Questions and answers for employers.

It’s the process where an eligible employee is automatically enrolled into their company’s qualifying pension scheme without any action on their part. Under current Government proposals, this will become a legal requirement for all UK employers.

A large number of the working population in the UK are not saving enough for retirement or taking advantage of private pension schemes that may be on offer. We are living longer and have an increasing proportion of people of retirement age compared to those of working age. Auto enrolment is a part of a Government initiative to increase private retirement savings.

Auto enrolment will begin in October 2012. However, to help businesses prepare for the administration changes and costs of auto enrolment, it will be introduced in stages. This will see larger employers start to auto enrol their employees in 2012 while medium to smaller employers will be phased in later. By September 2016, all employers will be required to auto enrol their employees into a qualifying scheme.

You will have to auto enrol any eligible employee. An eligible employee is anyone aged between 22 and state pension age whose earnings are over the income tax personal allowance (£7,475 a year from 2011/12). Minimum contributions will be based on income above the national insurance earnings threshold - currently £5,715, and up to £38,185 (2010/11 figures). This range is called “qualifying earnings”.

You will not have to auto enrol an employee who is not eligible. However they may wish to be enrolled. If an employee aged between 16 and 22, or over the state pension age but under 75 wants to opt in then you as an employer will have to contribute if they earn more than £5,715 a year.

If an employee earns less than £5,715 a year, they can still opt in but you do not have to contribute.

This is a scheme that meets certain minimum criteria in relation to contributions or benefits. A qualifying scheme must also have the ability for employers to auto enrol without requiring employees to join themselves. NEST ‘National Employment Savings Trust’ is the Government’s sponsored qualifying scheme.

The amount that employees and employers will have to contribute will also be phased. For the first four years, up to the end of September 2016, the total yearly contribution will be set at 2% of qualifying earnings, with the employer having to contribute at least 1%. From October 2016, this will increase to a total pension contribution of 5% with employers having to contribute at least 2%. Then from October 2017 onwards, the total minimum contribution will be 8% with the employer having to contribute at least 3%. The difference between what the employer must pay and the overall minimum contribution is made up by the employee plus some tax relief from the Government.

The scheme will need to have a default fund available as agreed with the pension provider. This will be used to auto enrol new employees and for those who don’t make an investment choice if you offer one. You can choose an appropriate scheme that offers investment choices to meet your obligations.

You may already offer your employees a scheme, but it will need to meet certain criteria to be suitable for auto enrolment:

• A personal pension plan/stakeholder pension scheme paying in at least the minimum percentage of qualifying earnings.
• A final salary pension scheme. The minimum contributions mentioned above will not apply as long as the scheme provides a minimum level of benefits.
• A money purchase occupational pension scheme paying in at least the minimum percentage of qualifying earnings.

All types of schemes must have the means to auto enrol eligible employees. If you don’t currently offer any scheme or your current scheme does not meet the criteria then you can either change your current scheme to fit the criteria or set up a new scheme.

If the scheme already meets the required criteria for the level of benefits payable from it then current scheme members don’t need to change. However you will need to auto enrol all eligible new and existing employees who are not members.

If you have employees who are not eligible for your final salary scheme but who are eligible for auto enrolment, then you will need an alternative scheme for them.

If your final salary scheme is closed to future benefit accrual and you have eligible employees, you will need to have an active qualifying scheme in place for future benefit accrual. This can be either a final salary or money purchase scheme.

If the scheme already meets the required criteria for the level of contributions then current scheme members don’t need to change. However you will need to auto enrol all eligible new and existing employees who are not members.

If you have employees who are not eligible for your current scheme but who are eligible for auto enrolment, then you will need an alternative scheme for them.

You may decide to close your current scheme, however before you do, you must check the contractual rights of your employees and go through a consultation process with them. Your new scheme must be suitable for auto enrolment.