Since the duty to automatically enrol eligible workers in a pension scheme was introduced in 2012, over 11 million workers and over 2.3 million employers have been enrolled into pension saving. However, 318,374 fines for breaching this duty have been issued by the Pensions Regulator over the same period, with 27,938 of those occurring in the second half of 2023.
The Pensions Regulator’s wide-ranging powers to investigate cases and secure compliance include escalating daily fines (the size of which is based on the employing company’s size) and, where there is a wilful failure to comply, criminal sanctions that can result in imprisonment for a term not exceeding two years, a fine or both.
While wilful failure to comply is rare, many aspects of the automatic enrolment regime are often overlooked and can prove costly if non-compliance goes unchecked for some time. Below the author has highlighted some issues they have come across when advising employers on their duties.
Who is a “worker”?
Anyone who has employees who work, or ordinarily work, in the UK and are aged between 16 and 75 is required to comply with the auto-enrolment duties. A “worker” is any individual who:
- Works under a contract of employment
- Has a contract to perform work or services personally and is not undertaking the work as part of their own business
An individual who is paid a fee as a self-employed contractor under a contract for services is not normally classed as a worker.
There are special rules for directors. Directors are only workers if they have a contract of employment and are not the only person working for the company under an employment contract. For directors who are workers (and also for limited liability partnership (LLP) partners who are not salaried members under HMRC tax rules), the employer can decide whether to enrol those who meet the age and earnings criteria, subject to those people having the right to opt-in.
Directors are only workers if they have a contract of employment and are not the only person working for the company under an employment contract
Information requirements
The employer must write to all workers (including directors and LLP partners) about how the pensions duties apply to them. It must do this within six weeks of the duties’ start date or of a decision made to postpone that date for up to the three months allowed. The Pensions Regulator’s website has letter templates that employers can use.
An employer is only exempted from the need to write to workers if it uses contractual enrolment instead. This involves obtaining a worker’s consent to be put into a pension scheme that meets the criteria to be a qualifying scheme for automatic enrolment and to deduct pension contributions. Where this approach is used, consent is normally obtained in the employment contracts.
Enrolment into a pension scheme
Staff who are aged between 22 and state pension age and earn over £10,000 per year (or £833 per month/£192 per week) must be put into a pension scheme.
To be a qualifying scheme, it must meet certain requirements which differ according to the type of pension scheme. They are based on the contribution rate for a defined contribution scheme and the benefits a worker is entitled to under the scheme for a defined benefit scheme.
Qualifying earnings
For a defined contribution scheme, the minimum contribution rate is 8 percent, of which 3 percent must come from the employer. These percentages do not apply to all earnings; they apply to what a worker earns over a minimum amount (currently £6,240), up to a maximum amount (currently £50,270), which are sometimes called “qualifying earnings”. So, for someone who earns £18,000 a year, the minimum percentage is worked out on the difference between £18,000 and £6,240, which is £11,760.
The earnings included in the calculation are:
- Salary
- Wages
- Commission
- Bonuses
- Overtime and statutory sick pay
- Maternity, paternity, adoption and shared parental leave
- Parental bereavement
- Neonatal care pay
Certification
If an employer does not want to base pension contributions on qualifying earnings (for example, if it does not want overtime and/or bonuses to be included in the earnings calculation for contributions), it can self-certify that the scheme meets alternative requirements. The alternative requirements are, broadly:
- Minimum contributions of 9 percent basic pay, of which the employer must pay at least 4 percent (basic pay excludes bonuses, overtime, commission and certain allowances)
- Minimum contributions of 8 percent of pensionable pay, of which the employer must pay at least 3 percent, provided that pensionable pay constitutes at least 85 percent of total earnings
- Minimum contributions of 7 percent of total earnings, of which the employer must pay at least 3 percent, provided that all earnings are pensionable
If contributions are not based on qualifying earnings but the employer has not certified this, the contributions paid must at least meet the minimum requirements on a qualifying earnings basis. Any underpaid contributions must be rectified.
Certificates have a maximum validity of 18 months and must be in place for each period where contributions are paid based on something other than qualifying earnings. An employer has one month, beginning with the effective date of the certificate, to complete the necessary checks and sign the certificate.
It is important to use the correct earnings thresholds… Not doing so puts workers at risk of not receiving their full contributions and employers at risk of regulatory action
Certificates do not have to be sent to the Pensions Regulator but must be kept for at least six years after expiry, as the Pensions Regulator can ask to see them. Where contributions have been underpaid, the Pensions Regulator can issue an unpaid contribution notice to:
- Estimate the rate of unpaid contributions
- Direct the employer to calculate the unpaid contributions
- Charge interest on the unpaid contributions (at a rate of 4.2 percent plus the increase in the retail prices index)
- Direct the employer to pay both its and its workers’ unpaid contributions.
It is important to use the correct earnings thresholds when contributions are based on qualifying earnings and for certificates to be in place when based on something else. Not doing so puts workers at risk of not receiving their full contributions and employers at risk of regulatory action which could lead to financial penalties. Employers should follow the guidance on the Pension Regulator’s website to ensure they avoid unintentional fines and/or penalty notices.
