Every UK employer must auto-enrol all eligible workers into a workplace pension scheme. They must also make employer contributions of at least 3% of each employee’s qualifying earnings into the scheme.
That’s for anyone between 22 and state pension age, who’s not in a qualifying pension scheme. Plus, they have to earn more than £10,000 a year.
That means your business must operate a pension scheme. So now’s a good time to choose the most suitable kind for your workforce.
There are plenty of options to choose from—we’ll take you through each one below. But first we’ll look at the basics.
And remember, you can refer to our HR and employment law software if you need any immediate help with this topic.
When did workplace pensions start?
On 1st October 2012 there were changes to workplace pensions. New regulations for auto-enrolment began from that date.
This means you must enrol your eligible workers into a compulsory workplace pension.
Any business with at least one employee must enrol them onto a workplace pension scheme. You must also make workplace pension contributions.
The standard workplace pension rules
Before we explore these, remember you can refer to our employment law advice for help on the finer details, as this is a complex issue.
The government has minimum levels you and your employees should pay into a scheme.
Workplace pension laws make it clear you have to automatically enrol an employee and contributions—if they’re eligible, that is. And what are the requirements? These are:
- They’re a “worker”.
- Are aged between 22 and the state pension age.
- Earn at least £10,000 per annum.
- Work most of their time in the UK.
An employee between 16 and 74 can still ask to join your pension scheme voluntarily, even if you don’t have to automatically enrol them.
You can’t refuse this request. And you’ll still have to make employer contributions if they earn over the following:
- £118 a week.
- £472 every four weeks.
- £512 a month.
The total workplace pension rates for contributions are now at 8% of qualifying earnings. Of this, minimum employer’s contribution is at least 3%.
This means the total of employees’ and employer’s contributions must add up to at least 8%, but the employer’s part must be at least 3%.
These figures came into effect in April 2019.
How does a workplace pension work?
After they’re enrolled in your scheme you must also pay the minimum contributions at the right time. What you can’t do includes:
- Forcing a worker out of the scheme
- Dismissing a worker or discriminating against an individual for using the scheme
- Suggesting a job candidate will have a better chance of landing a role if they opt out of the scheme (more on opting out further below)
- Close the scheme without enrolling your workforce into a new one first
While you can delay the date on which the employee is automatically enrolled by up to three months (“postponement”, as we call it), you must tell the worker it affects in writing when they first become eligible.
And you must still let them join if they ask you to.
You must also tell them the date they’re added to your pension scheme. This includes information such as:
- The pension scheme you use.
- Who runs the scheme.
- The amount the worker will contribute.
- How much you’ll pay into it.
- How the worker can leave the scheme.
Can you opt out of workplace pension?
Yes (from an employee’s point of view), it’s possible for a worker to do this after they’re enrolled. They can ask you for the appropriate form to do this.
From a business perspective regarding workplace pension, opt out carries other considerations. These include:
- They’ll have to refund money you pay in if they make this request within one month (“opt out”—there’s more on this below).
- You must let them re-join the scheme again once a year if they ask to after opting out.
- You must also automatically enrol them into the scheme again once every three years if the worker still meets the eligibility criteria—it’s a legal requirement for you.
1. Defined benefit workplace pensions
These sorts of schemes can be very expensive to run and are very rare.
Future pension entitlement is down to the employee’s eligible earnings and how long they’ve been in the scheme. That determines how much they’ll receive when they retire.
Defined benefit pensions are a broad category that includes final salary and career average revalued earnings (CARE) schemes.
You can decide when drawing up yours what types of pay (e.g. overtime or bonuses) count as earnings.
2. Defined contributions
This is the most common and simplest form of scheme.
Here workplace pension employer contributions are across a range of investments. The amount you pay out to retiring employees depends on:
- The amount of contributions that were made on the employee’s behalf.
- How well the investments have performed.
- How long they’ve been part of the scheme.
Some defined contribution schemes offer employees the chance to have a say on where you invest contributions.
3. Cash balance plans
Cash balance plans are a hybrid of defined benefit and defined contribution schemes.
The employee pay-out for all three kinds can be either an income during retirement, or a tax-free lump sum and income.
4. The National Employment Savings Trust (NEST)
NEST is a new government scheme available to all employers, as an alternative to setting up your own scheme.
You could also use NEST for some employees and set up your own scheme for others.
NEST is free to use, managed online, and the design is specifically for the new auto-enrolment rules.
It’s a defined contribution-type scheme, with an investment approach that’s won several investment awards. More than 100,000 employers now use it.
Rules for all scheme types
Whichever type of pension scheme you opt for, under the new pension rules you must:
- Inform employees in writing about the scheme you’ve enrolled them in.
- Let employees leave your scheme if they ask and repay their contributions within a month after they opt out.
- Let employees re-join your scheme after opting out, at least once per year.
- Automatically re-enrol eligible employees who’ve opted out once every three years.
Keep in mind there are certain things you can’t do. These include:
- Encourage employees to opt out, or opt them out by force.
- Close the scheme without enrolling employees into a replacement.
- Unfairly discriminate against employees based on their decision to stay in or opt out of your scheme.
Need our help?
Getting your pension scheme right can be a tricky business, but it’s essential you do so. Get in contact for immediate help: 0800 783 2806.