Making sense of pensions: a guide for payroll administrators · 2019-04-10 · Making sense of pensions: a guide for payroll administrators 4 of 32 1. Introduction This booklet is

Making sense of pensions: a guide for payroll administrators

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Making sense of pensions: a guide for payroll administratorsSecond edition


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This handbook is a guide to help payroll administrators.

It should not be taken as a definitive statement of all aspects of the relevant

legislation. If any issues arise, the payroll administrator should discuss with their

pension administration team what action to take.

This is the second edition of this guide and it has been updated to include useful information in connection with auto-enrolment.

You will first need to know which of your company’s schemes is being used to fulfil these new auto-enrolment requirements.

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Contents

1. Introduction ............................................................................. 4

2. Occupational pensions ........................................................... 5

3. Auto-enrolment ...................................................................... 7

4. Pensionable pay and contributions ..................................... 10

5. Contracting-out ..................................................................... 15

6. Regular payroll processing ................................................... 18

7. Member events ..................................................................... 23

8. Periodic events ...................................................................... 26

9. When things go wrong ........................................................ 27

Notes ......................................................................................... 29


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1. IntroductionThis booklet is a guide for anyone who administers a staff payroll and is required to make deductions from individuals’ pay for contributions to

an occupational pension scheme.

An occupational pension scheme describes any arrangement where the employer has

organised a pension scheme for its employees. This guide focuses on the two main types

of trust based occupational pension scheme; defined benefit (DB) schemes and defined

contribution (DC) schemes. However, many parts of this guide are relevant to other

arrangements which may also be sponsored by the employer such as a group personal

pension scheme.

More information about different types of occupational pension arrangements is provided

in section 2. Reference to pension schemes will, unless otherwise stated, refer to both DB

and DC schemes.

The administration required for a member of a pension scheme will involve both the payroll

and HR departments and these two teams need to establish procedures at the outset. This

guide is intended for use mainly by the payroll team.

!

New terminology

The following new terminology will be helpful when reading this guide; a more general

note explaining this new terminology can be found in section 3.

Employees (which can include contractors and agency workers) will now be categorised

into three main groups:

>> Eligible Jobholders

Employees aged between 22 and State Pension Age with earnings above the earnings

trigger of £10,000 (2015/2016).

>> Non Eligible Jobholders

Employees who, but for age, would be eligible jobholders or those employees

earning below the earnings trigger but above the qualifying earnings limit of £5,824

(2015/2016).

>> Entitled Workers

Employees earning less than the qualifying earnings limit.

It is only eligible jobholders who have to be auto-enrolled; however non eligible jobholders

and entitled workers can opt in. Further information about categorisation of members based

on their ages and earnings can be found in section 3.

Why you should read this guide

It is very important that pensionable pay and pension contributions are both correctly

calculated and recorded against a member’s payroll record as they will directly affect

the amount of pension a member receives when they retire. This may be the only

income they receive when they retire so it is important that it is accurate.

In addition, legislation surrounding the deduction and payment of contributions to

a pension scheme sets specific timescales.

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2. Occupational pensionsMany employers have established a pension arrangement for the benefit of their employees. This is known as an occupational pension scheme

and is effectively a form of deferred remuneration, often seen as a way of attracting and retaining valued staff. There is also a statutory duty

on all employers to offer a pension arrangement to their eligible employees. Such an arrangement must meet certain criteria and is then

known as a Qualifying Workplace Pension Scheme (QWPS). More information about QWPS and auto-enrolment is provided in section 3.

Types of occupational schemes

There are two main types of scheme which employers set up for their employees and

directors. These are called defined benefit (DB) and defined contribution (DC) schemes.

There are also variations of these two main types of scheme as described below.

DB schemes

With this type of a scheme there will be a specified level of benefit on retirement (i.e. the

defined benefit). The benefit is not determined by the amounts of contributions paid by

the employer and/or member but is based on three factors:

The defined benefit is then calculated by multiplying a fraction (i.e. the accrual rate usually

either one sixtieth or one eightieth) of the final pay by the number of years of pensionable

service.

Typically, part of this pension may be exchanged for a cash sum which will have the effect

of reducing the member’s pension. Alternatively, the scheme may provide a lump sum in

addition to the amount of pension calculated by the formula.

DB schemes are sometimes known as final salary arrangements.

£21,000/60 x 15 = £5,250 per annum

A member with fifteen years pensionable service and final

pensionable pay of £21,000 may have their defined benefit

calculated as follows:

the number of years of membership in the scheme1.

the pensionable pay being received at or near the date of retirement2.

accrual rate3.


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DC schemes

With this type of scheme the total contributions of both the employer and member are

invested and on retirement the member traditionally has used the fund available, including

any investment returns, to purchase a pension. This type of pension is commonly called an

annuity. A proportion of the fund at retirement (currently 25%) can usually be taken as cash.

The 2014 Budget introduced greater flexibility in the way that DC members can take their

benefits on retirement from 6 April 2015.

Personal pension plans and stakeholder pension schemes are DC type schemes.

DC schemes are sometimes known as money purchase arrangements.

Career Average Revalued Earnings (CARE) schemes

This is a type of DB scheme but the benefit on retirement is calculated based on the

pensionable pay for each scheme year of membership instead of the pensionable pay being

received at or near the date of retirement. The figure for each year is then uplifted until

retirement to take account of inflation. The resulting pension figures for each year will then

be added together to arrive at a total pension on retirement.

Cash balance schemes

A cash balance scheme has characteristics of both a DB scheme and a DC scheme. The

total contributions of both the employer and member are invested but the growth in the

value of the fund is defined at the outset. On retirement the value of the fund is then used

to purchase a pension in the same way as for a DC scheme.

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3. Auto-enrolmentFrom October 2012 new employer duties were introduced from employers’ ’staging dates‘. Staging dates are being spread over a five year

period starting with the largest employers and are normally based on the number of persons covered by the employer’s largest PAYE scheme

as at 1 April 2012.

An employer’s staging date is the date from which they are required by law to auto-enrol

certain staff into a pension scheme.

Employers can find out their staging date by going to

www.tpr.gov.uk/staging-dates >

Employers will need to assess their workforces, including consideration of whether the

requirements extend to non-employees, e.g. agency staff and contractors. Workers

who are working or ordinarily working in the UK will need to be categorised by age and

earnings as Eligible Jobholders, Non-Eligible Jobholders or Entitled Workers in accordance

with the table below.

Earnings Age 16 - 2222 - State

Pension AgeState Pension

Age - 75

Under the lower limit of the qualifying earnings band

Entitled Worker

Between the lower limit of the qualifying earnings band and the ’earnings trigger’

Non-eligible Jobholder

Over the earnings triggerNon-eligible Jobholder

Eligible Jobholder


We show annual earnings amounts below applicable to the 2015/16 tax year but in

practice pro rated amounts will apply for each worker’s relevant pay reference period, e.g.

monthly amounts for monthly paid workers and weekly amounts for weekly paid workers.

£10,000 For the auto-enrolment earnings trigger

£5,824 For the lower limit of the qualifying earnings band

£42,385 For the upper limit of the qualifying earnings band

For the purpose of the new duties, pension schemes will be classified as auto-enrolment

schemes, qualifying schemes or non-qualifying schemes. Auto-enrolment schemes will

generally satisfy the same criteria as qualifying schemes but will additionally need to be

open to new joiners and allow them to be auto-enrolled without them providing any

information or expressing any choice.


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The following summarises the requirements for those workers who are not already

participating in a qualifying pension scheme.

Generally, the minimum requirements for auto-enrolment schemes and qualifying schemes

are:

>> DB schemes will generally need to be either contracted-out of the State Second

Pension or be deemed to meet the “test scheme standard”. New minimum quality

requirements will be introduced from April 2016;

>> DC schemes will need to meet minimum contribution requirements. These may

be phased in and the full minimum contribution requirements must be met from

October 2018. See the following table for details of the full minimum contribution

requirements based on the qualifying earnings band or the main alternative

pensionable pay definitions:

Definition of pensionable payMinimum DC

employer contributionMinimum DC total

contribution

Qualifying earnings band 3% 8%

Basic pay 4% 9%

Pay, which is at least basic pay and for the workforce in aggregate is at least 85% of total pay

3% 8%

Total pay 3% 7%

Considerations

When will employers become subject to the new requirements?

The new requirements will apply from the employer’s staging date. This will normally be

determined based on the number of persons in the employer’s largest PAYE scheme size

as at 1 April 2012 (please note this will include employees of another employer if the

PAYE scheme is shared and any pensioner members paid through the employer’s PAYE).

Employers with 120,000 persons or more in their largest PAYE scheme had a staging date

of 1 October 2012, whilst employers with fewer than 30 persons in their largest PAYE

scheme will have a staging date between 1 June 2015 and 1 April 2017 depending on

PAYE reference number. Employers with fewer than 50 workers, and who share a staging

date with a larger employer up to and including 1 April 2015, will have flexibility to adopt

a later staging date.

Employers may choose to bring forward their staging date to another set staging date

more convenient to the operation of their businesses.

Eligible Jobholder

Must be auto-enrolled into an auto-enrolment scheme but can

then opt out. Opt outs will need to be periodically re-enrolled.


Can opt in to an auto-enrolment scheme.

Entitled worker

Can choose to join a pension scheme. This need not be an auto-

enrolment scheme and the employer is not required to contribute.

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Who are workers for the purpose of the requirements and how are they likely to

be categorised?

The workforce should be assessed, with recognition that the requirements can potentially

extend to workers who do not have a contract of employment. If there will be Entitled

Workers, the employer should consider whether to offer them qualifying or non-qualifying

provision, and through which pension arrangement.

Which pension schemes will the employer use to meet the new requirements?

Employers will need to review their existing pension arrangements and consider what role,

if any, they will take with regard to the new requirements. For example, a contracted-out

DB scheme that is closed to new joiners, but open to future service benefits, may be used

as a qualifying scheme for the remaining active members. However, it is unlikely to be

re-opened as an auto-enrolment scheme. DC schemes should be reviewed to ensure that

they can be used and are suitable to be used for auto-enrolment.

Most existing pension schemes will need some degree of change, and the timescales for

this should be recognised. Employers are also likely to consider whether there is any role

for the National Employment Saving Trust (NEST) or NEST-like alternatives.

Employers will need to register with The Pensions Regulator (and in some cases also

certify) those pension schemes used to comply with the new requirements. Employers may

consider consolidating existing pension arrangements prior to their staging dates.

Will the employer use postponement or phasing?

Under DC schemes, the employer may postpone a worker’s auto-enrolment date by up

to three months. This can be a useful option, e.g. to align the auto-enrolment date with

payroll processes, e.g. to avoid calculation of part-month contributions. A longer period

of postponement, up to 1 October 2017, is available (subject to conditions) for any DB or

hybrid auto-enrolment schemes. Please note that workers have the right to opt in during a

period of postponement.

Phasing in of the DC minimum requirements can be used to graduate the onset of

additional pension costs but consideration would need to be given to how this would

interact with current pension provision.

Are there penalties for non-compliance?

The Pensions Regulator’s role is to ensure that those responsible for providing access to

and managing work-based pensions fulfil their obligations. Whilst supporting employers

in meeting their responsibilities, the Regulator warns that it will be tough on those who

do not respect their obligations. The Regulator has powers to issue fixed penalty notices,

which may be followed by escalating daily penalties if non-compliance continues.

Payroll providers should therefore make sure that they have processes in place to support

auto-enrolment requirements.

“”


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4. Pensionable pay and contributionsMaintaining accurate earnings records is a vital part of pension administration as they provide the basis of the member contributions to be

deducted from payroll and the benefits calculated on leaving service, retirement or death.

Pensionable pay

Pensionable pay (sometimes known as pensionable salary, pensionable earnings or

contribution earnings) is the rate of pay used in calculating member contributions to a

pension scheme. Pensionable pay is not necessarily the same as P60 earnings and each

scheme will set out its own definition of pensionable pay in its scheme rules, including

details of whether fluctuating earnings such as overtime, bonuses etc. are included and

whether any deductions or adjustments are applied.

Payroll administrators must be familiar with the definition applying to their scheme so that

contributions can be calculated correctly.

Part-time members

Member contributions are usually calculated for part-time members as a percentage of the

actual part-time pensionable pay, while any salary related pension benefits will be based

on the full-time equivalent pensionable pay.

How is the full-time equivalent pensionable pay calculated?

Consider a member with part-time pensionable pay of £10,000 a year and working 25

out of a possible 37 hours a week.

Care should be taken to establish whether any fluctuating elements of pensionable pay

included in the £10,000 are already being paid at the full-time rate.

Example 1Pensionable pay equals annual basic rate of pay fixed at each 1 April less an

amount equal to the Lower Earnings Limit at that date.

Example 2Pensionable pay from each 1 May equals the basic annual pay at that date,

together with the three year average of variable pay.

£10,000 x (37/25) = £14,800

The full-time equivalent pensionable pay would

typically be calculated as follows:

Full-time equivalent pensionable pay

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What happens if the definition of pensionable pay includes a deduction e.g. Lower Earnings Limit?

Sometimes the definition of pensionable pay includes a deduction such as the Lower Earnings Limit (LEL). In this case, consider a member with part-time pay of £10,000 a year and working

25 out of a possible 37 hours a week. Assume the LEL is £5,772 a year. Both methods arrive at the same answer so you can use whichever is more appropriate for your scheme.

£10,000 x (37/25) - £5,772 = £9,028

The full-time equivalent pensionable pay would

then be calculated as follows:

Full-time equivalent pensionable pay

(£9,028 x 5% x 25/37)/12 = £25.42

The contributions payable by the same member,

based on a member contribution rate of 5%,

would typically be calculated as follows:

Monthly member contribution

Where pensionable pay fluctuates monthly,

the calculation could be done as follows:

£10,000/12 = £833.33

Monthly part-time pay

£5,772/12 x 25/37 = £325.00

Monthly part-time LEL

(£833.33 - £325.00) x 5% = £25.42

Monthly member contribution


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Salary sacrifice

Some employers operate a salary sacrifice arrangement. This means that the member

sacrifices part of their salary which the employer then pays directly to the pension scheme.

As a result of having a lower salary both the member and the employer pay less National

Insurance Contributions (NICs).

As part of the salary sacrifice arrangement, the employer may pay all or part of their NICs

saving to the pension scheme along with the amount of sacrificed salary.

As an example, take a member earning £25,000 a year who decides to salary sacrifice

£2,000. The member’s new salary is £23,000, with the employer paying £2,000 to the

pension scheme. Both the member and the employer will pay less NICs because the salary

is lower.

Where there is a salary sacrifice arrangement in place you should check with your pension

administration team exactly what information they require. This will vary according to the

detail of the arrangement.

Salary sacrifice arrangements are sometimes referred to as ‘SMART’ pensions (SMART –

Save More And Reduce Tax), flexible pensions or pensions flex.

See the table on page 14 ‘Tax relief on contributions’ for a worked example showing the

effect of salary sacrifice on take home pay.

Pensionable pay during temporary absence

In some circumstances, such as long-term sickness, maternity or family leave, a member

may be in receipt of reduced or nil pay. For pension purposes you need to check your

scheme rules and be aware of any over-riding legislation to determine the contribution

rates and benefits to be provided in these circumstances. For example, member and

employer contributions to a DC scheme will typically cease when a member is temporarily

absent on nil pay due to long-term sickness but for members on ordinary maternity leave,

legal protections normally mean that employer contributions and recorded pensionable

pay must be maintained at the normal scheme rate.

Final pensionable pay

Although you will not generally need to calculate the final pensionable pay (sometimes

known as final pensionable salary or final pensionable earnings) members may ask you

about this common pension term in relation to their benefits.

For DB schemes final pensionable pay will be defined in the rules of the scheme and is

the earnings figure used when calculating earnings related member benefits. Despite its

name, final pensionable pay is usually an averaged figure based on pensionable pay over a

year or a number of years rather than the member’s actual rate of pay on leaving service,

retirement or death. £23,000 £2,000

Member = £25,000/y Employer

£2,000

New SalaryPension savings Pension savings

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The calculation of final pensionable pay can be complex and often includes the addition

of inflationary increases and other adjustments which are difficult to replicate without a

detailed knowledge of the scheme rules. For this reason, any queries about the calculation

of final pensionable pay should normally be referred to your pension administration team.

Earnings cap

With effect from March 1989, legislation introduced a limit on the amount of pensionable

pay/final pensionable pay on which the benefits and contributions of certain members of a

pension scheme may be based. This is known as the earnings cap. Subsequent legislation

has removed this limit but many pension schemes chose to retain a notional cap. Your

pension administration team should advise if this applies to your scheme (2010/11 was

the last year for which Her Majesty’s Revenue & Customs (HMRC) published a notional

earnings cap figure).

Schemes that wish to maintain a notional earnings cap should increase it annually as

detailed in the scheme rules. Your pension administrator will help identify the increase basis.

If the earnings cap applies to a member then you should base the calculation of their

pension scheme contributions on the latest applicable earnings cap figure.

Annual allowance

Under current legislation the maximum tax-relievable pensions that can be built up in any

tax year is called the annual allowance. The annual allowance for 2015/16 is £40,000.

Any pension savings which exceed the annual allowance are subject to a charge. For a DC

scheme a member’s total contributions (both those paid by the member and those paid by

the employer in respect of the member) are included in the assessment against the annual

allowance. The method of calculation is more complex for DB schemes. Your pension

administrator will help identify any member affected by the annual allowance.

Pension input amount

This is the amount that is tested against the annual allowance for the pension input period

(see below). In assessing whether an individual has exceeded their annual allowance,

schemes must test the pension input in each year against the annual allowance. There are

different methods of calculating the amount depending on the type of pension scheme.

Pension input period

This is the period over which the pension input amount is calculated. This is normally the

scheme year but may be a different period. Your pension administrator will help identify

the pension input period for your scheme.

Flexible retirement

Many schemes allow members the flexibility of taking all or part of their pension at the

scheme’s normal pension date whilst continuing to work. Normal pension date is sometimes

referred to as normal retirement date and will be defined in the rules of the scheme. Some

members may also choose to continue working past their normal pension date and delay

receipt of their pension. The requirements for the deduction of contributions in these cases

will vary with each scheme and if there is a member in any of these situations then you

should consult your pension administration team for further advice.

Additional Voluntary Contributions (AVCs)

AVCs are contributions over and above a member’s normal contributions if any, which the

member elects to pay to their occupational scheme. Between April 1988 and April 2006

occupational schemes were required to offer AVC facilities to allow members to obtain

extra retirement benefits.

“”


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Tax relief on contributions

Contributions to an HMRC approved pension scheme attract tax relief at source. What this actually means in practice can be illustrated with the following example.

The table below shows a comparison between the deductions and net pay before and after joining the pension scheme. It also illustrates the difference between making contributions from

pre-tax pay and via salary sacrifice.

For the purpose of this example tax is applied at the basic rate of 20% (2014/15) to earnings over £833 a month (2014/15). National Insurance is applied at a rate of 12% (2014/15) for

earnings over £612 a month (2014/15). The member pays a pension contribution of £150 per month. In practice the current rates should be used.

If the member pays AVCs, these are added to the pension contribution figure to obtain tax relief in the same way.

Requirements under auto-enrolment

Under the new auto-enrolment requirements, when a new member joins a scheme, contributions to the pension scheme are due from the member’s auto-enrolment date and must be

calculated and backdated to that date. The scheme rules will determine what is classed as pensionable pay, the rates of contributions to be applied and the due date for paying contributions

as described elsewhere in this guide. This does not change with the introduction of auto-enrolment.

Before joining the scheme

Scheme member (non sacrifice)

Scheme member (salary sacrifice)

Gross monthly pay £2,000.00 £2,000.00 £1,850.00

Member pension contribution £0.00 £150.00 £0.00

Tax at basic rate of 20% £233.40 £203.40 £203.40

National Insurance at 12% £166.56 £166.56 £148.56

Take home pay £1,600.04 £1,480.04 £1,498.04

Employer pension contribution n/a n/a £150.00

Notes:

1. The effect on tax relief after joining the scheme (non-

sacrifice) is that when an amount of £150 is paid into the

pension scheme, the take home pay is only reduced by £120.

2. The effect on tax relief after joining the scheme (salary

sacrifice) is that when an amount of £150 is paid into the

pension scheme by the employer and the salary is reduced

by the same amount, the take home pay is only reduced by

£102.00.

3. This same principle applies where the member is a higher

rate tax payer.

Example comparison between the deductions and net pay before and after joining the pension scheme:

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5. Contracting-outState pension provision includes earnings related benefits – known as the State Second Pension (S2P). Prior to April 2002, S2P was referred to

as the State Earnings Related Pension Scheme (SERPS). You may still see references to this term but it means broadly the same. Many pension

schemes contract-out of S2P and the scheme then provides benefits instead of the State paying S2P. Members of a contracted-out pension

scheme are only contracted-out during their period of active membership of the scheme.

A pension scheme is commonly called contracted-in where S2P is paid by the State. With effect from 6 April 2016 it will no longer be possible for schemes to contract-out.

What is the State pension age?

The State pension age is the earliest age from which pensions can be drawn from the

State pension scheme. Historically this has been 65 for men and 60 for women.

The State pension age for women is being increased to 65 to bring it into line with men.

This change is being phased in for women who were due to reach State pension age

between April 2010 and November 2018. Subsequent increases to 66, 67 and 68 are

scheduled.

What are the effects of contracting-out?

Both the employer and member pay National Insurance Contributions (NICs) at a reduced

rate. This is achieved by deducting NICs in line with the relevant contracted-out rate

instead of the contracted-in rate. Payment of reduced rate NICs reduces the earnings

related portion of the State benefits to which the member is entitled.

NIC Categories

As mentioned above, different NIC rates apply to contracted-out members whilst they are

an active member of the contracted-out scheme. It is therefore very important to check

that the correct NIC rate is being applied when any of the following events occur:

>> an employee joins a contracted-out pension scheme

>> a member leaves a contracted-out pension scheme

>> a member reaches State pension age

“”

A useful tool to calculate a person’s state pension age can be

found at: www.gov.uk/calculate-state-pension >


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The following tables summarise the main NIC category letters which you may need.

Employees in a contracted-in pension scheme

A. Rate

All employees in a contracted-in pension scheme, other than the exceptions listed below.

B. Rate

Married women and widows entitled to pay reduced-rate Class 1 NICs* who are not

members of a contracted-out pension scheme.

C. Rate

Employees over the State pension age.

Employees in a contracted-out scheme

D. Rate

All employees who are members of a contracted-out pension scheme, other than the

exceptions listed below in this table.

E. Rate

Married women and widows entitled to pay reduced-rate Class 1 NICs*.

C. Rate

Employees over the State pension age.

*Class 1 NICs are paid by employed people and their employers

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Calculation of contracted-out earnings (COEs)

If your scheme is contracted-out your pension administration team will periodically ask you

for the contracted-out earnings, sometimes referred to as COEs, for individual members or

the active membership as a whole. They are always calculated with reference to tax years.

Contracted-out earnings are the sum of:

1. Earnings above the Lower Earnings Limit, up to and including the Earnings Threshold

2. Earnings above the Earnings Threshold, up to and including the Upper Accrual Point

Contracting-out reference numbers

When a pension scheme first became contracted-out it received a contracting-out

certificate from HMRC. If you do not have a copy of this certificate you can obtain one

from your pension administration team. This certificate will show two important reference

numbers which should be used in all communications with HMRC in respect of any

contracted-out members.

>> Scheme Contracting-out Number (SCON) (e.g. S1234567B)

>> Employer Contracting-out Number (ECON) (e.g. E7654321Z)

If your company is made up of more than one employer which participates in the same

pension scheme then there will be a separate ECON for each employer although the

SCON will be the same. You need to make sure the correct ECON is quoted for each

member of the pension scheme.

A note about National Insurance numbers

A National Insurance number is a personal account number. The number ensures that the

NIC and tax which have been paid are properly recorded on every individual’s account. It

also acts as a reference number for the whole social security system.

A National Insurance number never changes even if the person moves abroad, marries,

changes name, etc. Entitlement to many State benefits depends on a person’s NIC record.

If someone doesn’t have a National Insurance number, then they can apply to get one.

It is important to note that HMRC no longer accept any forms containing temporary National

Insurance numbers. It is therefore vital that your pension administration team is provided

with a correct National Insurance number for each employee on joining the scheme.


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6. Regular payroll processingYour pension administration team needs to maintain detailed earnings and service records to allow them to calculate accurate pension scheme

benefits for your members. This means that every time you exchange information with your pension administration team you need to be

aware of how they will use the information you provide and how payroll data impacts on a member’s pension records.

To assist you in working with your pension administration team, we have provided below examples of some DC and DB payroll cycles, along with a summary of the most frequent payroll

data issues. The exact procedures to be followed for your particular scheme should be agreed with your pension administration team.

DC scheme, monthly payroll run

In DC schemes the deduction of regular member contributions is just the first stage in the

regular investment cycle when the employer and member contributions paid in respect of

individual members are invested with selected investment managers in order to build up a

retirement fund in the member’s own name.

It is vital that the correct level of contribution is deducted and that contributions are

forwarded for investment as soon as possible after deduction from the member’s pay and,

at the very latest, by the 19th day of the following month.

The absolute deadline of the 19th day of the following month is a statutory deadline. For

some schemes it is possible for the absolute deadline to be the 22nd day of the following

month. For this to apply the payments must be made electronically and the schedule of

contributions must allow for payment to be made up to the 22nd day of the following

month. You should check with your administrator whether this applies for your scheme

before making any changes to your payment date.

Step 1

Contribution schedule issued by pension administration team

Your pension administration team can issue an electronic contribution schedule detailing

the contributions due for that period, based on the pensionable pay and employer and

member contribution rates held on their records.

Step 2

Completed contribution schedule received by pension administration team

The payroll team should complete and return the electronic contribution schedule

detailing the contributions deducted for that period and clarifying any differences to the

amounts calculated by the pension administration team. The payroll team will need to

check that contributions have been deducted for any new eligible jobholders who should

be auto-enrolled and recorded accordingly, along with any other new joiners.

“”

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Step 3

Pension administration team reconciles and validates payroll data

Returned contribution data is then loaded directly to the pension administration system

and reconciled. This will highlight any instances where the contributions received differ

from the expected amounts. As accuracy is vital, the pension administration team normally

prefer not to move forward to the next stage in the investment cycle until all differences

have been investigated. However, if this is not possible then the pension administration

team will proceed with those members where there are no outstanding queries in order to

avoid any delays.

Step 4

Investment instructions forwarded to investment managers

The pension administration team arrange for the contributions to be invested in line with

the member’s chosen investment options. This may mean splitting the contributions for an

individual member across a number of different funds or investment managers.

Step 5

Member records updated for investment details

The pension administration team receive confirmation of the units purchased in respect of the

contributions invested and record the details on the members’ individual computer records.

DB scheme, monthly payroll run

Contribution procedures for DB schemes differ from DC schemes because they are not

usually invested in individual retirement funds. Therefore, the scheme will not necessarily

need to record contribution details on a monthly basis.

Your pension administration team will reconcile the contributions received, but for larger

schemes, this will often be a monthly reasonableness check with a full reconciliation

taking place as part of the annual scheme update exercise. It is vital that the correct level

of contribution is deducted and that contributions are forwarded in accordance with the

contributions schedule.

The contributions schedule will specify the contributions level and deadlines for payment

of contributions into the scheme bank account. At the very latest this will be by the 19th

day of the month following deduction from the member’s pay. The absolute deadline

of the 19th day of the following month is a statutory deadline. For some schemes it is

possible for the absolute deadline to be the 22nd day of the following month. For this to

apply the payments must be made electronically and the schedule of contributions must

allow for payment to be made up to the 22nd day of the following month. You should

check with your administrator whether this applies for your scheme before making any

changes to your payment date.

Step 1

Payroll team provides details of total contributions being paid in the month

The payroll team notifies the pension administration team of the total contributions being

paid in the month, split between employer, member, AVCs or life assurance premiums.

The payroll team will need to check that contributions have been deducted for any new

eligible jobholders who should be auto-enrolled.

Step 2

Pension team carries out reasonableness check on amounts paid

Your pension administration team checks that contributions have been paid by the

statutory payment date and that the amounts paid are reasonable, taking account of the

total payroll, joiners and leavers during the month, employer and member contribution

rates and the amounts paid in previous periods.


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Issues affecting regular payroll data - An example of a completed contribution schedule for a DC scheme, with potential issues highlighted

Total Employee contribution due 1,326.20 Total Employee contribution paid 1,051.01

Total Employer contribution due 2,652.42 Total Employer contribution paid 2,082.33

Total contribution due 3,978.62 Total contribution paid 3,133.34

Due Contribution type Rate Amount Deducted

Alderson, Debra Anne 294.87 Pensionable Pay [06/04/2014] : 33,700.00 294.87

XYZ Pension Scheme (DC): Eee 98.29 Constant percentage of earnings 3.50% 98.29

XYZ Pension Scheme (DC): Eer 196.58 Constant percentage of earnings 7.00% 196.58

Brent, Gary David 1,669.06 Pensionable Pay [06/04/2014] : 190,750.00 1,678.91


XYZ Pension Scheme (DC): Eer 1,112.71 Constant percentage of earnings 7.00% 1,112.71

Kyle, Stephen 537.69 Pensionable Pay [06/04/2014] : 61,450.00 322.62



Muir, Geoffrey 836.94 Pensionable Pay [06/04/2014] : 95,650.00 836.94



Singh, Gurmeet 640.06 Pensionable Pay [06/04/2014] : 73,150.00 0.00



Indicates that there is a discrepancy

between the amount which the pension

administration team was expecting to

be paid to the scheme in respect of

the member and the amount actually

paid. For all of these discrepancies, your

pension administration team needs to

establish the reason for the difference

and keep track of any issues that might

affect future contribution cycles. Some

issues may be explained by simple

human error but many will arise due

to your pension administration team

being unaware of changes to members’

pensionable pay, contribution rates,

working hours, joiners and leavers etc.

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Quick tips for regular payroll data

The following should be notified to your pension administration team.

1. Changes to pensionable pay

2. Eligible jobholders to be auto-enrolled

3. Where employees join as eligible jobholders the first month’s

contributions will not be invested as these members have a one month

‘opt out period’ after they have been auto-enrolled.

4. Other joiners/leavers in the period

5. Members opting out within the opt out period of one calendar month

of joining or receiving written auto-enrolment information if later

6. Changes to working hours

7. Changes to usual contribution rates

8. Changes to voluntary contribution rates

9. Weekly/monthly paid members identified

10. Members becoming temporarily absent and, if so, whether employer

and/or member contributions are continuing

11. Members returning from temporary absence

12. Non-standard contributions (employer contribution matching, salary

sacrifice etc.)


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Internet functionality

Good governance is fundamental to effective and efficient pension scheme management. Trustees, HR and payroll teams need large amounts of information and/or data at their fingertips

and will benefit from on-line access to scheme documentation and/or member data. In addition, as we try to reduce the amount of paper we use, the use of electronic means to shared

information is becoming more common place; Pension Administration is no exception.

Barnett Waddingham’s on-line solution, BWebstream, provides on-line access to all the relevant information and data which trustees, HR and payroll teams need in the management of their

schemes within a secure, intuitive and easy to navigate platform.

>> Payroll and HR departments can access:

>> individual membership data in real-time (on a read only basis).

>> electronic versions of the administration manual.

>> announcements from the trustees to employers and/or individual members.

>> frequently asked questions (FAQs).

>> administration reports providing summary information for some or all of their

members.

>> copies of training materials and links to other useful websites.

>> Barnett Waddingham’s Secure File Exchange (SFX) within BWebstream allows

documents to be exchanged in a secure way as an alternative to password

protected attachments in emails.

bweb tream

https://logon.bwebstream.com/

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7. Member eventsEffective communication between HR and the payroll department is important to ensure that appropriate notifications and instructions can be

passed on to your pension administration team.

New joiners

Legislation now requires that every employer must auto-enrol their employees into a pension scheme if they are between 22 and State Pension Age, earn more than the minimum threshold of

£10,000 pa (2015/16) and work in the UK. These employees are known as eligible jobholders. These requirements came into force from an employers staging date. Further information about

auto-enrolment is available in section 3. The table on the following page sets out some considerations for HR and payroll teams when employees are enrolled into a pension scheme.

Other considerations:

Application to join

Employers that have passed their Staging date must now operate on an ‘opt

out’ basis (rather than an ‘opt in’) for eligible job holders, so that employees

are automatically included in the pension scheme as part of their contract of

employment. HR must clearly communicate this to employees. It is then up to the

employee to request to opt out of the scheme if they so wish by obtaining the

appropriate form from the pension scheme administrator. If an employee opts

out then this should be recorded on their HR/payroll file as it is a requirement that

they are re-enrolled in a further three years’ time in the same way.

Part-months’ payments

Scheme rules should provide detail of how contributions will be deducted in

respect of part-month membership. Some may only allow members to join on

the first day of each month or others may require a full months’ contribution

irrespective of the date of joining the scheme. The HR/payroll teams should be

familiar with their scheme rules and keep members informed. Under the new

auto-enrolment requirements, when a new member joins a scheme, contributions

to the pension scheme are due from the member’s auto-enrolment date and must

be calculated and backdated to that date.


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HR Team actions

>> DB & DC

>> If the employer runs more than one scheme, the HR team should consider which

scheme an employee should be joining, e.g. senior managers/directors might join a

different scheme.

>> There should be a system in place to ensure that all eligible jobholders join the

scheme at their auto-enrolment date.

>> HR team to issue a Nomination of Beneficiary form (sometimes known as an

Expression of Wish form) in respect of any death benefits due and any required

scheme information.

>> Where the relevant scheme pays death benefits, the HR team should consider whether

a health declaration is required and issue the appropriate form to the employee.

>> Advise the pensions administration team of any new starters in advance of payroll

deductions being paid over so that they will be aware of these employees in the event

that one of them contacts the pension administration team for an opt out form.

>> The employee’s record on the HR database should be updated and relevant

information provided to the payroll team in relation to pension scheme membership.

>> DC

>> The HR team will need to make appropriate arrangements in accordance with

agreed processes in relation to the provision of independent financial advice.

Employee actions

>> DB & DC

>> Employee should complete relevant form(s), as provided by HR team. However, it

must not be a requirement for eligible jobholders to complete an application form

in order to join the scheme.

>> Where death benefits are payable, the employee may be required to sign a health

declaration.

>> Employee should complete the Nomination of Beneficiary form supplied by the HR

team, confirming their nominated beneficiaries for any death benefits.

>> DC

>> Employee may wish to make investment choices and should seek independent

financial advice, which may be provided by the employer.

>> It must not be a requirement for eligible jobholders to make an investment fund

choice. Eligible jobholders that do not make a choice will have their contributions

invested in accordance with the scheme’s default investment strategy.

Payroll Team actions

>> DB & DC

>> The financial information section of the employee’s form should be completed

and the finished form forwarded to your pension administration team, with copies

being retained for employer records. Employees that are auto-enrolled are unlikely

to have completed an employee form.

>> The payroll team should ensure that necessary updates are made to the employee’s

payroll record so that contributions are correctly deducted – care should also be

taken in relation to any change in contracting-out status.

>> Contribution payments to pension providers should be updated to reflect

contributions paid by new joiners.

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Leavers

Detailed below are the typical actions required by payroll when an employee ceases to be a

pension scheme member. Please note that payroll should always consider the requirements

of the pension scheme to which each employee belongs.

Payroll should amend the employee’s record so that no further contributions are

deducted.

>> Left employment – voluntarily (including ’retirement’)

Pension administration team will need to be informed – which may be by completion of

a leaver form, with consideration given to which of the following may be required:

>> pensionable pay or final pensionable pay

>> actual salary or full-time equivalent

>> salary at a point in time, or over a specific period

>> contracted-out earnings for tax year in which the member left the scheme

>> Opting out after the opt out period of one calendar month

As above for a member who leaves employment. Some schemes require members to

give notice of their intention to opt out and complete an appropriate discharge form.

>> Opting out within the opt out period of one calendar month

If a jobholder wishes to opt out of the scheme within the opt out period they must

complete an opt out notice. This must be obtained from the scheme administrator/

provider and not supplied by the employer. When a member opts out of the scheme

the employer must refund any contributions that have been deducted within 1

month of receiving the opt out notice, or, if the payroll arrangements have closed

before the notice is received, by the 2nd payroll date. You should not wait for

the pension scheme administrator to return the contributions before making the

payment to the jobholder.

>> Left employment – redundancy

As for voluntary leavers, but scheme rules should be consulted in relation to treatment

of any severance payments or payments in lieu of notice.

>> Death

As for others leavers, but the pension administrator may require additional

documentation to support any insurance claim (e.g. copy payslips, death certificate).

Some scheme rules may also have a death benefit pay which is different to

pensionable pay.

If a member leaves part way through a payroll period, the scheme rules/practice will

dictate whether a part-months’ earnings should be provided to the administrator.

“”

“”


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8. Periodic eventsYour pension administration team will require data on an annual basis in connection with the scheme’s annual update.

Data which may be required:

>> National Insurance number

>> Other unique identifier (such as payroll reference)

>> Initials

>> Surname

>> Gender

>> Date of birth

>> Type of employee: eligible jobholder, non-eligible jobholder or entitled worker

>> Gross salary earned during previous scheme year (Refer to scheme rules for earnings

definitions)

>> Annual rate of salary at the date of update (Refer to scheme rules for earnings definitions)

>> Pensionable pay (this may exclude such things as bonus, overtime or long service

awards) (Refer to scheme rules for earnings definitions)

>> Contributions paid (Split between employee, AVC and, where applicable, employer)

>> Contracted-out earnings (Refer to scheme rules for contracted-out status)

>> Part-time hours worked including any changes during the year

>> Paid maternity leave

>> Any unpaid absence during the year

>> Contractual full-time hours

This data should be provided for each scheme member who is active at the year end as

well as leavers during the year.

The annual testing that is likely to be done by your pension administration team and the

reasons why are set out below. Your pension administration team will usually produce

annual benefit statements for your members using the annual update data provided. It is

therefore important that the checks outlined below are carried out and indeed borne in

mind by the payroll team when producing the data extract.

>> Completeness - Has the pension administration team been provided with data for

each active member? This test will enable the administrator to identify leavers they

may not have been advised of. Have all data fields been completed for all members?

>> Reasonableness checks - How does the annual update data compare with that

already held on member records?

>> Previous submissions - Does the total annual contributions figure agree the sum of

the monthly figures already received?

>> Pay rises - How does the salary figure received this year compare with that for last

year? Pension administrators will generally set tolerance levels for this test based on

the nature of the employers business or pay structure. For example, members whose

pay includes large bonuses or commission elements may experience pay decreases.

>> Contributions v salary - Do the salary and contribution figures reconcile with the

contribution rate? e.g. for a scheme member earning £10,000 in a scheme with a 6%

member contribution rate, the pension administrator would expect to see a member

contribution figure of £600. Care should be taken for schemes where the contribution

salary definition includes a deduction, such as the Lower Earnings Limit or the Basic

State Pension.

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9. When things go wrongFrom time to time errors occur on payrolls where NICs and/or pension contributions have been deducted in error or at the wrong time. The

following examples may be helpful if something goes wrong but you should always consult your pension administration team as well.

NICs have been deducted at the contracted-in A rate but should have

been deducted at the contracted-out D rate

Option 1

If the employer and the member agree, it is possible to leave the situation as it is and start

NICs at the correct rate from the next payroll run. The scheme rules need to be checked

and, if necessary, the trustees consulted. Once the member has agreed to this course of

action, they must be given a letter for their records either from the employer or from your

pension administration team explaining the effects. Ideally, the member should sign a

copy of the letter acknowledging receipt and this should be kept on their HR and pension

records.

Broadly, the effect of this course of action is that the member and employer have overpaid

NICs but the member will qualify for S2P as well as the scheme pension for the period that

A rate NICs were paid. Your pension administration team must be advised and notified of

the date from which the member and employer started paying the correct D rate.

Option 2

Alternatively, the situation can be corrected by refunding to the member and the employer

the difference between the A and the D rate. However, only the amount relevant to the

current tax year, or the date of joining the scheme if later, can be refunded. These NICs

have already been taxed as part of gross pay, so the refund will probably have to be

calculated manually for each pay period as it must not be taxed again. Where the wrong

rate has been paid in previous tax years, the employer must write to HMRC National

Insurance Contributions Office (NICO) setting out the amounts involved and giving

the member’s home address. NICO will normally refund directly to the employer and

separately to the member. Your pension administration team must be given the correct

contracted-out earnings figures for any earlier tax years.

Member has paid NICs at the contracted-out D rate but should have

paid at the contracted-in A rate

Both the employer and the member have underpaid NICs. The situation must be explained

to the member. If the problem only arose in the current tax year, the employer and the

member may be prepared to make good the shortfall. In this case, the NIC underpayment,

which will probably have to be calculated manually, should be deducted from the

member’s taxable earnings in the same way as any other NIC payment. If the problem

arose before the current tax year, HMRC NICO should be consulted; they may agree to

reclaim the underpaid amounts direct from the member.

Member has paid NICs at the correct rate but has not paid pension

contributions

Assuming that the member signed an application form authorising deductions from pay

and the problem has only been going on for a short period, it is normally possible to

arrange with the individual to pay back the missed contributions, which must be done

through the payroll to ensure that correct tax relief is given. However, the scheme rules

must be checked to make sure this procedure is permitted and whether the trustees’


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consent is needed. Your pension administration team must be informed of the amount of

missed contributions and the arrangements being made to repay them.

Alternatively, if the member cannot repay the pension contributions it may be necessary

to adjust the pension benefits but this course of action has wider implications and further

advice must be sought.

If the member did not specifically authorise deduction of contributions from pay, then the

employer may have to fund the shortfall. Further advice should be sought.

Member has paid contributions in error

If pension contributions have been deducted in error and the employee has not given

written consent for the contributions to be deducted, the amounts paid in error must be

refunded through the payroll. These contributions have already been subject to NICs as

part of gross pay, so the amount repaid needs to be taxed but without any further NIC

deductions.

If the employee opted to join the scheme and authorised contribution deductions, the

position can only be corrected by opting out, in which case the employee needs to

give the appropriate period of notice required by the scheme rules and to complete

a disclaimer for the trustees. Your pension administration team will then arrange a

contribution refund if this is permitted by the scheme rules.

If a problem is spotted after the member or employee has left you should consult the

pension administration team.“”

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Please contact your Barnett Waddingham consultant if you would like to discuss any of the above topics in more

detail. Alternatively contact us via the following:

[email protected] 020 7776 2200 www.barnett-waddingham.co.uk

Barnett Waddingham LLP is a body corporate with members to whom we refer as “partners”. A list of members can be inspected at the registered office. Barnett Waddingham LLP (OC307678), BW SIPP LLP (OC322417), and Barnett Waddingham

Actuaries and Consultants Limited (06498431) are registered in England and Wales with their registered office at Cheapside House, 138 Cheapside, London EC2V 6BW. Barnett Waddingham LLP is authorised and regulated by the Financial Conduct

Authority and is licensed by the Institute and Faculty of Actuaries for a range of investment business activities. BW SIPP LLP is authorised and regulated by the Financial Conduct Authority. Barnett Waddingham Actuaries and Consultants Limited is

licensed by the Institute and Faculty of Actuaries in respect of a range of investment business activities.

March 2015 | 3404906

Documents

Making sense of pensions: a guide for payroll administrators · 2019-04-10 · Making sense of pensions: a guide for payroll administrators 4 of 32 1. Introduction This booklet is