A pensions shake-up is about to hit employers throughout the UK. Stephanie Hawthorne examines the legal requirements and asks are employers ready to join the revolution?
In the most far-reaching pensions reforms since the introduction of the state pension in 1909, all employers will by law have to contribute to a pension plan for their staff. Auto-enrolment will be introduced on a gradual or staged basis from this October to February 2018.
The 600 or so largest UK employers, each with more than 6,000 workers and who between them employ around a third of the UK’s ten-million-strong workforce, must comply by April 1, 2013. Eventually, an estimated 1.3 million employers will be affected.
Research by the Association of Consulting Actuaries shows that 73 per cent of employers are planning to use their existing pension schemes to meet the standard of the new regulations. Many will have to upgrade their schemes to qualify under the 2008 Pensions Act.
Those who already offer their employees a workplace pension will need to ensure their scheme meets the minimum legislative requirement and provide for employees who are not already enrolled. Contracted-out defined benefit (DB) schemes will meet the test automatically.
Stephen Nichols, chief executive of The Pensions Trust, offers some top tips for employers new to pensions: “Find out your staging date and budget for your increased pension costs. Select an auto-enrolment compliant pension arrangement that you can afford and register it with the Pensions Regulator. Ensure your Human Resources and payroll processes are ready, and keep your staff informed,” he says.
Some 73 per cent of employers are planning to use their existing pension schemes to meet the new standards
For small employers, who may find it uneconomic to run their own schemes, three providers, especially suitable for low to middle-earners, are vying for custom. They are: National Employment Savings Trust (NEST), which has a public service obligation and so must accept all employers who apply; Now: Pensions, backed by ATP, the largest pension fund in Denmark; and the People’s Pension run by B&CE, a UK firm formed in 1942, which large employers may find useful.
If you are one of the UK’s 1.27 million smaller employers, with fewer than 250 workers and whose delayed staging date means you don’t need to comply for another three years or more, you probably don’t need to be doing much immediately other than find out your staging date and keep a watching brief over the regulations.
But do not bury your head in the sand as systems can take up to 18 months to prepare. Since auto-enrolment covers many different functions within an organisation there is a danger that everyone will assume it is someone else’s problem, so bosses need to appoint a project leader.
The first step an employer should take is to identify their staging date. Kevin Le Grand, president of the Society of Pension Consultants, says: “Without knowing the staging date, an employer will not be able to plan to meet the requirements in full and failure to meet the relevant statutory deadlines will expose them to possible sanctions from the Pensions Regulator.”
Claire Carey, partner of law firm Sackers, warns: “An employer who ‘wilfully’ fails to comply with its core auto-enrolment duties will also be guilty of an offence, liable on conviction to imprisonment, a fine or both.”
An employer’s key duties
- Offer a qualifying pension scheme with a minimum contribution of 8 per cent of a band of earnings (£5,564 to £39,853), although the DWP is still consulting on final thresholds, with at least 3 per cent from the employer. The employer contribution must be at least 1 per cent until October 1, 2017, when it will increase to 2 per cent and then 3 per cent from October 1, 2018, and collect and pay over the employee’s contribution which will also be phased in until it reaches 4 per cent with an additional 1 per cent tax relief.
- Automatically enrol all eligible job holders – a wider term than employees and may include some contractors or agency workers – aged between 22 and state retirement age, earning at least £7,475 in 2011/12. Earnings are not simply basic salary, but include overtime, bonuses, commissions and benefits, such as maternity or paternity pay. Employers can use a three-month waiting period which saves auto-enrolling very temporary workers.
- Provide information to job holders to let them know they are being automatically enrolled and have the right to opt out in the month after auto- enrolment.
- Make refunds to those who have opted out. Employers must not encourage their workers to opt out or have recruitment practices that benefit job applicants who opt out or treat a worker unfairly because of auto-enrolment.
- Re-enrol eligible job holders, who have opted out, every three years.
- Register with the Pensions Regulator and provide status reports on auto-enrolment within four months of their staging date.
- Keep records for at least six years.