The introduction of auto-enrolment

Starting from 1 October 2012, up to 10 million people in the UK are expected to eventually be enrolled in a pension scheme under ‘auto-enrolment’, which has been hailed as the biggest pensions revolution since state pensions were introduced over a century ago. Auto-enrolment requires all employers to enrol their workers into a qualifying workplace pension scheme if they are not already in one, and contributions at a minimum level must be made (if the scheme is a defined contribution scheme) by the employer and usually by the employee as well, although the employee has the option of “opting out”. An employee who opts out must be re-enrolled every three years.

Auto-enrolment is being ‘phased in’ and individual employers’ duties will be gradually introduced over the next six years, based on the employer’s size. Similarly, contribution rates are also being phased in. Only the largest employers, such as banks and supermarkets will be involved in the first wave of auto-enrolment, others will then join as the system is rolled out. The Department for Work and Pensions has said that it predicts that by the end of the year, about 600,000 more people in the UK will be saving in a workplace pension and by May 2014, around 4.3 million more people will be signed up.

The UK government has introduced auto-enrolment due to its concerns over people solely relying on the state pension when they retire, especially as life expectancy continues to increase. Under auto-enrolment, employers automatically have to enrol their workers who are (a) not already in a qualifying workplace pension scheme, (b) at least 22 years old, (c) below state pension age, (d) earn more than £8,105 a year and (e) work (or ordinarily work) in the UK (under their contract). However, even if the workers do not automatically qualify to be enrolled, many still have the right to join the scheme. If the non-qualifying workers tell their employer that they would like to ‘opt in’ to the scheme, the employer must allow the worker to do so.

All employers are subject to safeguarding provisions and they cannot take any action that is intended to encourage an employee to give up the right to be automatically enrolled into a qualifying pension scheme. For example, employers cannot decide against recruiting an individual because that person wants to join a company pension scheme or state that the individual’s appointment might depend on the decision to opt out. As such, employers should look at their recruitment policies and flexible benefit provisions if they have not already done so.

Auto-enrolment has been years in the planning, but the big test will be whether those at the helm (for example pension providers, company pay roll and HR departments) can cope with the strain of the changes, particularly during the initial introductory periods. It remains to be seen how successful and popular auto-enrolment will be.