Pensions World

Phil Daniels, Capita Hartshead, on how to work out who is an “eligible jobholder”

The question of who needs to be auto-enrolled is commonly raised by employers and many have been surprised by the answer. Why? Because most employers thought that the rules would be relatively simple and that it would be easy to set up, administer and work out the costs involved.

However, even firms with a straightforward workforce structure have found that the information required to identify their eligible employees is not necessarily all kept in one place. Many have discovered limitations with their systems and processes which have resulted in a rethink of their strategy and unexpected expenditure.

A question of definition

The definition of “eligible jobholders” (those employees who must be auto-enrolled) is based on earnings and age. So, how do you work out who needs to be auto-enrolled? For a start, payroll needs to identify those whose earnings are above the earnings trigger, (currently £7,475 for the year, but under review with a revised figure expected shortly). This sounds easy, but it depends on the pay reference period, which could be weekly, monthly or another variation. Many employers have a combination of pay periods, so that is numerous different checks.

However, the definition of earnings covers more than just basic pay. Therefore if contributions are to be based on the minimum requirements, pay items such as bonuses and commissions may need to be taken into account. This could lead to some employees becoming eligible unexpectedly. As eligibility depends on pay periods, while an individual’s annual income may be below (or close) to the earnings trigger, their pay in a particular period may exceed the minimum. There are various examples of where spikes in pay could occur, such as extra hours worked, or a bonus or commission payment. This could happen at any time in the year, so payroll systems need to be able to identify when this occurs and the auto-enrolment process started.

Then there are the age criteria – all jobholders between age 22 and state pension age may need to be auto-enrolled. Does the employer have this information available on the payroll system or does it have to be obtained from another source (HR maybe)? If this is the case, how will the systems work together and who will be responsible for ensuring the information is obtained? This is also a continual process, as employees age.

In addition to the eligible jobholders, there are non-eligible and entitled workers. The non-eligible jobholder (those outside the qualifying age range or with earnings below the earnings trigger) can opt in to the scheme. If they do this, the employer has to calculate and pay contributions. Entitled workers (those outside the qualifying age range and with earnings below the lower threshold) can decide to join, but do not have to benefit from an employer contribution.

Identifying qualifying earnings

Minimum contributions are based on a qualifying band of earnings. Payroll systems need to identify qualifying earning, calculate the relevant contributions and be flexible enough to cope with changes. We already know that minimum contribution rates will change during the phasing period, but it is also likely that some other factors such as the earnings trigger and pay thresholds will change over time. What if the employee, or employer, wants to pay more than the minimum? Can your system cope with this degree of flexibility? The more varied the workforce, the more complex the potential issues. For example, it may be necessary to pay contributions to more than one pension arrangement. Will your systems be able to differentiate what is paid where?

In conclusion, many employers who thought that they would be able to deal with auto-enrolment in house are finding that they need to actively involve their payroll providers, pension scheme administrators and advisers in the process. A lot of work has been done to develop solutions to assist employers meet their regulatory duties. However, if you have not already done so, our advice is to contact your advisers soon, as they are about to get very, very busy!