Introduction and Background
One of the biggest shake-ups to affect employers this year will be the Government’s introduction of the auto-enrolment in to pension schemes which came in to effect on 1st October 2012. The idea behind this is to improve the income for millions of people when they retire because of the huge number of people who, at present, have made no arrangements for their retirement. It is estimated that around 11 million people will be affected by this change.
Prior to 1st October employers with 5 or more employees only had to have a designated stakeholder pension scheme unless they had an occupational scheme. They did not have to have anyone in the designated scheme but they had to have one available if employees wanted to use it and they had to manage any payments from employees into the scheme.
The above requirement has been removed. However, for any active members of staff paying into an existing designated scheme employers have to continue to process the payments.
Over the next six years, employers will have to identify all eligible jobholders within their organisation and automatically enrol them in to a “qualifying” pension scheme. Eligible jobholders will be anyone aged 22 and over, not already in a qualifying pension scheme, under the state Pension age and earning more than £8,105 per year (the current PAYE tax threshold).
Every Company now has a staging date by which they have to comply with the new auto-enrolment rules. The date depends on the number of employees they have and their PAYE reference. Dates can be found at http://www.thepensionsregulator.gov.uk/employers/staging-date-timeline.aspx
Companies with less than 50 employees have a staging date no earlier than April 2015. However, a Company can voluntarily bring forward their staging date.
On their staging date they must have a scheme in place that meets at least the requirements of a NEST account (see below), although they can have other types of occupational schemes that offer equal or better benefits. NEST rules insist on a minimum contribution of 8% of salary: made up of 4% employee, 3% employer and 1% tax rebate.
If the employer wishes to contribute more than 3% (eg 5%) then this would reduce the amount the employee has to pay in. But if the employee decides to pay in more than their 4% this does not reduce the amount the employer has to pay.
On the staging date all eligible jobholders are automatically enrolled into the scheme and the employer manages the contributions from the employee and the employer.
The employee can opt out at any time. If they opt out then every 3 years they have to be auto-enrolled back in. If they opt out and want back in the employer can accept them back in or make them wait until the next 3 year cycle starts.
Communication of scheme
As well as the administration of the new system, employers must also ensure that all of the upcoming changes to the pensions are communicated to all workers, informing them about how the new scheme will affect them.
Employers also have to inform the Pensions Regulator about how they have fulfilled their duties as an Employer, as well as maintain specific records about enrolled workers, their status within the scheme, the payment of contributions and about the qualifying scheme itself. Also, they will need to monitor all workers who are not yet eligible job holders, on an on-going basis to determine if and when their status changes.
For employers who don’t have suitable pension schemes in place, or need to make changes to existing schemes, this may take time and will inevitably incur an additional cost to the business. Early planning is therefore essential.
The Pensions Regulator will be enforcing this change to pensions and whilst they recognise that some employers will fail to introduce these changes because they haven’t understood the requirements or have been unable to comply for some other reason, there will be a range of sanctions that the Regulator can impose from informal warnings through to financial penalties.
As an employer you need to be thinking about how you are going to communicate with your workforce about these changes and, if you haven’t already got a pension scheme in place, you must start to consider what scheme to introduce.
You should also consider the potential increase in financial terms that this will cost particularly if you aren’t currently paying in to a pension scheme to make pension arrangements for your employees.
It is good practice to offer access to independent financial advice. For example, if an employee does opt out an employer has to ensure they have a signed opt out agreement to prevent any claims against them in the future.
Employers may wish to consider NEST - the National Employment Savings Trust. It is a qualifying scheme under the Government's reforms and is intended to complement existing workplace pension provision. It has been set up to meet the needs of people new to pension saving and is open to all employers and self-employed individuals.
If you have any questions please ask me. I am also working with Wendy Cochran, an independent financial advisor who has extended, to my newsletter readers, a free pension review on an individual or company basis www.wendycochran.com