If you run a business and you have at least one employee, under current UK legislation you must provide a work-place pension scheme and fulfil various Employer duties, such as:
- Automatically enrolling all eligible employees into the pension scheme
- Calculating contribution levels – then making sure they get to the pension provider in a timely fashion
- Communicating with all employees regarding the pension scheme and how it affects them individually.
This however is not an exhaustive list, there are many employer duties. Keeping on top of them can become a full-time job, distracting you from the core activities of your business. After all, you did not get into business to become a pension scheme administrator.
In my experience often times errors occur due to a lack of communication or a misunderstanding regarding who is taking care of which employer duty.
Due to the nature of workplace pensions, many errors can carry on undetected for many months if not years before they come to light at which point the damage has been done and correcting them can be costly.
“An ounce of prevention is worth a pound of cure” – Benjamin Franklin.
Over the years we have helped to correct many different types of problems with employer pension schemes. Here are five we come across regularly:
1. Failure to provide Employee Communications
When you first assess an employee for automatic enrolment, they fit into one of three categories of worker. Either an Eligible Jobholder, a Non-Eligible Jobholder, or an Entitled Worker. This depends primarily on their age and level of pay. It is essential that you communicate within a 6-week period, but hopefully at the earliest opportunity post work force assessment, with the outcome of that assessment and how this affects them going forward. Essentially, will you need to automatically enrol them or not? In either of these situations, you must provide them with their options moving forward.
Why is this important?
If you assess an eligible employee and automatically enrol them into the scheme without notification, they may miss their opportunity to opt out of the pension, should they be inclined to do so. This can result in funds being trapped inside the pension scheme against the employees wishes. If they complain about this, you may find yourself subject to regulatory or legal action.
If you assess and employee and find them to be a non-eligible job holder or an entitled worker and you fail to communicate this fact to them. You have opened yourself up to an unending financial commitment.
In theory an employee could come to you in the future (perhaps after a great deal of time has passed) and state that they were never notified about the company pension and where never offered the opportunity to opt into the scheme. You would then become liable as an employer at a minimum to back date all of the missed employer contributions over this period and may even find yourself on the hook for the employee’s side of the equation, this has been known to run into thousands of pounds worth of back dating.
Please make sure your employee communication letters are up to date with correct information and are provided to each employee at the correct time.
2. Failure to perform ongoing workforce assessments
Once you have performed your initial assessment of a worker and issued the relevant communications to them, you may believe your job is over. However, this is not necessarily the case. Should an employee be assessed as a non-eligible job holder or an entitled worker during their initial assessment and therefore not be automatically enrolled, you must continue to assess that worker each pay reference period to make sure they don’t satisfy the requirements for automatic enrolment.
Why is this important?
This is a prime example of the sort of error I see all to often. Perhaps you have a part time worker who earns way beneath the automatic enrolment threshold (currently £10,000.00 per year). but then does some overtime in one particular pay reference period and is suddenly (though temporarily) classed as an eligible employee. Depending on the schemes use of postponement this employee may become eligible for automatic enrolment. If you miss this opportunity and it later comes to light, you may again be on the hook for significant amounts of back dated pension contributions for that employee. This may lay dormant for years before bubbling to the surface.
Similar situations can occur when a member of staff is too young to be assessed as eligible (currently you must be between age 22 and State pension age, to be classed as an eligible job holder) but then passes the age threshold. If you are not continuously assessing your workforce, you can run into problems.
Please make sure you are keeping records of any of your employees not currently in the pension scheme and keep monitoring them and assessing them each and every pay reference period.
3. Accepting opt-out requests prior to automatic enrolment
This error unfortunately occurs far to frequently. Employers come to me with a list of their employees and mention a couple of employees who made the choice not to be automatically enrolled. This seems logical. If an employee doesn’t want to be enrolled, then why enrol them? They will only immediately opt out anyway.
Unfortunately, your employer duties don’t work like this. Your obligation as an employer is to assess the employee and should they be found eligible, automatically enrol them into a qualifying work-place pension scheme. (Making sure you don’t forget to communicate this fact to the employee along with their options going forward). The employee can then opt out.
Why is this important?
If you failed to automatically enrol an employee after being assessed as eligible, then they also never officially opted out. This again will lead to back dating of contributions regardless of whether the member wanted to be automatically enrolled or not and potentially enforcement action by the Pensions Regulator. In this instance you are even more likely to end up covering the employees missed contributions also.
Please make sure you enrol every eligible employee into the pension scheme at the appropriate time, don’t get caught out by this one.
4. Failure to provide postponement notices
Under current legislation you are allowed to use postponement within your pension scheme. This allows you to delay the automatic enrolment of an employee after they become eligible for automatic enrolment. There are many reasons an employer may choose to use postponement within their pension scheme. Some use postponement to avoid low paid workers finding themselves automatically enrolled due to a short-term fluctuation in pay, some to align a new employee’s automatic enrolment with the beginning of a pay reference period and others as part of a probationary period.
Whatever your reason to use postponement it is subject to a maximum of 3 months and can only be used if a postponement notice is provided to the employee within 6 weeks, either of the first day of employment or the day an employee first becomes eligible for automatic enrolment (whichever is applicable).
Why is this important?
Many employers are either unaware that they have to issue a notice (including various minimum requirements) or attempt to postpone assessment of the employee for longer then the 3 month maximum. Often because this doesn’t fit with a probationary period already in place for new employees.
If a notice isn’t provided within the first 6 weeks and you miss the deadline. You will need to back date the employee’s pension contributions as though you had enrolled them on their first day of employment (or the day they first become eligible for enrolment).
Should you attempt to postpone an employee’s enrolment into the pension scheme longer than 3 months, you may find yourself subject to regulatory and legal action as well as owing back dated contributions.
5. Selecting an unsuitable method of calculating contributions
The minimum contribution calculation method under auto-enrolment is based on qualifying earnings. Qualifying earnings are also referred to as banded earnings and represent a section of an employees pay as follows:
- £120 – £967 – per week
- £520 – £4189 – per month
- £6240 – £50270 – per year
Based on the 2022/2023 tax year: but subject to change.
Contributions must be set at a minimum level of 8% of an employee’s qualifying earnings with at least 3% coming from the employer. Often this level is adhered too and results in 3% from the employer and 5% (gross) from the employee.
However, it is possible to certify that your scheme at least meets the minimum requirements by using a different definition of pensionable pay. Often this is based purely on basic pay or on Full pay.
Qualifying earnings is composed of the following pay elements:
- salary.
- wages.
- commission.
- bonuses.
- overtime.
- statutory sick pay.
- statutory parental leave pay (maternity, paternity and adoption pay)
This can lead to a situation where someone has chosen to use basic earnings as their definition of pensionable pay, but due to high levels of over time or bonuses/commissions they find themselves deducting contributions that are less than would have been the case under the minimum requirements.
Why is this important:
Qualifying earnings is not an alternative method of defining pensionable pay, it is the minimum requirement. It may well be that when you started your pension scheme, the use of an alternative definition of pensionable pay was a more generous method of calculating pensionable pay. However, as businesses develop and the way employees are remunerated changes, this may well also change.
This may leave you exposed to fines and back pay for multiple employees if not the entire scheme.
Please make sure you are regularly reviewing your scheme to make sure you are at least inline with the minimum requirements under current legislation.
We are here to help
We have a long history of not only of setting up and running fully compliant successful pension schemes for employers, but also fixing schemes for employers where errors have occurred and going on to maintain them in line with the rules.
Our aim is to make sure you can invest more of your time in doing what you do best and be able to rest easy knowing that your pension scheme is in good hands.
If you would like some help, please see our contact us page for details.