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. Pensions schemes have various names, including:
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 members of staff. This requirement is known as automatic enrolment (or the ‘auto-enrolment’ or ‘auto enrolment’ duty). Auto-enrolment applies to all staff who:
are classed as ‘workers’
are between 22 and the State Pension age
earn at least £10,000 per year
work in the UK
When does the auto-enrolment duty not apply?
If a member of staff does not meet the above criteria, employers don’t have to automatically enrol them in a pension scheme. Further, employers must not automatically enrol someone in a pension scheme if:
they’re in a limited liability partnership (LLP)
they’re a director without an employment contract and employ at least one other person
For more information on when the auto-enrolment duty doesn’t apply, see the Government’s guidance.
How much are pension contributions?
Employers and staff each pay a percentage of earnings into the workplace pension. The total minimum pension scheme contribution from employers and staff 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 the pension scheme. Eligible staff members must generally make contributions of at least 5%. If these levels of pension contribution are already made through an existing workplace pension scheme, there is no need to take any action, as the requirements of auto-enrolment will be fulfilled.
Depending on pension scheme 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, in order 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, in the form of reduced national insurance contributions (NICs).
It is vital that any type of salary sacrifice arrangement does not 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 levels of contributions are made.
However, it is important that employers do not 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 have an effect on other payments and benefits?
A few issues which should be kept in mind when considering a salary sacrifice arrangement include:
any changes to earnings-related payments (eg pensions and overtime rates) which result from a reduction in cash salary are made clear to the worker
earnings-related benefits such as maternity allowance may be affected by a reduction in cash salary
salary sacrifice can affect a worker’s entitlement to contribution-based benefits such as the State Pension and the Employment and Support Allowance
entitlement to statutory pay (eg sick pay, maternity and paternity pay) can potentially be lost if a salary sacrifice arrangement reduces a worker’s average weekly earnings below the lower earnings limit
employers are responsible for ensuring that they pay and deduct the right amount of tax and NICs for the cash and benefits they provide
employers are also required to 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 choose to 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. In order to opt out, staff 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:
a decision to opt out must be taken freely and willingly, without any pressure being put on the worker
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
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 relied on from:
the employer’s auto-enrolment duty start date
the worker’s first day of employment
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 either accept the postponement or request immediate enrolment into the pension scheme. If a worker requests 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 postpone the pension contributions of a new worker beyond the initial 3 month period. For more information on pension postponement, read The Pension Regulator’s guidance.
Pension regulation and administration
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 - although the timeline for the project is currently being revised. For more information, see the government’s Pensions Dashboards Programme website.
Following new requirements expected to be published by the Pensions Regulator in 2023 (ie the Single Code of Practice, or ‘the Code’), trustees under most occupational pension schemes will be 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 this system of governance to cover further areas in some detail, including:
a risk assessment of the system
a remuneration policy
a policy on the appointment of advisers and service providers
considerations towards climate change and climate security
To ensure compliance with these requirements once the Code is in force, trustees may consider setting up a trustee sub-committee to work with professional advisors and reviewing their existing systems of governance to identify areas of non-compliance.
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.