In the summer of 2007 a seminar from one of the major UK insurance companies at Mere Golf & Country Club caused something of a stir. The topic was pensions and the changes that were due to come over the following few years.
It focused on how workplace pensions were to change and how employers were going to be forced to pay into employees’ pensions from 2012. At the time they called them Personal Accounts and introduced us to a body called the Personal Accounts Delivery Authority (PADA). PADA were to be the Trustee body responsible for delivering the workplace pensions, also known as Auto-enrolment.
These announcements were greeted with uproar in the room. The general feeling amongst the world weary delegates was that the changes would never happen! Well four years on, we are just one year away from the launch of Pension Auto-enrolment.
The project is now full steam ahead despite a change of government, a change to the Trustee Authority, and a nifty name change — they’re now dubbed National Employment Savings Trust (NEST).
The overall reform to pension legislation and employment law will be the biggest change we have seen in many years and will have wide ranging effects on both employers and employees alike. Education around Auto-enrolment is set to be a mammoth task but will have to be done as the penalties for non compliance can be quite severe. I have summarised the rules below, however there is a lot of detail that goes around these rules, please let us know should you wish to have a more detailed discussion regarding pension reform.
A brief overview of employer’s duties.
From 2012 the changes to pension law will affect all employers in the UK who employ more than 1 person, it is thought that this will affect almost 1.3 million employers.
The changes in a nutshell
Employers will need to do all of the following:
- Automatically enrol certain workers into a pension scheme.
- Make contributions into the workers pension scheme, by 2017 this contribution has to be at least 3% of qualifying earnings.
- Register their Auto-enrolment pension scheme with The Pensions Regulator.
- Provide workers with certain information about these changes and detail how these changes will affect them.
The Detail
- Pension auto-enrolment commences from October 2012.
- All eligible job holders will have to be auto-enrolled once they earn £7,475 (aligned with the personal allowance figure).
- Employees earning less than £7,475 can opt into the scheme, however the employer only has to contribute if the employee is earning in excess of £5,715.
- The employer has to make a contribution for all employees (including temporary and contract workers) unless the employee opts out of the scheme.
- The minimum contribution to the scheme must be at least 8% of earnings between £5,715 and £38,185, of this a minimum of 3% must come from the employer. The contribution levels will be phased in over a period up to October 2017.
- Each employer will be given a staging date between 1st October 2012 and 1st September 2016, these dates will be based on number of employees (largest first) and then your PAYE reference number.
- Within 1-month of the staging date the employer must:
- Give all eligible employees enrolment information.
- Give details of the chosen scheme to the employees.
- Give details of the employees to the chosen scheme provider.
- Deduct the first month’s contribution from the employee’s salary.
- The employee then has one month in which they can opt out of the scheme, should they take up the option to opt out the contribution has to be refunded. The employee cannot opt out before they are auto-enrolled. If the employee does opt out they have to be re-enrolled in three years.
- The employer can impose a three month waiting period, this is for new employees and those reaching the age of 22 only.
- Employers choosing to implement their own scheme rather than using the NEST scheme (which has many restrictions) must self certify that the scheme they offer passes a “quality test”.
- The employer has to register their scheme with The Pension Regulator within 2 months of their staging date, this needs to give details on how many employees they have enrolled into their scheme.
Our View
It is our belief that some employers worlds will be turned upside down and they will need a great deal of help with auto-enrolment. The main issues facing the employers and workforce will be:
- Choosing and reviewing scheme design.
- This will not be a one size fits all exercise
- Employers will want different solutions
- Employees will want different solutions
- Understanding the new regulatory requirements.
- Auto-enrolment won’t be simple
- Checking the minimum contributions will be a huge task
- Self certification will not be easy
- The penalties for non compliance will be severe
- Managing costs.
- Many will see a large increase in employment and administration costs
- There is action that can be taken now to minimise the impact of these costs
We want to ensure that everybody, both employers and employees are aware of the impending changes and that they do not fall foul of the new regulations. Please feel free to give us a call on 0161 832 4451 or e-mail us should you wish to discuss any of the above.