Making plans for auto-enrolment

Auto-enrolment has been described as the biggest change in UK pension legislation for a century, but what does it mean for law firms and the people who work for them? Put simply, it means that employers must automatically enrol certain staff members into a pension scheme that meets set criteria, and make contributions towards it.

Auto-enrolment is a cornerstone of the Government’s pensions reform strategy and is designed to encourage workers to save more for their retirement, but it looks set to present some considerable challenges for law firms, and the penalties for non-compliance are severe.

Here are some of the most frequently asked questions about auto-enrolment.

Q: When does my firm need to have a scheme in place?

A: The new employer duties are being phased in over six years, starting with the UK’s biggest companies. The date when your business must be compliant is known as its staging date; it depends on the number of staff you have and the last two digits of your payroll reference number. For smaller firms with less than 50 staff, staging dates begin in June 2015. For a definitive staging date for your firm, visit www.thepensionsregulator.gov.uk

Q: Does auto-enrolment affect all employees?

A: The Pensions Regulator has classified all workers into one of three categories – eligible job holders, non-eligible job holders, and entitled workers (those who earn less than £5,668). For law firms, the vast majority of staff will fall into the eligible job holder category, which comprises workers aged 22 to state pension age who earn more than £9,440 a year (in the 2013-14 tax year). Staff who fall outside this category are classed either as non-eligible jobholders or entitled workers, and do not need to be automatically enrolled into a pension scheme.

Q: Can firms opt out of their auto-enrolment obligations?

A: No, all employers must comply.

Q. Can employees opt out of the scheme, if they wish?

A: Yes. However, they must be enrolled into the scheme first, before they are able to opt out. It is illegal for their employer to encourage them to leave the scheme.

Q: My firm already has a pension scheme.Does it have to do anything?

A: Yes. There is a misconception that if you have a pension scheme in place then you don’t need to worry, but not all company pension schemes will be compliant with the new rules. Assessing your existing pension arrangements will be the first step for many law firms.

Q: How much do staff have to contribute?

A: From October 2018, 8% of qualifying earnings will need to be paid into the employer’s pension scheme, at least 3% of which should come from the employer. The rest comes from the employee.

Q: How much do employers have to contribute?

A: Minimum employer contributions are being phased in over a number of years. Up until October 2017, the employer will need to contribute 1% of qualifying earnings, rising to 3% after October 2018.

Q: What is the process?

A: The recommendation from the Pensions Regulator is that firms should start planning for auto-enrolment 18 months before their staging date. This means that, for smaller firms of 50 staff or less, the planning process should have already begun, as the staging dates begin in June 2015. Nominating and registering a point of contact at your firm is stage 1, followed by an assessment of staff eligibility and any existing pension scheme. On average, law firms will have to complete 33 administrative tasks to prepare for final registration.

Q: Who is responsible?

A: Responsibility for complying with auto-enrolment obligations by the staging date, including setting up a workplace pension, lies with the employer, which in the legal sector will often mean the partners. Failure to introduce a compliant scheme in time is a criminal offence. For firms with between four and 50 employees, the fines that can be imposed are an initial £400 fixed penalty notice and/or up to £500 for each day that the firm goes past the deadline.

No shortcuts

While staging dates may seem some time off at the moment, we suggest law firms should begin researching their auto-enrolment obligations as soon as possible, as there could be complications along the way.

Make sure you have budgeted for the higher cost of employer contributions, and look out for hidden costs such as record keeping and upgrading payroll systems.

It is crucial to have an effective plan for communicating with staff and dealing with their concerns through what could otherwise be an unsettling process. In short, the penalties involved mean there is no scope for shortcuts.