Auto-enrolment is one of the biggest changes to have hit the pensions market in recent times, yet the experience of larger employers, that have auto-enrolled their staff since the legislation was introduced on 1 October 2012, has been largely uncomplicated.
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- Weekly-paid employees’ eligibility for auto-enrolment is prone to change frequently because of their fluctuating pay.
- Employers’ payroll teams face increased workloads because of this fluctuation.
- HR and pensions teams need to support payroll providers to manage the workload.
There have, of course, been challenges, not least of which is how to manage weekly-paid employees.
The tight timescales involved in processing the pay and pension contributions for weekly-paid staff has been a particular issue for employers.
Organisations must begin to deduct contributions in each pay reference period on or after the date an employee is auto-enrolled, even if this means calculating partial earnings for that period.
Employers must pay all eligible jobholders’ contributions to the trustees or managers of their pension scheme by the 22nd day (for electronic payments) or the 19th day (for cheque or cash payments) of the month after deduction.
Derek Miles, managing director of financial planner Aspira, says: “Where the contributions were deducted in the period between the eligible jobholder’s automatic enrolment date and the end of their opt-out period, they must be paid across to the scheme by the end of the second month.
“For example, if the first deduction is week four of August, the employer has until the end of October to pay that into the scheme. Once the opt-out period expires, the normal payment deadlines apply.”
Some employers’ payroll deadlines have also posed a challenge.
Robyn Caffell, auto-enrolment expert at employee benefits provider Secondsight, says: “Often, an employer’s payroll deadline is quite late in the pay reference period, or total earnings for [auto-enrolment] assessment purposes may only be known at the last minute.”
This may result in an employer auto-enrolling eligible weekly-paid employees into its pension scheme and then having to refund the previous four weeks’ contributions if the employees opt out of the scheme within the opt-out period, he says.
Staff who are auto-enrolled have one calendar month to opt out of their employer’s pension scheme.
A refund may also be due if an employee has not earned enough to reach the auto-enrolment earnings threshold within the employer’s pay reference period.
For example, weekly-paid workers could earn enough to be eligible for auto-enrolment one week, but fall short of the threshold the following week, and their pension contributions will vary accordingly.
Robert Sutton, senior pensions consultant at Thomsons Online Benefits, says employers’ approach to pay variations should be based on their definition of pensionable pay.
“If an employer’s definition of pensionable pay was basic pay, and the employee’s contract stipulated a minimum number of hours per week, with all additional hours worked treated as overtime, then, once enrolled, the contribution required will remain relatively constant for that employee,” he says.
“In contrast, if an employer’s definition of pensionable pay was total pay, then both the employee’s and employer’s contributions are likely to be much more volatile. If contributions are made at the statutory minimum level, which uses qualifying earnings as the pensionable pay definition, and the [employee’s] earnings fall below £109 a week, nothing would need to be contributed.”
Postponement is a useful tool to help employers manage their auto-enrolment duties for weekly-paid employees.
Organisations can use a postponement period to defer their assessment of employees’ eligibility for auto-enrolment. This is particularly useful for employers with temporary staff who, at the end of the postponement period, may no longer be working for the organisation, or who may no longer be earning enough to qualify for enrolment, saving the employer the administrative burden of processing their contributions and possible opt-out requests.
There could, of course, be subsequent spikes in employees’ earnings which could trigger auto-enrolment eligibility and, therefore, raise an issue for employers once the initial postponement period has expired. Auto-enrolment cannot be deferred indefinitely.
But Sutton adds: “There are provisions in the regulations [for employers] to defer the payment of their first contribution until after the opt-out period has expired, but many employers are unaware of this and some schemes are unable to administer it.
“What is needed is the establishment of an efficient contribution refund process and communication processes that are considerably more efficient than those relating to monthly-paid workers.”
But payroll providers’ readiness to deal with employers’ auto-enrolment issues is not the only factor determining the success of an auto-enrolment project.
Mavis Grover, UK product manager in payroll and HR at SumTotal Systems, says: “As zero-hour contracts become more prevalent, weekly-paid staff can expect vastly different salaries from week to week, making life more difficult for the payroll teams as they assess employee eligibility each pay run period.
“Decisions on whether or not to postpone an employee from being auto-enrolled for up to three months are often outside the scope of payroll and, therefore, precious time is spent waiting for decisions from the HR or pensions teams.”
“While the payroll system can handle the identification of employees who meet auto-enrolment criteria, decisions then have to be made on whether they should be enrolled, or postponed due to fluctuating earnings.
“All of this also needs communicating to the employees, which is a huge extra workload for payroll and HR and pensions staff.”
Viewpoint: Lawrence Sutton: Tackling the complexities of weekly-paid staff
Auto-enrolment is a difficult challenge for any employer, but particularly for organisations with weekly-paid employees, who present additional complexities.
Staging dates always fall on the first of the month, which will often be in the middle of an employer’s pay reference period for weekly-paid employees. Employers can consider using postponement to align the date at which they auto-enrol employees with the start of a pay reference period to avoid part-period calculations.
Another issue for employers is that pay reference periods (PRPs) can often start and end on different days within a week for groups of employees, so organisations should ensure they are aware of all employees’ PRPs so that they comply with auto-enrolment guidelines.
Technical changes to areas such as PRPs are expected to be in place soon following the Department for Work and Pensions’ publication of responses to its Technical changes to automatic enrolment, public consultation on draft regulations and other proposed changes, published in March 2013. This should provide additional flexibility and easements for employers, but it is still likely to be a complex problem to solve.
Timescales for processing and communication are inevitably small for weekly pay cycles, especially where there is a significant amount of variable pay. The scope for employers to use postponement to buy themselves extra time within their pay cycle is also limited for weekly-paid workers.
As a result, about 80% of the employers I deal with use simple postponement and rely on their payroll system to carry out their assessments rather than a third-party system.
There are also the opt-out and refund of contributions processes for employers to consider, which may require an aggregation and reconciliation of multiple weekly amounts. Add in the complexity of salary sacrifice, where appropriate, and this can be a difficult process for organisations to get right, and a challenging one for them to communicate.
Some employers are using auto-enrolment as a catalyst to move away from weekly pay cycles. Organisations for which this is not feasible or desirable should not underestimate the amount of work involved in getting their processes, systems and communications right.
Lawrence Sutton is senior manager at emxsolutions, People Services, Tax and Pensions at KPMG
Viewpoint: Ian Luck: Tax guidance for auto-enrolling weekly-paid employees
The introduction of pensions auto-enrolment arguably has a greater impact on employees who are weekly paid, where a more hand-to-mouth existence and less sophisticated financial management might be prevalent, than with traditionally monthly-paid staff.
But without doubt, employers of weekly-paid staff will find compliance with the regulations extremely onerous.
Any employee earning more than £182 per week must be automatically enrolled, when eligible, with contributions being based upon earnings above £109 per week. With the current minimum wage at £6.19 for over 21 year olds, that equates to anyone working slightly more than 17.5 hours per week.
Employers must identify the pay reference period for their workers. This is the period over which they pay the worker and must be at least one week.
It would not be unusual for an employee to be paid on Friday for the hours they have worked since Monday, but the pay reference period extends all the way through to include Sunday. Contributions deducted from pension scheme members and those due by the employer must be paid by the 22nd (19th if by cheque) of the following month.
Members can opt out of the pension scheme within one month of the date they are supplied with written information about their auto-enrolment. This must not be more than one month after their auto-enrolment date.
In such cases, employers must refund to the member any contributions that have been deducted, less any tax due, within one month of receiving the opt-out notice or the last day of the second pay reference period. This is regardless of whether the money has made its way back from the pension scheme.
The refund is made net of tax relief for employers using a group personal pension plan as their qualifying workplace pension scheme. For employers using an occupational pension scheme, such as Nest (National Employment Savings Trust), the contribution refunded will be the gross amount, so organisations will need to ensure that the correct tax is applied before it is returned to the employee.
Ian Luck is financial services director at Smith & Williamson
Case study: Cineworld extends payroll team’s working week to cope with auto-enrolment workload
Cineworld employs 4,480 staff at cinemas throughout the UK, and 92% of them are paid fortnightly.
Payroll manager Jenni Bromfield says: “We have faced a number of challenges, not least the fact that most of our staff are on zero-hour contracts and have pay that varies, so it is difficult to generate the data that determines who is eligible for auto-enrolment.
“All our payroll processes are geared up for BACS payments on one key date, so if something goes wrong, it would become very complicated.”
To help manage the workload of paying and, potentially, enrolling fortnightly-paid staff, Cineworld has extended its payroll service to weekends.
Bromfield adds: “Fortunately, our team of administrators can access the payroll system from home. It’s an informal arrangement, but it works very well and enables some terribly laborious processes to be completed within the required timeframe.”
Cineworld’s auto-enrolment staging date was 1 August 2013 after it deferred its 1 May staging date by three months.