Auto-Enrolment: Does your current pension scheme cut the mustard?

So far, we’ve looked at the broader picture of what’s involved in complying with Auto Enrolment, as well as timelines and the eligibility of your workforce.

But what about Auto Enrolment pension schemes themselves?

Employee pension schemes are complex creatures, and only some meet the government’s strict requirements for Auto Enrolment compliance.

You’ll need to assess whether yours is a fit, how to get it ready for the new requirements, or how to choose and implement a new scheme if necessary.

Cutting the mustard

If you already have a pension scheme operating for your employees, you can work out whether it’s acceptable as an Automatic Enrolment scheme if it ticks all the following boxes:

  • It needs to permit Automatic Enrolment rather than requiring consent or information from a new employee joining your business.
  • It must automatically enrol employees within three months of their joining the business.
  • It must have a ‘default’ investment option that recognises the likely characteristics and needs of employees, is balanced between risk and return, and has a ‘glide path’ (a phased investment schedule) to safer assets as retirement approaches.
  • It must meet one of the minimum contribution tests (more of that below…)
  • And it must have an opting-out facility.

Common qualifying schemes include:

Defined Contribution (DC) Schemes
Employees build up a fund during their working life from their own contributions plus contributions from their employer if offered, which is then converted into an income upon retirement. It can be either an occupational or a personal scheme. If it’s an occupational scheme, contributions are usually deducted from the employee’s salary before tax. 

Defined Benefit (DB) Schemes
These are not based on gradually built-up ‘pots’, but pre-defined lump sum pay-outs on retirement, based on what the employee have paid in plus other factors such as length of service, salary and age. They are often known as Salary-Related Pension Schemes.

Hybrid Schemes
These combine certain characteristics of Defined Contribution and Defined Benefit Schemes.

Minimum contribution requirements

Just to add a bit more complexity to the mustard mix, your pension scheme must fall into one of 3 categories of minimum contributions:

  • Tier 1: contributions of at least 9% of basic pay, including 4% employer contributions
  • Tier 2: contributions of at least 8% of basic pay, including 3% employer contributions (provided at least 85% of all workers’ total pay is pensionable).
  • Tier 3: contributions of at least 7% of total earnings, including 3% employer contributions

All of this is fairly straightforward once you’ve cut through the jargon, but it’s nonetheless a good idea to consult a pensions provider for a professional opinion rather than sticking to D.I.Y. – Cashtrak can recommend several highly-regarded firms.

My existing pension scheme passes muster…so what next

Unfortunately, the fact that your existing scheme meets all the criteria to be successfully labelled Dijon, English, or Wholegrain doesn’t mean you can take the rest of the summer off. An eligible scheme is a good start, but there are still steps you must take to make it auto enrolment-ready:

  • Decide if you definitely want to continue using that scheme for Automatic Enrolment.
  • Assess all of your employees to check who is already in your pension scheme.
  • Those who are will need to be informed about the switch to Automatic Enrolment, and be auto-enrolled via the correct processes.
  • Other employees who are not yet in your pension scheme at all need to receive information about joining through Automatic Enrolment, or opting out.
  • You can, if you wish, run two schemes concurrently: keeping your existing scheme for those already on it, and setting up a different Automatic Enrolment-specific scheme for employees newly signing up.

And what if my scheme goes against the (whole)grain? Or I’ve never had one?

Simple: you need to either adapt your existing scheme to tick all the boxes, or select a new scheme altogether.

A pensions professional will be able to advise as to whether the regulations on your existing scheme can be satisfactorily adapted or whether you’re better off starting from scratch.

If you want to choose a new scheme, there are several specifically set up recently with AE in mind – such as NEST and The People’s Pension, whilst at Cashtrak we can suggest reputable schemes such as ICB Pension Solutions. None of these are obligatory though as many schemes will be perfectly satisfactory; again, you should consult a pensions professional in making any decision.

Remember, as mentioned above, you are permitted to run two schemes concurrently should you wish to.

Once you’ve signed up to a new scheme, Cashtrak are perfectly placed to help you get your payroll software and record-keeping systems ready for your new set-up, and the extra pension contributions you’ll be managing.

For further advice on Auto Enrolment and how we can take the heat out of the process, contact us for a no-obligation discussion today, and remain confident that you can cut the mustard, however spicy the specifications.


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