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:
occupational pensions
company pensions
work-based pensions
works pensions
Where staff members are eligible for auto-enrolment, employers may also need to pay contributions to a pension scheme.
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:
If a member of staff does not meet the above critera, 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 on other person
they have resigned from their job or if the employer has given notice to dismissed them
they’re from an European Union (EU) country and in an EU cross-border pension scheme
For more information on when the auto-enrolment duty doesn’t apply, see the Government’s guidance.
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 must 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%.
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.
A salary sacrifice arrangement, where cash payments are reduced in exchange for pension contributions, can essentially fulfil the auto-enrolment obligation if the employer 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).
A few issues which should be kept in mind when considering a salary sacrifice arrangement include:
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.
It is possible to postpone pension enrolment for the first 3 months of a worker’s employment. This is known as ‘postponment’ 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 postponment 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.