Ask any founder or small business leader and they’ll all agree – between the day to day running of the company itself and planning for the future, little time is left over to manage the additional – but essential – elements. A perfect example of this is workplace pensions.

Setting up a pension scheme is critical, not only for compliance with UK law, but to ensure the long-term financial security of your staff. To help you navigate the process of setting up and managing a workplace pension, we’ve put together the following guide.

Should you need any assistance understanding the fine print of a pension scheme or understanding the best product for your company, don’t hesitate to get in touch with our pension lawyers today for a free consultation.

In this guide:

  1. Does my business need a workplace pension scheme?
  2. What are the auto-employment rules?
  3. Types of workplace pensions
  4. Workplace pensions – employer costs
  5. How to set up a workplace pension
  6. Managing your small business’ workplace pension

Does my business need to have a workplace pension scheme?

If your small business employs staff, then the short answer is yes – no matter the size of the business or your industry you operate in, you must provide a workplace pension scheme and automatically enrol all eligible staff to the scheme.

The provider and scheme you opt for is up to you, but it’s imperative to link your pension scheme to your payroll system and communicate the details of the scheme to your employees.

What are the auto-employment rules?

In 2018, the law on workplace pensions changed. Under the Pensions Act 2008, employees must be automatically enrolled into a pension scheme. So, rather than ‘opting in’, pensions have become ‘opt out’. The law also requires employers to contribute to employees’ pensions.

Employees can choose to opt out of the pension scheme; however, employers are required to automatically re-enrol eligible staff into the workplace pension scheme every three years, regardless of whether they choose to opt out once more.

Types of workplace pensions

As an employer, there are two types of pension scheme you can offer to employees. These are:

  • Defined benefit
  • Defined contribution

Defined benefit pensions – sometimes called ‘final salary’ or ‘career average’ pension schemes – are based on tenure, age and salary rather than the amount an employee has contributed to a pension scheme.

This type of pension promises to pay a guaranteed income to the scheme holder, for life, once they reach the retirement set by the scheme. The amount they receive is based on an accrual rate; a fraction of their final salary multiplied by the number of years the employee has been a member of the pension scheme.

With higher life expectancies, employers face higher unpredictability and thus more expensive pensions. For this reason, final salary pensions are increasingly rare, and since employer’s are responsible for making sure there’s enough money in the scheme for employees when they reach retirement, they are typically only offered by larger companies and public sector organisations.

Defined contribution pension schemes are generally considered the more suitable type for small businesses. Defined contribution pensions are, as the name suggests, based on the amount of money that is contributed to the fund and how the fund is invested. Contributions are to be deducted from employees’ salary, pre-tax. It is your responsibility as their employer to organise this.

Workplace pensions – employer costs

From April 2019, the minimum amount that employers must contribute to an employee’s workplace pension is 3%.

You’ll need to pay these contributions into your staff’s pension scheme by the 22nd day (19th if you pay by cheque) of the next month. If you pay late or do not pay the minimum contribution for each member of staff, you may be fined as a penalty for non-compliance.

You may choose to match the mount contributed by your employees, or you can contribute more. This could come as part of a benefits package that helps you to attract and retain talent.

According to information from GOV.UK, “Under most schemes, it’s the employee’s total earnings between £6,032 and £46,350 a year before tax.” Total earnings include:

  • salary or wages
  • bonuses and commission
  • overtime
  • statutory sick pay
  • statutory maternity, paternity or adoption pay.

How to set up a workplace pension

If you don’t have a workplace pension scheme and plan to take on staff that qualify – you must set one up. The Pensions Regulator website offers employers an online tool, which may tell you whether you need to set up a workplace pension scheme.

1.     Assess your workforce

If your employees meet the following criteria, they must be automatically enrolled to the pension scheme upon joining the company.

  • are aged between 22 and the State Pension age (around 65 depending on their age)
  • earn at least £10,000 a year
  • normally work in the UK

If a member of staff becomes eligible during their time of employment (e.g. if they turn 22) it is your duty to enrol them to your pension scheme and provide written confirmation to your employee within 6 weeks of enrolment.

2.     Ensure you are able to meet minimum contribution

As an employer, it’s your duty to ensure you are always making the minimum contribution into your employees’ workplace pension schemes on time. If you have already set up a pension scheme, you will have agreed to due dates with the pension provider for which you will pay both employee and employer contributions into the pot. If you’re employing staff for the first time, you can use the tool on the Pensions Regulator site to understand your exact requirements.

3.     Choose your pension scheme

Setting up a pension can take time, so it’s important to start as soon as possible to enrol your staff. When browsing the market for the right provider and scheme for your staff, there are a number of key considerations you will need to make.

The first is whether you can use the scheme for automatic enrolment, as some schemes may only be available to businesses with a minimum number of staff who earn a certain amount. Make sure the scheme is suitable for all staff.  You should also check whether the scheme is regulated by the FCA (Financial Conduct Authority) or reviewed independently to ensure it meets an acceptable standard.

Cost will inevitably be a key consideration when choosing a pension scheme, and it’s worth noting that different providers charge in different ways e.g. a one-off upfront payment for the life of the pension scheme, or a recurring monthly cost.

There will also be staff costs to consider, such as the charges employees pay to cover the cost of managing their pension fund. Some schemes will offer lower rates to staff with lower earnings, which may mean that these workers pay less for their pensions.

When choosing the right scheme, it will help to compare the costs and charges against the level of service provided – some may have higher upfront costs, but make auto-enrolment easier for you in the long-term.

Once you have chosen your scheme, you must submit all eligible staff members’ details to the scheme and agree on precise dates for contributions with your provider.

4.     Write to your staff

Once you have selected a pension scheme, you will need to write to your staff individually to detail how auto-enrolment works including tax relief. Some providers may offer this service as part of on-boarding your business to the scheme.

If not, our lawyers can assist you in drafting a letter to your staff that provides all the necessary information including how to opt out. It’s worth noting that employers should always encourage employees not to opt out of the scheme if possible.

5.     Declare your compliance

The Pensions Regulator provides a declaration of compliance checklist you can use for this step.

Managing your small business’ workplace pension

Having set up your business’ workplace pension, you should implement an effective record keeping process that protects you in the event of a dispute with either an employee or the pension provider. Guidance from the Pensions Regulator advises keeping records for 6 years. We recommend recording the following information:

  • the amount of money paid to each employee’s pension scheme from the employee’s salary.
  • the amount of money paid to each employee’s pension scheme by the employer.
  • the gross earnings of each employee.

If this information changes – for instance, if an employee decides to increase their pension contribution – you should alert the pension provider of this as soon as possible. This is critical as failure to do so could lead the provider to assume you are deliberately contributing too much of their salary towards their pension pot without their consent and report you to the Pension’s Regulator.

Legal advice for small businesses

For first-time employers, setting up and managing a workplace pension can be a challenge.

From navigating the small print in pensions schemes and understanding costs and charges to tax relief, reporting and changes in contribution, there are a number of critical elements to consider ahead of committing to a provider.

At 360 Business Law, we help employers to set up their workplace pension, enrol staff and keep all the necessary records to ensure protection in case of a dispute. For more information on how we can help or to arrange a free consultation, get in touch with our team.

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