Stacy O’Sullivan, Lane Clark & Peacock, takes us through the steps for opting in and out
Not all employees will want to be automatically enrolled into a pension scheme and so it is possible for them to opt out, but only after being automatically enrolled. However, if an eligible jobholder opts out, they must be automatically re-enrolled into an auto-enrolment scheme every three years. Once again, they can choose to opt out, but only after they have been automatically re-enrolled. And so the cycle continues...:
in, out, in, out … shake it all about.
An eligible jobholder who has opted out must be automatically re-enrolled into an auto-enrolment scheme on the third anniversary of the employer’s staging date and each subsequent third anniversary of the staging date if they continue to opt out.
In addition, eligible jobholders who are pension scheme members at the employer’s re-enrolment date, but whose benefits or contributions are below those required by the quality requirements (because after being automatically enrolled they opted for a lower scale of benefits or contributions), will need to be "re-enrolled" at a level of benefits or contributions which meets the quality requirements (see Example).
John is automatically enrolled on 1 January 2015 (his employer’s staging date) into his employer’s pension scheme at a 4% contribution level. His employer matches this 4% contribution. However, John decides to reduce his contribution level to 3% and his employer matches this with a 3% contribution. On 1 January 2018, John will need to be automatically re-enrolled into the pension scheme at the 4% level, despite already being a member of the scheme.
Where an eligible jobholder has opted out within 12 months of the employer’s next re-enrolment date, it is not necessary to re-enrol them at that re-enrolment date. This is intended to avoid the possibility of an individual opting out and then being re-enrolled within a short time period.
The re-enrolment date has some flexibility. Employers may choose to use a date three months either side of the three yearly anniversary of their staging date. So, for example, the first re-enrolment date for an employer with a staging date of 1 January 2014 must fall in the period 1 October 2016 to 31 March 2017.
Although this flexibility is useful, additional complexity may still arise for employers who offer pension provision through a flexible benefits or salary sacrifice arrangement.
For example, if the employer’s staging date is 1 January and the flexible benefits annual renewal date is 1 July, eligible jobholders who have opted out must be re-enrolled between 1 October and
31 March and, as this is not a "lifetime event" as defined by HM Revenue & Customs, they will not be permitted to amend their flexible benefit choices. Their re-enrolment will therefore need to be processed outside the flexible benefits scheme which will add to the administrative complexity.
To avoid this additional complexity, employers can bring forward their staging date so that their re-enrolment date is then the same date as their flexible benefits annual renewal date. However, this would bring forward the date at which eligible jobholders are automatically enrolled and therefore increase the employer’s pension costs.
Employers will need to keep accurate records of dates of employment and of opting out where applicable. They will also need to consider the most appropriate re-enrolment date within the three months either side of the three yearly anniversary of their staging date and whether to bring the latter forward.
Author: Stacy O'SullivanStacy O'Sullivan is a senior consultant at Lane Clark & Peacock.