What is a workplace pension?
A workplace pension is a way of saving for retirement that’s arranged by employers. Pensions generally work by putting a percentage of a staff member’s pay directly into a pension scheme. Pension schemes have various names, including:
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occupational pensions
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company pensions
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work-based pensions
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works pensions
Where staff members are eligible for auto-enrolment, employers may also need to pay contributions to a pension scheme.
The Pensions Dashboards Regulations 2022 are introducing a requirement that all pension schemes and providers connect to a ‘pension dashboard’ (ie an online portal for access to pension information) to make pensions more accessible for employees. The deadline for the first category of pension providers (ie large schemes) to connect to a dashboard was to be 31 August 2023 - the timeline for the project is currently being revised. For more information, see the government’s Pensions Dashboards Programme website.
What is the auto-enrolment duty?
All employers are required by law to provide a workplace pension for certain staff members. This requirement is known as automatic enrolment (or the ‘auto-enrolment’ or ‘auto enrolment’ duty). Auto-enrolment applies to all staff who:
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are classed as ‘workers’
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are between 22 and the State Pension age
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earn at least £10,000 per year
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work in the UK
The Pensions (Extension of Automatic Enrolment) Act 2023 was passed in 2023 and gives the Secretary of State for Work and Pensions the power to pass regulations changing the auto-enrolment eligibility requirements. The intention is to widen eligibility so that some younger workers and workers with lower earnings are also eligible for auto-enrolment. As of July 2024, these changes have not yet been made nor has a date been provided for their introduction.
When does the auto-enrolment duty not apply?
If a staff member does not meet the above criteria, employers don’t have to enrol them in a pension scheme automatically. Further, employers does note need to automatically enrol someone in a pension scheme if that person, for example:
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is a director without an employment contract and employ at least one other person
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has resigned from their job or if the employer has given notice to dismissed them, or
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from a European Union (EU) country and is in an EU cross-border pension scheme
For more information on when the auto-enrolment duty doesn’t apply, see the government’s guidance on workplace pensions.
How much are pension contributions?
A staff member and their employer each pay a percentage of the staff member’s earnings into their workplace pension. Generally, the total minimum pension scheme contribution from the employer and staff member combined is 8%.
Since April 2019, employers have been required to pay at least 3% of a worker’s qualifying earnings (ie their salary before tax) into their pension scheme. Eligible staff members must generally make contributions of at least 5%. If these pension contribution levels are already met through an existing workplace pension scheme, there is no need for a staff member to take any action to join another pension, as the requirements of auto-enrolment will be fulfilled.
Depending on a pension schemes rules, employers and staff may pay more than the minimum contribution amount. Where employers pay more than the legal minimum, staff members can pay less than the 5% contribution provided the total contribution from them and their employer is at least 8%.
What is salary sacrifice?
An employer can make a contractual agreement with a worker to alter the terms of the original employment contract, to reduce cash salary payment in exchange for some form of non-cash benefits, such as enhanced pension contributions or childcare vouchers. This type of contractual change, known as salary sacrifice (or ‘salary exchange’ or a ‘SMART scheme’), can have advantages for both parties, such as reduced national insurance contributions (NICs).
Any type of salary sacrifice arrangement mustn't result in cash salary payments falling below the level of the national minimum wage.
How does auto-enrolment interact with salary sacrifice?
A salary sacrifice arrangement, where cash payments are reduced in exchange for pension contributions, can essentially fulfil the auto-enrolment obligation if the relevant employer's and worker’s required contributions are made.
However, employers mustn't require or induce their workers to opt out of auto-enrolment (eg by implying that salary sacrifice is a pre-condition of auto-enrolment).
Does salary sacrifice affect on other payments and benefits?
A few factors that should be kept in mind when considering a salary sacrifice arrangement include:
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any changes to earnings-related payments (eg pensions and overtime rates) that result from a reduction in cash salary should be made clear to the worker
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earnings-related benefits such as maternity allowance may be affected by a decrease in cash salary
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salary sacrifice can affect a worker’s entitlement to contribution-based benefits such as the State Pension and the Employment and Support Allowance (ESA)
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entitlement to statutory pay (eg sick pay, maternity pay and paternity pay pay) can potentially be lost if a salary sacrifice arrangement reduces a worker’s average weekly earnings below the lower earnings limit
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employers are responsible for ensuring that they pay and deduct the right amount of tax and NICs for the cash and benefits they provide
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employers must also report any non-cash benefits to HMRC at the end of the tax year. Some non-cash benefits may be exempt from tax and disregarded before calculating NICs. However, any conditions that apply to the exemptions must be satisfied
How does a worker opt out of their workplace pension?
Staff members who do not wish to take advantage of auto-enrolment can opt out (ie leave). They have one calendar month, known as the ‘opt-out period’, to formally leave the scheme and get a full refund of any contributions. To opt out, a staff member must obtain an opt-out notice from the pension scheme, complete this, and return it to their employer.
Some key points to bear in mind regarding opting out include:
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a decision to opt out must be taken freely and willingly, without any pressure being put on the worker
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the opt-out period starts from the later of the day the active membership is created or the date a worker receives the letter containing auto-enrolment information
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employers are required to issue a full refund of any contributions the staff member has made into a pension scheme within a month of receiving a valid notice to opt out
Staff members can still opt out after one month. However, they will not receive a refund of the contributions already made.
For more information, see the government’s guidance.
Can an employer postpone pension contributions for new workers?
It is possible to postpone pension enrolment for the first 3 months of a worker’s employment. This is known as ‘postponement’ and can be utilised on from:
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the employer’s auto-enrolment duty start date
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the worker’s first day of employment
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the date the worker meets the auto-enrolment criteria
To postpone their auto-enrolment duty, the employer must write to the worker stating that they intend to postpone pension enrolment. This letter must be sent within 6 weeks of the postponement start date. If a worker is on a fixed-term contract lasting less than 3 months, it may be possible to avoid pension enrolment altogether using this method.
Upon receiving the letter, the worker can accept the postponement or request immediate enrolment into the pension scheme. If a worker asks to be enrolled, the employer must do so as soon as possible.
At the end of the postponement period, the employer should assess whether the worker meets the age and earnings criteria to be put into a pension scheme. If they do, the worker must immediately be put into a pension scheme, and pension contributions must be paid. It is not possible to to postpone a new worker's pension contributions beyond the initial 3-month period.
For more information on pension postponement, read the Pension Regulator’s guidance.
Pension regulation and administration
Pension dashboards
The Pensions Dashboards Regulations 2022 are introducing a requirement that all pension schemes and providers connect to a ‘pension dashboard’ (ie an online portal for access to pension information) to make pensions more accessible for employees. The deadline for the first category of pension providers (ie large schemes) to connect to a dashboard was 31 August 2023. The overall deadline is currently set at 31 October 2026. For more information, see the government’s Pensions Dashboards Programme website.
The new General Code of Practice for pensions
The new General Code of Practice (ie ‘the Code’), published by the Pensions Regulator, came into force on 28 March 2024. It aims to provide clarity on the previously existing distinct Codes of Practice by compiling the majority of them into a single document outlining the Pensions Regulator’s expectations for governing bodies (ie the parties that run pension schemes - for occupational pension schemes, this will be the trustees).
Trustees under most occupational pension schemes are expected to establish effective systems of governance regarding these schemes. These systems should include internal controls.
For schemes with over 100 members, the regulations will require further action to be taken by the governing bodies, including:
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completing and documenting an own-risk assessment of the effective governance system within 12 months of the end of the first scheme year beginning after 28 March 2024, and carrying out an own-risk assessment every 3 years
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producing a written remuneration and fee policy setting out the principles for appropriate decision-making processes for pay and payment levels of fees paid by trustees, and reviewing the remuneration and fee policy every 3 years or annually if necessary
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maintaining a written policy on the appointment of advisers and service providers considering guidance stated in the Code, and reviewing this outsourcing policy every 3 years or before starting an appointment process
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considering climate change and climate security
Trustees should consider setting up a trustee sub-committee to work with professional advisors and review their existing systems of governance to:
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identify areas of non-compliance with the Code
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manage conflicts of interest (or avoid them as required by the Code)
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oversee the scheme’s reporting requirements to the Pensions Regulator
These new requirements should help employees know more about how their pension money is handled, providing reassurance regarding financial or ethical concerns that they may have.
For more information, read the Pensions Regulator’s guidance.
