Pensionable Pay and Auto Enrolment

Blog #6 image

Caroline Castle, from Torquil Clark, provides monthly guidance on auto enrolment topics that employers should pay particular attention to.

For those employers who have already been running a pension scheme prior to auto enrolment, the term “pensionable pay”, will not be a new one. Prior to your staging date, as an employer providing a pension scheme for your employees, you had to determine the earnings on which pension contributions are calculated. You were able to decide what counted in the assessment of contributions. If your employees experienced great fluctuations in earnings, thanks to overtime, commission or bonuses, these could be ignored for the most part in determining the pension contributions for that individual. As such you were able to budget reasonably accurately for the contributions drawn.

So how is this affected by auto enrolment?

From your staging date onwards you need to be using one of the four definitions of earnings specified by The Pensions Regulator. These may mean that even your existing members require a different level of contribution from the past, based on the new pensionable earnings definition. You can decide which definition to use, but once you have done this, part of your registration with The Pensions Regulator includes the certification of which route you will be using, to manage your scheme.

So what are the four definitions and what are the differences?

  1. Qualifying Earnings
  2. All income of all types will need to be included in the definition of Qualifying Earnings. Overtime, shift allowance, bonus, commission and car allowance are all thrown into the mix for each and every pay period. Only then, by applying the set parameters of a threshold of £5,772 (2014/15 tax year) and a ceiling of £41,865 (2014/15 tax year), will you be able to determine the exact “pensionable pay” for your employees, based on these total earnings. Using this definition will require an 8% overall contribution on this band of earnings for members by October 2018 and a minimum starting rate of 1%, from staging to October 2017, for both employer and employee.

    Typically this definition produces the lowest contribution bill for both parties.

  3. Total Earnings
  4. Again all earnings from all sources need to be included. With this definition however there is no threshold and no ceiling applied. Contributions are effectively based on whatever is earned and are thus very simple to calculate. Using this definition will require a 7% overall contribution by October 2018, and once again the starting rate is 1% for both parties from staging date until October 2017.

    Contributions are likely to vary considerably though in line with the fluctuations in earnings.

  5. Basic Earnings
  6. If you do not want the fluctuations that Total Earnings could introduce and want to manage the contributions much more steadily, then you can use basic pay. However, whilst this definition does not include commission or overtime, other statutory payments such as sick pay, maternity pay and holiday pay all need to be incorporated in the basic earnings definition and assessed for each and every pay period.

    Be mindful too that you will still need to calculate the total earnings for all employees, as it is these that will drive the assessment for those eligible for auto enrolment and the basic pay earnings are thus only used for calculating the contributions. Furthermore, this definition will introduce the highest contribution scale, namely 9% by October 2018 and the only definition which requires you, as the employer, to pay 2% from staging date and more than your employee’s 1%.

  7. Basic Earnings (85% of Total Earnings definition)
  8. The fourth definition uses both total and basic earnings. If you can confirm that your basic pay definition creates a payroll that is at least 85% of your total payroll, this definition can be useful. This restriction is not to be assessed for each and every employee but across your payroll as a whole. In addition this definition allows you to cap the overall contribution by October 2018 at 8% and you can start at an employer contribution of 1% from your staging date, should you wish to do so.

    Once you have elected which definition to use, part of your employer duties will be to ensure that your scheme is managed in accordance with the definition you have selected. You will also need to undertake regular reviews to check that you are sticking to the parameters you have elected.

    As with all aspects of auto enrolment, the choice that is offered can be confusing and advice from your Employee Benefit Consultant will be invaluable to ensure you not only select the definition that is right for you and your business, but that your scheme is managed in accordance with the requirements that this definition imposes.

    To find out more about Auto Enrolment, visit www.iod.com/autoenrol or call 01902 576707.

    Torquil Clark Ltd is authorised and regulated by the Financial Conduct Authority. Not all Auto Enrolment services are regulated by the Financial Conduct Authority. Consultancy charges apply.

Leave a comment

How do businesses founded during the recession differ from those that started up ahead of the economic downturn?

The 2014 annual DNA of an Entrepreneur Report from Hiscox, providers of IoD Professional Indemnity Insurance and IoD Office Insurance, has uncovered some significant differences between the two sets of business owners – firms founded in financially challenging times, aka Generation Recession businesses, are more likely to have a younger, female owner and are more focused on digital and social media. What’s more, the data, compiled from 3,500 small businesses in six countries, suggests this new breed of entrepreneurs are more likely to have hired staff in the past year and, despite the challenging economic conditions, they’re optimistic about success and are reporting increased profits and revenue.

Read More »

Leave a comment

Where Now for Retirement Income?

Malcolm Small

Malcolm Small, a Senior Advisor on Financial Services Policy at the IoD, reflects on the new pension rules.

As the dust settles after the announcements in Budget 2014, it is becoming clear that the choices for consumers at retirement around how they might generate income have moved from huge and complex, to huge, complex and almost infinite. Recent announcements about the tax treatment of inherited pension funds have added fuel to the fire. Conversations with industry players and commentators have revealed some quite surprising conservatism and paternalism, suggesting that the whole purpose of pension saving is to produce a regular and predictable income stream, rather in the same way an annuity does, and that such an outcome should be mandated. This feels rather like where we were pre-Budget, and references have been made to the new freedoms being particularly bad news for low to modest earners, who will, it is alleged, be least well equipped to make decisions about their pension fund. Read More »

Leave a comment

How do your Zero Hours Staff fare with Auto Enrolment?

stopwatchCaroline Castle, from Torquil Clark, provides monthly guidance on auto enrolment topics that employers should pay particular attention to.

There has been a lot of news recently about “zero hours” staff and the uncertainty that this causes both the employee and the employer. These are employees who have a contract under which they work for a certain employer, but do not have a fixed number of hours or schedule for their working week. An employer can determine there is no work for the employee and the employee themselves can also decide they are unavailable to work during at a particular time. The arrangement might be considered along the lines of “temping” but with one specific employer. As such, their earnings fluctuate greatly between pay periods and can be zero when there is no work or they’ve taken annual leave. As we know these contracts can create issues with the service the employer provides, as evidenced in the baggage handling situation at Gatwick Airport this summer. However they also introduce other issues on account of Auto Enrolment.

Read More »

Leave a comment

The EU reform agenda – What is Labour’s?

euro handshake

Over the past 18 months since David Cameron first outlined his broad vision for renegotiating the UK’s place in a reformed European Union, discussion over how this might play out has occupied much of the debate surrounding the Conservatives’ future Europe policy orientation. Protecting the interests of countries outside the Eurozone, “repatriation of powers” and freedom of movement are just some of the issues that have been thrown into the mix.

Read More »

Leave a comment

Simon Walker on the Annual Convention: 1950-2014

Simon Walker

The Annual Convention is a place for ideas. You’d expect nothing less from an event, now in its 64th year, where over 2,000 business leaders, entrepreneurs and politicians meet to set the business agenda for the year ahead.

And this year’s theme, ‘game changers’, fits right into the legacy of the Convention. The founder of Wikipedia, Jimmy Wales, arguing that we’re still “in the very beginnings of the internet” may feel a far cry from Earl Mountbatten of Burma urging his audience “to be ready everywhere, all the time” back in 1959. But preparing for the future and anticipating tomorrow’s challenges have always been cornerstones of the Convention’s philosophy. Read More »

Leave a comment