What is automatic enrolment?

What is automatic enrolment?

There are many workers who don’t have any savings for their retirement so to encourage all workers to save for this, in as easy a way as possible, the Government introduced Automatic Enrolment. 

Since 2012, all employers must enrol their eligible employees into a workplace pension scheme if they are not already in one.

The scheme must meet certain conditions and for employers who already have a pension scheme in place that meets the conditions, there may be no change and the scheme can be used for Automatic Enrolment. Most employees will now be automatically enrolled.

Employers and Government Scheme

All employers must have a scheme in place by February 2018.

Some employers will chose to use a national scheme such as the one set up by the government – National Employment Savings Trust – more commonly known as NEST.

Schemes must meet prescribed quality requirements in order for them to be deemed suitable for automatic enrolment. For money purchase schemes there is a minimum total contribution that must be paid. 

For DB schemes there are different requirements for example, one that satisfies the reference scheme test for contracting-out, automatically meets the quality requirements.

Other types of schemes will need to meet what is known as the Test scheme standard.

There are some specific differences to be aware of when dealing with members of automatic enrolment schemes which we will look at now.

Eligibility

For the purpose of these schemes workers are classified as shown below. 

You can see that there are three types of workers:

  • Eligible jobholders
  • Non-eligible jobholders
  • Entitled Workers

Eligible jobholders

  • Workers aged between 22 and State Pension Age who earn at least the earnings threshold amount
  • They must be automatically enrolled
  • They don’t need to do anything

Non-Eligible jobholders

  • Workers aged 16 to 21 or State Pension Age to age 74 and earning at least the earnings threshold amount
    OR
  • Aged 16 to 74 and earning between the lower limit of the qualifying earnings band and the earnings threshold amount
  • They must be offered the right to join and the employer must pay contributions
  • To join they must complete an "opt-in” notice

Entitled Workers

  • Workers aged 16 to 74 who earn less than the lower limit of the qualifying earnings band
  • Employers must ensure Entitled Workers have access to a pension scheme if they request one. It doesn’t have to be a qualifying pension scheme and the employer does not have to contribute.
  • To join they must complete a "joining notice”

The earnings threshold amount is £10,000 per annum.

Eligible jobholders will receive information about the scheme and their rights. They do not need to do anything and contributions will be automatically deducted from their automatic enrolment date.

The qualifying earnings band is a band of gross annual earnings that fall between two amounts known as the:

  • lower limit of the qualifying earnings band (£5,876 for the 2017/18 tax year), and the;
  • upper limit of the qualifying earnings band (£45,000 for the 2017/18 tax year)

The above amounts are reviewed each year by the Department of Work & Pensions (DWP).

Opt-out Period

If an eligible job holder decides not to remain in the scheme there is an opt-out period which starts the later of the date the worker:

  • Becomes an active member or;
  • Is provided with written enrolment information

They must complete a valid opt-out notice for their employer who must then unravel their records and refund any contributions deducted so that the worker’s position is the same as if they had never joined the scheme.

This is a specific rule for automatic enrolment schemes. If a member leaves the scheme at any other time after the opt-out period they will have the same options and be subject to the normal rules on leaving a pension scheme.

Contributions and Investment

Many automatic enrolment schemes will be set up on a DC basis and the long-term total minimum contribution rate set by the government is 8% of earnings, this is split between:

  • The employer who pays at least 3%
  • Tax relief at 1%
  • Any member rate required to meet the full 8% rate

There is a specific criteria that members cannot be required to make an active choice on where to invest contributions, consequently the employer’s scheme must provide a default investment option that members will automatically be invested in.

The scheme is designed to be simple and easy for the member.