Although the pensions auto-enrolment regime originally started to kick in during 2012, an alarming number of employers are still failing to appreciate that they are not yet fully compliant.
One particular problem area we are coming across is when a pension scheme doesn’t use ‘qualifying earnings’ as a definition for auto-enrolment. Qualifying earnings are currently earnings between £6,136 and £50,000 made up of any of salary, wages, commission, bonuses, overtime, holiday pay and statutory sick, maternity, paternity and adoption pay.
As the employer is responsible for assessing whether a component of pay constitutes an element of qualifying earnings, the standard minimum contributions can be difficult to administer. So they are allowed instead to use ‘certification’ to calculate contributions on an alternative basis.
The facility has been designed for employers with good quality money purchase schemes which don’t necessarily satisfy the standard qualifying earnings basis in all circumstances. It enables them to decide if they actually want to include overtime, bonuses, performance-related pay and other earnings related to the worker’s employment.
Certification can be useful when total earnings tend to fluctuate or if employers just want to simplify their pension arrangements, because putting a percentage of basic pay towards pensions is much easier to understand than a percentage of earnings within the qualifying earnings limits.
To use the approach employers must either do an equivalence check to certify that contributions are in excess of qualifying earnings or use one of three contribution sets (or ‘tiers’) – not all of which use the qualifying earnings mandatory total minimum contribution of 8%.
For Tier 1, pensionable earnings must be equal to or more than the worker’s basic pay, and this generally excludes overtime, bonuses and commission. The minimum overall contribution is 9%, of which the employer must contribute at least 4%.
Tier 2 can also use basic pay but you must be able to demonstrate that the total basic salary bill is at least 85% of the overall salary bill. The minimum contribution required is 8%, of which the employer must pay at least 3%.
Tier 3, which in our experience employers make relatively little use of, includes all earnings in pensionable earnings. The minimum required contribution is 7%, of which the employer must pay at least 3%.
Whether an employer is doing an equivalence check or using one of the tiers, using certification involves having to create a certificate to say that you are doing so and to demonstrate to The Pensions Regulator (TPR) that the contributions being made are at least at the minimum required.
We are finding that this is the bit that many clients fail to appreciate, even though they tend to understand the tiers and the contribution levels required.
Such certificates must be obtained at least every 18 months and kept for six years after expiry. Employers are required to make them available to employees when requested and to TPR – which could ask to see every certificate required for the last six years during a spot check.
When Chase de Vere is doing audits for new clients we are frequently finding companies have failed to realise they need the certificate, sometimes both at outset or at subsequent 18 month intervals.
Such an omission is sure to come to light if we undertake a governance report, which we perform annually for clients that have it included in their client services agreement.
A governance report, which is effectively an all-embracing rubber stamp to ensure that you meet the TPR’s six principles for good governance, provides a lot more in addition. It involves an independent financial adviser (IFA) confirming that a pension scheme’s structure is compliant, that its provider is fit for purpose and that its default fund is suitable.
We will even cover employee engagement within our governance reports and indicate what we can do to help ensure that the workforce remains happy.
The value of investments and the income derived from them can fall as well as rise. You may not get back what you invest.
The Financial Conduct Authority does not regulate some elements of auto-enrolment.
Content correct at time of writing and is intended for general information only and should not be construed as advice.