete until 2018, however, small and medium-sized employers with between 50 and 249 employees can expect to have to comply with the new regulations during the year starting in April 2014. Companies with 30-49 employees will have to start complying from August 2015 and those with fewer than 30 employees from January 2016.
The Pensions Regulator will be overseeing compliance with the new regulations and will send a letter to companies 18 months, 1 year and 6 months before they are required to start automatically enrolling their employees in a workplace pension scheme but if you want to check the commencement date for your SME pension obligations then it is also possible to do so on the Pension Regulator’s website.
So why are these new SME pension obligations being implemented?
Quite simply the government is concerned that there is an ageing population in the UK who are not making adequate financial provision for their retirement. They plan to tackle this problem by ensuring that more people save for their retirement by contributing to their employer’s pension scheme and that all employers actually have a suitable pension scheme in place.
And what exactly do these changes to the Pensions Act mean for an SME?
Essentially, an employer has two main duties with which they must comply:
- To start automatically enrolling eligible employees in a pension scheme from the date assigned to them by the Pensions Regulator – this is known as the “staging date”. An eligible employee is one who ordinarily works in the UK, is aged 22 years or over and earns over a certain amount. The automatic element of enrolment means that an employee does not have to fill in any forms or supply any information to their employer and the employer must formally confirm that each eligible employee has been enrolled.
- An employer must make no attempts to persuade an employee to relinquish their right to be a member of a pension scheme. Whilst an employee cannot opt out of automatic enrolment they may, within the first 4 weeks of being enrolled on a scheme, request to opt out of membership of the pension scheme.
The easiest way to determine which employees are eligible would be to use the payroll software to categorise each employee based on their age and earnings. The earnings threshold includes commission, bonus and overtime payments as well as regular salary and is reviewed each year by the Department of Work & Pensions (DWP).
An employer must also give any employees who are not eligible for automatic enrolment in a pension scheme formal written notice of how they can opt in to the scheme.
It would be useful to state what is meant by an “employer” with respect to these regulations as the term covers more than just companies or legal entities. The regulations apply, for instance, to temp agencies who are responsible for paying the temporary staff they provide and also applies to parents who employ nannies or people who employ a carer in their own home. However, self-employed people or companies where the only employee is a single director are exempt from these regulations.
Both occupational pension schemes and contract-based schemes are allowable under the regulations but SMEs should be aware that any existing scheme they have in place may not be adaptable to the new requirement; for instance, it may not be possible to increase the number of members in a scheme so companies will need to check their existing pension arrangements. Typically an SME would use a master trust type of pension scheme i.e. a large money purchase scheme for multiple employers such as that available from the National Employment Savings Trust.