Workplace pensions: Important things employers need to know
Almost nine in ten workers—89% to be precise—have workplace pensions, up 0.8 million from 2023. And the total annual workplace pension savings for eligible savers has increased in recent years as well. In 2023, the average was was £131.8 billion, up from £43.2 billion since 2012.
Workplace pensions are essential for employees, as they help them save for retirement, but they’re also incredibly important to understand as an HR professional, as not paying workplace pensions means breaking the law. Knowing how to set up a workplace pension for employees makes it easier to implement and ensures compliance.
In this guide, we’ll explore the what, who, and how of workplace pensions, as well as the key considerations for HR department or small businesses regarding the types of workplace pension schemes, and more.
What is a workplace pension?
A workplace pension is a retirement savings plan set up by an employer. It’s funded through contributions from employees, employers, and, in many cases, government tax relief.
Sometimes called a ‘company pension’ or ‘work-based pension’, it works by deducting a percentage of an employee’s salary each payday and paying it into a pension pot. Employers usually match this percentage or contribute a fixed percentage on top. In some cases, employees may be entitled to tax relief.
Employers are legally required to provide a workplace pension, although employees can choose to opt out if they prefer.
Are workplace pensions mandatory?
Yes, workplace pensions are mandatory for all eligible employees. Employers must automatically enrol eligible staff, although employees can choose to opt out if they wish. Employers are also required to contribute to these pensions.
When did workplace pensions become compulsory?
Automatic enrolment into workplace pensions came into effect in 2012. Initially, it only applied to large and medium-sized organisations but was later expanded to all business sizes, including small and micro businesses. This change was introduced under the Pensions Act 2008, which established the legal framework for automatic enrolment.
How to set up a workplace pension
Setting up workplace pensions as an employer involves several key steps:
- Choose the type of scheme. Select an automatic enrolment pension scheme and enrol your staff. Remember, doing it early is key, as the process can take time.
- See who needs one. Determine which employees need automatically enrolling based on your duties start date.
- Communicate to staff. Send letters to staff explaining how the automatic enrolment affects them. Do this within 6 weeks of your duties start date.
- Verify your compliance. Complete the declaration of compliance to confirm that you are meeting legal requirements. This must be submitted within five months of your duties start date to avoid fines.
Who do employers have to enrol in a workplace pension scheme?
We’ve covered what workplace pensions are and how to set them up—now let’s look at who is eligible. The Department for Work & Pensions, states that employees who meet the following criteria must be enrolled:
- 22 years old or older
- Earn at least £10,000 a year
- Employed in the UK
Employees must also be classed as ‘workers’, meaning they have a contract to provide work or services in exchange for payment. Employees who do not meet these requirements, or who earn below the threshold, do not need to be automatically enrolled for a workplace pensions. Although they may choose to join one voluntarily.
What is re-enrolment?
Re-enrolment is a legal requirement for employers to automatically enrol eligible staff back into a workplace pension every three years. This includes employees who previously opted out — they can choose to opt out again. Employers must also submit a re-declaration of compliance to confirm they’re continuing to meet automatic enrolment requirements.
Can employees opt out of workplace pensions?
Yes, employees can opt out of workplace pensions. Employers are advised not to encourage this—it could be considered inducement. The decision to opt out must always be made voluntarily by the employee.
Employees can only opt out once they have been automatically enrolled, either one month after joining the scheme or after receiving their enrolment information.
To do this, an employee will need to fill in an opt-out notice provided by the pension scheme and return it to their employer. Any contributions already deducted while automatically enrolled must be refunded to the employee.
What types of workplace pension are available?
There are two main types of workplace pension scheme:
Defined Contribution (DC) schemes
Often called ‘money purchase schemes’, these pensions are funded through contributions that are invested in assets such as shares and bonds to grow the pension over time. Employers decide which type of scheme is offered to their employers. In some cases employees can choose how their money is invested, though this is not mandatory.
Defined Benefit (DB) schemes
These schemes provide a pension based on salary. It’s determined by an employee’s length of service and earnings. When an employee retires, employees can take part as a tax-free lump sum and receive the remainder as regular pension income. The exact method varies between schemes.
Employers provide these options, but it is up to employees to choose which suits them best.