Since 2018, all employers, whether they employ one person or one hundred, are legally required to set up and run a workplace pension for their employees that allows them to save for their retirement through contributions deducted straight from their salary. Usually, the employer, as well as the employee, will pay into the pension. You can read about the different types of workplace pension schemes here.
This law was introduced as the government was conscious that millions of people were not saving for retirement and wanted to encourage more people to build up a private pension income to supplement the state pension.
In this article, we help you navigate the process of setting up a workplace pension that meets your legal obligations.
Why Do I Need to Set up a Workplace Pension?
Under the Pensions Act 2008, all employers in the UK are required to provide a workplace pension scheme (also known as an ‘occupational pension scheme’) for eligible staff. This obligation kicks in as soon as your first member of staff starts working for you. You are considered an employer for this purpose if you deduct tax and National Insurance contributions from an employee’s wages.
There are two main types of workplace pensions:
- Defined contribution (DC) schemes (also known as ‘money purchase’ schemes) where income on retirement depends on factors such as stock market performance, the amount of money contributed to the scheme and related charges and fees. These schemes are usually provided by a third party and are typically found in the private sector.
- Defined benefit (DB) schemes (also known as ‘final salary’ schemes) where the income on retirement is effectively guaranteed by the employer. These schemes are now quite rare and are usually only found in the public sector.
Who Must I Enrol in a Pension Scheme?
Since 2018, all employers must enrol eligible employees into a workplace pension scheme and contribute towards it if they are a UK employer with at least one member of staff. This is known as ‘automatic enrolment’ as it is automatic for staff – they do not have to do anything because you, as the employer, must automatically enrol them into a pension scheme and make contributions to their pension without needing to ask if they want to be part of it.
To comply with auto-enrolment, you will need to assess all your staff and enrol those who are eligible. Payroll must also be updated to deduct and contribute pension contributions as required.
Members of staff will be eligible for auto-enrol if all the following apply:
- they are aged between 22 and state pension age
- they earn at least £10,000 per year
- they usually work in the UK
- they are not already in an appropriate workplace pension scheme
If a member of staff meets the above auto enrolment conditions, they will also be covered if
- they are on a short-term contract
- an agency pays their wages or
- they are away on maternity, adoption or carer’s leave.
Members of staff can opt out of your workplace pension scheme after you have enrolled them. However, if they choose to do this, they will miss out on the employer contribution that you make to their pension, as well as the government’s contribution, which takes the form of tax relief. By law, however, you will be obliged to re-enrol them back to the scheme every three years as long as they still meet the eligibility criteria.
You should be aware also that the Pensions (Extension of Automatic Enrolment) Act 2023 received royal assent in September 2023.
This legislation will extend the scope of automatic enrolment further by removing the lower earnings limit for contribution and lowering the age at which workers become eligible for automatic enrolment to eighteen years old.
A consultation on implementing these new measures is expected so it is likely to be some time yet before these changes come into effect.
Setting Up the Scheme
Your auto-enrolment obligations start on the day your first staff member joins your business, As an employer, you must have your pension scheme set up and have enrolled eligible employees within six weeks of that date.
Choosing a Pension Provider
The first step is to choose the right workplace pension provider for your business and staff. You must do your research and pick a reputable pension provider with a solid performance and reliability history. Another factor to take into account is the fees associated with the pension scheme - management fees and transaction costs can vary a lot.
You have several options when it comes to providing a pension scheme for your employees. It is possible to make use of the government’s own scheme (NEST) another multi-employer pension scheme or to establish your own bespoke scheme. The last option is generally used by bigger companies with large numbers of staff.
If you are a small business that only employs a few people, the easiest solution may be to use NEST. It is a low-risk pension scheme that is backed by the government, hence providing a level of security for employers.
However, there are other options and each option has its advantages and disadvantages so it is vital to find the option that provides the best fit for your business and your employees.
How Much Should You Pay?
As an employer you must contribute to your employees’ pensions and each employee must also pay into their pensions. The current minimum levels for contributions are 3% by the employer and 5% by the employee. You can pay more if you want to and similarly, employees have flexibility to contribute more if they wish.
You must deduct contributions from your staff’s pay each month and you will need to pay these into your staff’s pension scheme by the 22nd day of the next month. If you pay late or do not pay the minimum contribution for each member of staff, you may be fined for non-compliance.
An employee will also get a 1% from the government on their contribution through tax relief.
Crucial Things to Remember
It is important to remember to notify all eligible employees that they have been enrolled in a pension scheme and give them information on how to opt out if they choose to do so.
You must also inform the Pensions Regulator that you have set up your scheme and confirm it is compliant.
Lastly, you should be aware that auto-enrolment is not a one-off process and you need to regularly review your pension scheme management to ensure you remain compliant.
Legal Considerations
The Pensions Regulator is responsible for ensuring employers meet their pension duties. If you fail to meet your legal duties, it can take enforcement action, including issuing compliance notices, penalties/fines and escalating penalty notices. Furthermore, any missed contribution through late compliance must be backdated and paid in full as if they were compliant.
How We Can Help
For businesses employing staff for the first time, setting up and managing a workplace pension can be challenging. There are several important things to consider, from understanding costs and charges to tax relief and reporting any changes in contribution.
We can offer you clear practical legal advice on how to navigate the law on pensions and comply with your legal obligations. Contact us via email for more information.
