Pensions auto-enrolment

26 Oct 2019

Group of people

All employers must ensure that their eligible employees are automatically enrolled into a workplace pension. This factsheet outlines the ongoing requirements on employers and highlights some areas of potential complexity – particularly for limited liability partnerships (LLPs) and company directors.

Employer obligations

The duties of an employer include:

  • Enrolling a worker into a pension scheme without the need for any action by the worker;
  • Arranging membership of a pension scheme for those workers who choose to opt-in or join a pension scheme;
  • Administering an opt-out process for workers who decide they do not want to be a member of a pension scheme, including automatic re-enrolment every three years if an employee remains an eligible jobholder;
  • Once a worker is enrolled, making minimum employer contributions to the scheme for eligible jobholders; and
  • Maintaining the required recordkeeping for the scheme and employees, and providing information to workers where appropriate.

As not all workers need to be auto-enrolled, employers need to monitor their payroll on an ongoing basis to identify where a worker must be added to their pension scheme. An obvious example of this would be when a new member of staff is first paid; employers also need to check, however, that other changes (such as an age change or an increase in salary which takes an individual over the earnings threshold) have not taken place that would require auto-enrolment for a longer-term employee.

Every three years, employers are required to re-enrol any workers who have opted out of auto-enrolment. As with the initial enrolment, such employees can choose to opt out again – but the employer must first re-enrol them. It is not possible to simply carry over an existing opt-out.

Who needs to be auto-enrolled?

First, the individual must be a worker either under an employment contract or a contract to perform work or services personally. This may include agency workers, but does not extend to individuals who are genuinely self-employed.

Directors and officeholders

Directors are excluded from the auto-enrolment requirements where either:

  • They do not have a contract of employment; or
  • They have a contract of employment, but no-one else (including any other director) does.

This means that ‘one-man band’ companies do not have any requirement to auto-enrol their director/shareholder. In other situations, it will be necessary to consider what employment contracts are in place.

Office-holders, such as non-executive directors and trustees, are excluded to the extent that they are not considered workers. The exclusion here only applies, however, for activities carried out in their capacity as office-holder. It is important to examine the facts of each individual case to identify whether an individual carries out other work which could bring them within the scope of auto-enrolment.

Partners in LLPs

LLPs should not assume that partners are not within the scope of auto enrolment as they may be workers under the Employment Rights Act 1996 (the ERA).

In May 2014 the Supreme Court ruled in Clyde & Co LLP v Bates van Winklehof that a partner of an LLP was a worker under the ERA. Prior to this ruling, previous case law under the ERA said that a partner of an LLP was not considered a worker. Whilst this case and the subsequent ruling concerns the definition of a worker under the ERA, the definition is very similar to that of a worker in the Pension Act 2008 for the purposes of automatic enrolment. The Pensions Regulator’s view is that the Supreme Court’s decision is equally applicable for auto enrolment and they expect LLPs to assess the status of each partner against the definition of worker in the Pensions Act 2008, taking into account the factors highlighted in the Supreme Court judgment. These are:

  • Integration within the organisation;
  • Dependence/subordination; and
  • Exclusivity (ie could the individual provide services to anyone else).

If an LLP determines that a partner is a worker, they are within the scope of auto-enrolment (although see the exceptions below).

Exceptions from auto-enrolment

There are certain situations in which, even though the auto-enrolment requirements are triggered, a business can choose not to auto-enrol an individual. These include:

  • Directors working under an employment contract;
  • Partners in an LLP who are workers for auto-enrolment purposes, but who are not ‘salaried members’ for income tax purposes;
  • Individuals who are under notice; and
  • Individuals who already have pension protection in place.

Care should be taken when considering whether any of these exceptions apply, and employers should take specialist advice where necessary.

Jobholders v entitled workers

The employer then needs to determine whether the individual is a jobholder or an entitled worker. The category of jobholder is then sub-divided into eligible and non-eligible jobholders. The employer’s duties are different for each of these categories of worker as follows:

Eligible jobholders

These workers are eligible for auto-enrolment and:

  • Are aged between 22 and state pension age;
  • Are working or ordinarily work in the UK; and
  • Have qualifying earnings payable in a pay period above the set earnings trigger for auto-enrolment (currently £192 per week).

Non-eligible jobholders

These workers are not eligible for auto-enrolment but can opt-in and:

  • Are working or ordinarily work in the UK;
  • Are aged between 16 and 21, or between state pension age and 74, and have qualifying earnings payable in a pay period above the set earnings trigger for auto-enrolment; or
  • Are aged between 16 and 74 and have qualifying earnings payable in a pay period below the earnings trigger for auto-enrolment but above the lower earnings level (currently £118 per week).

Entitled workers

These are workers who do not have sufficient qualifying earnings (currently below £118 per week) and who do not need to be automatically enrolled. They do have the right to join a pension scheme, which the employer must facilitate, but the employer is not obliged to pay into the scheme. Entitled workers:

  • Are aged between 16 and 74;
  • Are working or ordinarily work in the UK; and
  • Do not have qualifying earnings payable in a pay period above the lower earnings level for auto-enrolment.

Minimum contribution rates (defined contribution schemes)

The government has set minimum contribution rates for auto-enrolment pensions. The minimum rates comprise the employee contribution and associated tax relief and the employer contribution. Contributions can exceed the minimum.

The current minimum total percentage that must be contributed is 8%. Within that total contribution, the government has also set a minimum percentage of 3% that has to be contributed by the employer.

There are different rules for defined benefit schemes.

Further useful information can be found on the Pensions Regulator website.

This factsheet is based on law and HMRC practice at 1 October 2019.

Contact Us

Adam Kay
Partner, London

Key experience

Adam is a partner in the Transactions Tax Department of the London office.