Snapshot: What is Auto-Enrolment?
Auto-enrolment is as a result of change in law, mandating every UK employer with at least one member of staff to enrol them, if eligible, into a workplace pension scheme with compulsory employer contributions.
The reason for the “auto” is because all eligible staff must be enrolled automatically– the staff do not have to sign anything to be enrolled into the pension scheme. They can however choose to opt out.
Who does it apply to?
• Those who work in the UK
• Are aged between 22 and State Pension Age
• Earn more than £8,105 a year
• Are not already in a pension scheme
Employers are obliged to make contributions for part-time workers earning over £5,564 a year if these workers choose to take part.
Other part-time workers, those aged under 22 or over SPA (as long as working) can choose to opt-in.
When does it come into effect?
It came into effect in October 2012 for the largest businesses and is being phased in since then over a six-year period, with the expectation that by the end every employer with even one employee will be required to comply with auto-enrolment.
What does it mean?
Individuals may decide to opt out if they need all of their monthly pay to make ends meet or if they have a private pension policy which is considered sufficient. Staying in is not compulsory – but being the employer automatically enrolling you, is. However opting out does mean missing out on employer contributions (effectively “free money”).
Auto-enrolment is an opportunity for advisers and scheme providers to grow their business in the provision of specialist advice to employers on the requirements and implementation. However some have indicated that once they reach capacity, they may shut the door to new business – which would leave smaller firms in without competitive access
What are the problems with it?
The cost – it may represent an additional cost for employers due to individual ‘inertia’ to change the status-quo. Also, by setting a floor on the contributions required, employers who otherwise have been willing to pay higher contributions may be enticed to pay only that which is legally required.
A huge issue faced by employers is missing the staging date, with many employers seeking advice close to or even after their staging date. Employers appear to lack the knowledge to make informed decisions on auto-enrolment issues and delays are already resulting in fines typically in the region of £400 a day.
The Pensions Regulator recommends that employers have their scheme provider and advisers in place at least six months before the staging date to minimise the chances of missing the deadline.
What are the aims?
Previously many people didn’t save for their pensions because their employer didn’t offer them a pension or general lack of action in applying to join a pension scheme. By compelling employers to automatically enrol their eligible employees into a pension scheme, the government in a way is relying on member inertia i.e. individuals will not go to much effort to opt-out, and thus will inadvertently build up a pension pot.