New Year is a time to think about decluttering on a range of different fronts, and there is no reason why these shouldn’t include the company pension scheme.
Just because you complied with auto-enrolment regulations at outset doesn’t mean that anomalies won’t have arisen since through employees having extended absences or changing their working structures or earnings levels.
For new clients and prospects, we will be able to identify any such issues during the initial fact-finding process. And, with existing clients, we will eventually uncover them at annual reviews.
Nevertheless, we are continually getting queries from clients experiencing changing employee circumstances, and we deal with these as and when they arise. So why not make a resolution to look out for these situations?
Maternity and paternity leave
Quite a number of such enquiries relate to pension provision during maternity and paternity leave.
The key message here is that, if employees eligible for the statutory leave payments remain in the pension scheme and continue their own contributions, employers need to maintain contributions based on pre-maternity or pre-paternity leave salary.
Employers who fail to do so will be in breach of regulations, and a good payroll company should point this out. But, as we find at annual reviews, many employers are simply not aware of this obligation.
Even if the employee’s earnings fall well below the £10,000 auto-enrolment earnings trigger during maternity and paternity leave, it will not affect their entitlement to employer contributions. But contribution levels made by employees themselves will be based on their actual earnings levels during their leave, so they may become lower than previously.
Whilst this basic requirement is straightforward enough, the rules around maternity and paternity leave regulations can get quite complex if a pension scheme is using salary exchange.
The salary exchange approach, which involves the employee electing to give up part of their salary in return for additional pension contributions from the employer, is one that Chase de Vere commonly recommends to clients because of the potential cost savings.
As the employee is effectively earning a lower salary, they pay less tax and NI, and employers normally save on NI as well.
However, as it is illegal for employers to exchange salary from statutory maternity or paternity pay, they incur an extra cost. And, whilst they have to pay employer’s contributions here, it isn’t clear whether they have to pay the employee’s contributions as well.
There is no relevant case law, but employers wishing to be whiter than white should pay the employee’s contributions. Although we certainly have clients who risk not doing so.
Despite this potential downside, analysis we have made of client maternity trends has found that the savings made in employer’s NI via salary exchange have in the vast majority of cases greatly outweighed the additional costs resulting from maternity or paternity leave.
Other problem areas
Other common enquiries concern those who switch to part-time work, have fluctuating earnings, are off long-term sick or are contractors taken on for specific projects. But the first two categories hold few mysteries.
Part-time workers only need to be auto-enrolled if they earn above the £10,000 earnings trigger. And those with fluctuating earnings need to be auto-enrolled as soon as they earn above this trigger, but the if the employees earnings fall below £6,240 then (providing the pension scheme rules allow) the employer no longer has to contribute until earnings are in excess of the £10,000 earnings trigger once again.
With contractors, on the other hand, much depends on how they are set up. Those using PAYE need to be auto-enrolled but independent contractors don’t. Nor normally do those falling within IR35 – although the rules can get complex here.
And with the long-term sick much depends on the employer’s sick pay policy. Do they, for example, only pay Statutory Sick Pay (SSP) or do they go well beyond this?
Some employers insure pension contributions against sickness. But, if sick pay amounts only to SSP, employers aren’t required to pay pension contributions – because the rate of SSP is below that of the auto-enrolment earnings trigger.
If you require clarification about whether employees need to be auto-enrolled in your pension scheme or about any other aspect of pensions then please don’t hesitate to contact us.
The information contained within this article is for guidance only and does not constitute financial advice
Content correct at the time of writing.