Managing workplace pension opt outs

Most employees want to stay in an auto-enrolled workplace pension, but there are some exceptions. When it comes to being an employer, it is best to be prepared for this eventuality.

An auto enrolment workplace pension is the way most in the UK prepare for their later years, supplementing their state pension. But not everyone wants to be part of such a scheme, even though one of the main benefits is a contribution from their employer.

For some workers, the cost of living might simply be so great they do not feel they can spare the money. For others, it could be they need to deal with pressing debt or pay for other important life events. Meanwhile, some may already have a pension plan that does not involve this automatically implemented scheme.

The decision to leave an auto enrolment pension should not be taken lightly. Although it seems a long way off, stopping an investment that is meant to improve the quality of life in later years could be a mistake. Many might consider the state pension not enough to maintain the lifestyle they have become accustomed to, and others might have gaps in their National Insurance, meaning the money they do get from the government might not be as much as expected.

The auto enrolment programme is considered so fundamental that anybody who is earning £10,000, is between 22 and retirement age, and is considered a “worker” should be placed in a workplace pension scheme by their employer as soon as they join the company (or after their postponement period). In fact, even those who do not fulfil the criteria have to be told they have the option to join the pension (although in that situation, depending on earnings and age, the employer may not be obligated to contribute any money).

Lawmakers designed the auto enrolment pension to place responsibility on employers to make sure staff have a retirement plan that gives them a more comfortable life. It is fair to say it was successful in its uptake: the number of people holding private pensions as employees has now moved from less than five in ten to eight in ten.

Opting out: the criteria

Staff can opt out of the auto enrolment pension, but they can do so only after they have been initially signed up to the scheme. This mechanism is there to ensure people must make a conscious decision to leave a pension, and it creates a different mindset from deciding to sign up for one.

The decision to opt out must be made by the employee and not the company that employs them. Any attempt on the part of an employer to push someone out of such a scheme can be reported by the affected person to the Pensions Regulator.

It must be emphasised that the time window to opt out is short – people have a month from being enrolled to decide that they do not want to be a part of the scheme.

The responsibilities of the employee and the employer

So, what happens if someone does decide to opt out of a workplace pension?

The employee needs to have been given enough information about the pension to decide if they want to stay or go. They should not be making this decision without knowing about the pension and the benefits it offers in the long term.

Then, the first thing they need to do is complete an opt-out notice. You as an employer cannot provide this notice: it comes from the pension provider. Again, this mechanism has been put in place to ensure your business has no role in a staff member deciding to leave an auto enrolment pension.

As the employer, you need to check this opt-out notice very carefully when you get it. You need to have the main identifying details on the properly-dated form – this includes the staff member’s full name, the name of the employing business, the employee’s NI (National Insurance) number (or a date of birth) and their signature. The signature can be physical, but if it is electronic, then it can be a statement which confirms the jobholder is the one that submitted the notice.

Above the signature on the notice, it should have warnings which say:

• ‘I wish to opt out of the pension scheme.’
• ‘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.’

It should also have messages similar to the following in a “what you need to know” section:

• 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.
• 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 of the scheme, 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. The notice only allows you to opt out of pension saving with the employer you name in the notice. 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.

(The above comes from The Pensions Regulator website, where you can find the full rules and criteria.)

Once the paperwork is deemed correct, the scheme needs notifying that someone has opted out. After that has happened, you as the employer need to make sure the deductions from pay stop and that any money that had been put into the scheme by the staff member is returned to them. This money must be given back less any taxes that are due.

The money should go back within one month of being given the opt-out notice or – should the payroll arrangements close before the notice was handed over – by the last day of the next payroll run.

If the notice is submitted after the opt-out period, then the rules that apply are those for “active members”. The staff member in question might still be entitled to a refund, depending on the circumstance, but this is not an “opt-out” situation.

There is another way

In summary, detail is king when it comes to dealing with workplace pension opt-outs. Compliance with rules and regulations must be observed at each stage: from making sure the person is enrolled to ensuring – where there is an opt-out – the opt-out notice is valid. Then, responsibilities continue after the person has opted out in the shape of refunds being executed at the best possible moment.

Anyone that has opted out or ceased active membership will be re-enrolled at the cyclical re-enrolment date every 3 years if they are eligible (i.e. have earnings over £833, are over 22, under State Pension Age and haven’t opted out within 1 year of the re-enrolment date).

A pension programme needs care and attention all year to make sure it is compliant with UK rules and regulations. If you need help, Dataplan looks after the payroll and pensions of employees for businesses of all sizes across the country. We are happy to do the heavy lifting on this, and other onerous legal areas surrounding payroll and pensions, so you can do what you do best – putting your full attention on core business matters while looking after the staff who make it all happen.

For more information on how we can help you with your workplace pension scheme, please contact us.