Occupational Pensions / Auto Enrolment

Under a new law called ‘Automatic enrolment’, any employer (with at least one member of staff) must automatically enrol every employee between the age of 22 and State Pension age and earning in excess of £10,000 a year into a company-managed occupational pension scheme or a group personal pension scheme.

Automatic enrolment is being introduced gradually, via ‘staging’ dates, although all eligible employees should be enrolled in a workplace scheme by October 2018, at the latest.

However some employers may opt to avoid auto enrolment altogether by using contractual enrolment to enrol all the workers into an existing qualifying workplace pension scheme.

How occupational pension schemes work

The employee doesn’t have to do anything to enrol — the employer makes all the arrangements. Every payday, a percentage of the employee’s pay is deducted automatically from their salary or wages and invested in the scheme. The employer also contributes to the scheme on the employee’s behalf as does the government in the form of tax relief.

Contribution costs

The minimum contribution for employers is 1%, which will increase to 3% by October 2018, of the employee’s earnings. Employees are obliged to contribute at least 1% rising to 4% by October 2018.

Two types of scheme

In a ‘defined contribution scheme’, the employee’s retirement income is based on the contributions made, whereas in a defined benefit scheme, the employee’s pension income is based on his or her salary and length of service with the employer. Most occupational pension schemes are defined contribution schemes.

What happens if the employer goes out of business?

Most defined contribution schemes are managed by insurance companies not the employer, so employees’ pension pots should not be affected. If the scheme is a trust-based scheme, employees will still get their pensions, although not as much because the scheme’s running costs will be paid out of members’ pension pots rather than by the employer.