Auto-enrolment has been hailed a success, with fewer people than expected opting out. But as Lynn Graves, head of new business development, corporate pensions, at Scottish Widows, explains, it’s not the only way to offer a company pension scheme
Over the next two years, auto-enrolment will be rolled out to an even wider group of employers, who should now be thinking carefully about how they will implement the changes.
The new regulations stipulate that all employers will have to provide a company pension scheme into which they must enrol all eligible employees. However, auto-enrolment is not the only way that employees can join an occupational pension scheme. They can also become members through contractual joining.
The contractual option could be an alternative for employers to consider. If this is the case, your first step should be to speak to your pension provider or intermediary to find out whether or not this is a suitable route, and what you need to do to ensure that any scheme you run complies with regulations.
There is a key difference between the two arrangements. Contractual enrolment requires the worker’s consent to join the scheme and deduct contributions from salary. Auto-enrolment does not need the employee’s consent to join the scheme. However, the auto-enrolled worker has a statutory right to opt out.
Some employers may find that contractual enrolment is easier and more cost-effective from a payroll administration point of view. Employers must be aware, though, that contractually enrolling staff into a scheme does not relieve them of their statutory auto-enrolment duties.
They also have to provide the correct information to employees who have been contractually enrolled. For example, employers must confirm with employees their membership of a qualifying scheme and inform them that if they choose not to join or want to leave the scheme, the company will have to auto-enrol them.
Contractual enrolment can work well for businesses that have a stable workforce, with a low turnover of staff and where employees tend to be long-serving.
If you contractually enrol the entire workforce and they are paid above the auto- enrolment threshold, this system may work well. But if a staff member chooses not to join or leaves the scheme at a later date, as an employer you are still legally compelled to auto-enrol them into a scheme from which they can choose to opt out.
As an employer, you and those responsible for administering the scheme – HR, payroll and your pension provider – all need to understand what information needs to be provided to employees.
Depending on which approach you take, the choice for the employer is between simplifying the weekly or monthly payroll requirements of auto-enrolment and setting up two different pension schemes. Under a contractual scheme, the employer must have auto-enrolment available for those who decline to join it.
Four things to remember…
- Employers need the consent of workers if they are enrolling them into a contractual pension scheme. Auto-enrolment does not need consent but employees can opt out.
- Contractually enrolling staff into a workplace pension scheme does not relieve employers of their duties under auto-enrolment.
- Enrolment into a contractual scheme can be a good option for firms with a stable workforce.
- A key benefit of contractual joining is that it minimises weekly or monthly administration.