Pensions auto-enrolment practical issues: new joiners and opt outs

This article in our series on auto-enrolment looks at the practicalities of enrolling employees: when they need to be assessed, what information must be provided, deduction and payment of contributions, and how to deal with opt outs.

To introduce auto-enrolment successfully, employers will need to have in place procedures to make sure that employees join the pension scheme at the right time. There are five potential parts to this: assessment, enrolment, communication, deduction and payment of contributions, and processing opt-outs and refunding contributions. These processes will often be delegated to a third party - the trustees of an occupational pension scheme or an external provider - but the employer remains responsible.

Employee assessment

All employees must be assessed to establish whether they are eligible for auto-enrolment or whether they are entitled to request to be enrolled into their employer's pension arrangement. (The different categories of employees for automatic enrolment purposes are summarised in table 1). The first and most complex assessment will be at the employer's staging date, when all current workers must be assessed. After that:

• all new employees must be assessed on the first date of employment;
• those employees who were not eligible for auto-enrolment at their first assessment date because they were below the minimum age must be reassessed on their 22nd birthday;
• those employees who were not eligible for auto-enrolment at their first assessment date because they did not meet the earnings criteria must be reassessed on the first day of each pay reference period;
• employees who opt in or request to join must be assessed on the date of their application; and
• employees who have opted out will need to be reassessed on the employer's re-enrolment date.

In addition, where an employer has opted to postpone auto-enrolment or, in the case of a defined-benefit (DB) or hybrid scheme, has opted for a transitional period, the affected employees will need to be assessed at the end of the deferment.

Auto-enrolling employees

Employers have a one-month "window" during which to enrol eligible employees into active membership of a qualifying pension arrangement. This period starts from the date the employee first becomes eligible (their automatic enrolment date) and membership must start from that date, no matter at what point during the month the membership is established.

Where an occupational pension scheme is being used for auto-enrolment, the employer must provide the trustees with the information they require to establish membership. It is the employer's responsibility to make sure that membership has been set up from the correct date and within the timescale.

In cases where a personal pension or other contract-based arrangement is being used, the employer must set up membership on behalf of the employee directly with the provider. The member must be given key features information and the terms and conditions of the personal pension arrangement in order to establish the contract. While the employer can delegate the task of issuing this information to the provider, it remains responsible for making sure that the correct information is provided on time. To create active membership, the employer must also enter into an agreement with the provider about payment of contributions in respect of that member.

The member is deemed to have entered into the personal pension contract on the date on which they have been issued with the required information. However, the effective date of the arrangement must be backdated to their auto-enrolment date.

Flowcharts setting out example processes for auto-enrolment can be found on the Pensions Regulator's website (PDF format, 529K) (external website).

What information needs to be provided to the pension provider?

The regulator specifies the following minimum information that employers must provide to the scheme trustees or pension provider about each employee they are enrolling:

• name;
• sex;
• date of birth;
• automatic enrolment date;
• residential postal address; and
• national insurance number.

It is also recommended that employers provide the following additional information, unless the pension scheme specifically does not require it:

• postal address at work;
• work email address;
• personal email address (if the employer holds this information);
• gross earnings in each pay reference period; and
• employer and member contributions in any pay reference period, which can be expressed as a fixed amount or as a percentage of qualifying earnings/pensionable pay.

Opting-in and requests to join

There are four classes of employee who have the right to "opt in" to scheme membership (including the right to minimum employer contributions):

• "non-eligible jobholders";
• "eligible jobholders" who have been automatically enrolled but who have subsequently opted out;
• "eligible jobholders" who were already a member of a qualifying scheme on their automatic enrolment date but have subsequently left; and
• "eligible jobholders" who wish to become a member before the end of a period of postponement or deferment.

For such individuals, opting in is effected by their giving the employer a written opt-in notice. This can be provided on paper or by email; if the latter, the employee must personally confirm that they submitted the request to opt in. It is up to the employer to establish that the opt-in notice is valid. The auto-enrolment date for an employee who opts in is the first day of the pay reference period following receipt of the opt-in request, and the employer has one month from that date to complete the process.

The final category of employees who might ask to join a workplace arrangement comprises "entitled workers", those employees who are not categorised as eligible or non-eligible jobholders. These employees must also be enrolled on request, but the employer is not required to make any contributions towards their benefits. The arrangement into which they are enrolled does not need to be a qualifying scheme, but, if it is not, the employer will need to continue to monitor these employees for eligibility for "full" auto-enrolment.

Communicating with employees

To quote the regulator's guidance (PDF format, 275K) (external website), "it is the employer's duty to provide the right information, to the right individual, at the right time". The information that must be provided to employees who are being automatically enrolled is summarised in box 1. This information must be provided within one month of the employee's auto-enrolment date, but employers can choose to provide it in advance.

Employers must also provide information to other groups of employees as follows:

• Eligible jobholders and non-eligible jobholders who are already members of a qualifying scheme must be given details of that scheme, within two months of the effective date of their employer's auto-enrolment duties.
• Where the employer has adopted a transitional period in respect of a DB or hybrid scheme, all affected employees must be told that auto-enrolment has been deferred and that they are entitled to opt in during that period.
• Where the employer has implemented a waiting period, affected employees must be given written notice of the postponement by no later than the day after the date on which they first become eligible to be enrolled.
• Non-eligible jobholders must be told about their right to opt in to a qualifying scheme.
• Entitled workers must be told about their right to join a workplace pension scheme.

Unless otherwise specified above, this information must be provided within one calendar month of the staging date, the auto-enrolment date or the most recent assessment date, depending on the category of employee. All information must be provided in writing, either in hard copy or by email. Where it is clear an attempt to deliver information by email has been unsuccessful, an alternative approach must be taken. While workplace posters and websites can be used to provide supplementary information, they cannot be chosen as the primary form of communication. A third party can be appointed to provide the information, such as the scheme's trustees, administrator or provider, but the ultimate responsibility for providing the correct information, within the deadline, remains with the employer.

The regulator has provided templates for all the different types of communication on its website. These can be used as they are or adapted. However, there is no obligation to use the templates and it is likely that many employers will simply update existing pension communications materials to ensure compliance. For those employers who wish to provide generic publicity about auto-enrolment, the Regulator (external website) also offers editable poster templates, based on the Department for Work and Pensions' celebrity-driven television advertising campaign, and draft items for newsletters, intranet sites and email alerts.

Employee contributions

Employers must start deducting member contributions with effect from the first pay date after the date of automatic enrolment. Where an employee is enrolled partway through a pay period, the first contribution must be based on earnings between the date of enrolment and the end of the pay period. This differs from the earnings used for assessment, which must be based on the whole pay period.

Employers can avoid having to calculate contributions for partial pay periods by postponing the auto-enrolment date to coincide with their payroll cycle. There may be cases where the first deduction is based on more than one pay period - for example, for weekly paid employees or where the auto-enrolment process has been completed within the one-month window but after the payroll has been run. All contributions must be paid to the scheme by no later than the 22nd day of the month following the month in which they were deducted.

Opting out

All eligible jobholders who are automatically enrolled into a workplace pension must be given the opportunity to opt out. The opt-out provisions also apply to non-eligible jobholders who have opted to join an auto-enrolment scheme.

Employees must exercise the right to opt out within one month of the date on which they become an active member of their scheme - their employer must advise them of this date and when the right to opt out ceases. If employees exercise their opt-out during this window, their membership must be "unwound". This means that any contributions that had been deducted must be refunded (less tax) and they will be treated as if they have never joined the scheme. If an employee opts out after the one-month window has closed, they will be treated as an early leaver according to the scheme rules. There are two main differences between the new rules and "regular" early leaver treatment:

• the employee will receive a refund of their contributions even if the scheme into which they are enrolled is a contract-based scheme, such as a personal pension; and
• the scheme provider or trustees must refund to the employer any employer contributions that have been paid over in respect of that member.

Refunds must be paid within one month of receipt of the opt-out notice or, if the payroll has already closed for that month, by no later than the end of the subsequent pay reference period.

To ensure employers do not coerce or encourage members to opt out, they are prohibited from providing employees directly with opt-out notices for them to submit. Rather these must be requested from the pension provider.

The opt-out notice (PDF format, 594K) (on the Pension's Regulator website) must contain the following statutory statements:

• "Your employer cannot ask you or force you to opt out.
• If you are asked or forced to opt out, you can tell the Pensions Regulator - see www.thepensionsregulator.gov.uk.
• If you change your mind, you may be able to opt back in - write to your employer if you want to do this.
• If you stay opted out, your employer will normally put you back into pension saving in around three years.
• If you change your job, your new employer will normally put you back into pension saving straight away.
• If you have another job, your other employer might also put you into pension saving, now or in the future. This notice only allows you to opt out of pension saving with the employer you name above. A separate notice must be filled out and given to any other employer you work for, if you wish to opt out of that employer's pension saving as well."

It is up to the employer to make sure that opt-out notices received are valid. A valid opt-out notice must include:

• the employee's full name;
• the name of the employer;
• the employee's national insurance number or date of birth;
• the employee's signature or, if in electronic format, a statement confirming that the jobholder personally submitted the notice; and
• the date the form was completed.

In addition, the following statements must appear just above the employee's signature:

• "I wish to opt out of pension saving.
• I understand that if I opt out I will lose the right to pension contributions from my employer.
• I understand that if I opt out I may have a lower income when I retire."

If the employer receives an invalid opt-out notice, they must inform the employee, saying what is required to make the notice valid. In such circumstances the employee is allowed an additional two weeks to complete the opt-out, effectively extending the one-month period to six weeks.

Additional resources on XpertHR

• Pensions auto-enrolment: qualifying schemes and eligible workers This first article in a series on automatic pensions enrolment examines who must be enrolled, the nature of the schemes into which they can be enrolled and who can choose to be enrolled.
• Pensions auto-enrolment: staging and phasing dates This article continues the series on auto-enrolment by looking at the "staging" or implementation dates for employers of different sizes and how compulsory minimum contributions will be phased in.
• Read FAQs on pensions on XpertHR.