Pension Auto-Enrolment Exclusions

One of the key duties for UK employers under the new regime under the Pensions Act 2008 (“PA 2008”) is auto-enrolment of its jobholders. Implementation of the auto-enrolment employer duties is being phased in over a period of more than five years that started on 1 October 2012 and runs until 01 February 2018. 

Every employer in the UK has been assigned a staging date according to the size of its payroll, from when it will become subject to the new duties.

The new duties will apply to the employer automatically by law, with effect from its staging date. Once it is subject to the new duties, the employer must ensure that all its eligible jobholders are enrolled in an automatic enrolment scheme, unless they are already active members of a qualifying scheme (s.3(2), PA 2008) or unless a specific statutory exception applies. As a general principle, employers cannot contract out of, limit or exclude any of the new duties imposed on them, except under a compromise in relation to proceedings in an employment tribunal.

Jobholder’s Eligibility for Auto-Enrolment

A jobholder can opt out of the pension scheme in which he has been auto-enrolled, but if he does not do so the employer will be obliged to pay minimum pension contributions as long as the worker remains an active member. Whether or not the employer is making people redundant in the company is irrelevant (unless they are in a notice period – see below), and the employer’s duties of auto-enrolment regarding its active members still applies.

However, not all jobholders will have to be auto-enrolled in a pension scheme. One of the few ways an employer can be excluded from its pension scheme duties of auto-enrolment is if their jobholders do not meet the qualifications. To be eligible for auto-enrolment, a jobholder must:

Be aged at least 22, but below state pension age (SPA). SPA is currently age 65 for men and age 60 for women, though it is being incrementally equalised between the sexes. Women’s SPA will reach age 65 by November 2018.

Earn more than the earnings trigger in a relevant pay reference period (which is the same period used to assess qualifying earnings). The trigger is set at £10,000 a year in the 2016/17 tax year. Earnings include bonuses, overtime and statutory maternity, paternity or adoption pay among other things.

Not be within a category of jobholders who are excluded by law from having to be auto-enrolled. The statutory duty to auto-enrol jobholders becomes optional if they fall into one of the following categories:

They are in a notice period at any point within six weeks of their automatic enrolment date. This includes notice periods arising from a jobholder’s resignation, dismissal or retirement;

They have cancelled their scheme membership after being contractually enrolled in a qualifying scheme;

They benefit from lifetime allowance transitional tax protection;

They have received a winding-up lump sum in relation to a registered pension scheme and, in the 12 months since the payment was made, have both ceased to be employed and subsequently been re-employed by the same employer;

They hold office as a director of the company that employs them; or

They are a genuine partner in a limited liability partnership (LLP).

Auto-Enrolment Employer Duties Exclusions

An employer is exempt altogether from the duty to auto-enrol an individual who is an eligible jobholder if the employer is a “European employer” in relation to that individual under legislation governing cross-border pension schemes.

The duty on the employer to auto-enrol an eligible jobholder in an automatic enrolment scheme does not apply in the case of a jobholder who is already an active member of a qualifying scheme on their AED (automatic enrolment date).

Contribution Payment Time Limits Exceptions

There is also no complete exclusion if an employer cannot afford the pension contributions, but there are certain exceptions to the time limits for paying contributions. Contributions deducted by employers from jobholders’ salaries, together with employer contributions made on behalf of jobholders, must be paid to schemes within statutory time limits. As a general rule, if a contribution is deducted from the salary of an active member by his employer, the contribution must be paid over to the scheme by the 22nd of the month following the month in which the contribution is deducted from the member’s salary (if paid electronically) or by the 19th of the month in any other case.

An exception to these time limits arises, however, for contributions that are deducted from a jobholder’s salary during his first three months of scheme membership. These must be paid to the scheme by the 22nd day of the fourth month after the jobholder became an active member, assuming the contributions are paid electronically (and by the 19th day in any other case).

However, if contributions have been overdue for at least three months past their due date, the Pensions Regulator (the “Regulator”) can direct an employer to pay the outstanding contributions by issuing a compliance notice or unpaid contributions notice (Regulation 9, Compliance Regulations). The Regulator also has power to add interest to unpaid amounts at a rate of 4.2% plus the increase in the retail price index (RPI) (Regulation 10, Compliance Regulations).

Use of a Postponement Period

While employers cannot completely avoid auto-enrolment of their jobholders (except in the few circumstances mentioned above), the legislation allows an employer to operate a postponement or waiting period of up to three months before an eligible jobholder must be auto-enrolled. An employer can use a postponement period in any or all of three situations:

For eligible jobholders already working for an employer on the employer’s staging date.

For new workers who start work at a future date and are eligible jobholders when they join.

For existing and future workers who are initially ineligible, but who become eligible at a future date (for example, because they reach the age of 22 or start earning more than the earnings trigger).

If the employer decides to use a postponement period for one or more of the three situations referred to above, it must give its workers formal notice within one six weeks of the period starting. This must include confirmation of a worker’s deferral date, which is the end of the postponement period. Once the period has expired, the employer will be obliged to assess whether a worker is eligible for auto-enrolment (or counts as a non-eligible jobholder or entitled worker). If appropriate, the auto-enrolment formalities must be completed within six weeks of the jobholder’s deferral date.

Penalties for Failing to Comply with the Employer Duties

If an employer does not comply with its duties or co-operates with the Regulator, it may face enforcement action by the Regulator. The employer will be required to register with the Regulator within five months of its staging date, allowing it to monitor the employer effectively. A “wilful” failure by an employer to comply with some of the key duties, such as auto-enrolment, can amount to a criminal offence, where a person found guilty of this offence is liable on conviction to imprisonment or a fine or both (s.45, PA 2008).

In the first instance, the Regulator can issue a formal compliance notice. If a breach is not remedied, the Regulator can impose fixed penalties starting at £400. In the case of serious or persistent breaches, the Regulator can order escalating penalties. These range from £50 a day for employers with one to four workers to £10,000 a day for those with 500 or more workers.

A key point to note about the new regime is that workers will not be able to bring claims in employment tribunals about an employer’s failure to comply with the auto-enrolment and minimum contribution duties. But a claim by an employee that he has been unfairly dismissed in consequence of an employer’s non-compliance, or a claim by a worker that he has suffered detriment arising from breach of the employer duties, will be actionable in the tribunal.