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Are you ready to pay into a pension for all of your staff?

January 19, 2012

 A guest post by Tobias Hole

Continuing with a trend seen over the past few years, pensions are front page news at the moment.  Most of the stories are about the proposed changes to public sector pensions, along with pensioner poverty, the ageing workforce and the general effect of the recent stock market crash.

However, there has been very little in the press about the new employer duty to automatically enrol staff into a contributory pension scheme…  and the changes are not that far off.  Although it may seem like a boring subject, the new automatic enrolment duties really do deserve a lot more attention than they are getting at the moment!

In a nutshell – the key changes and necessary preparation, along with a few thoughts…

The duties are to be introduced in stages (on the employer’s “staging date”) based on employee numbers.  From October 2012, very large employers will have to “automatically enrol” almost all staff into a “qualifying pension scheme” and start making at least the minimum 1% employer contribution.  This minimum is currently scheduled to increase to 2% from October 2016 and then 3% from October 2017.

The timetable for fully implementing automatic enrolment was initially planned to take place over a period of four years.  However, the Government announced in November last year that there will be a delay in implementation for small businesses (those with fewer than 50 employees).  Pensions minister Steve Webb has said that the delay has been made in order to give small businesses “additional breathing space during these tough economic times”.

Such businesses will now have until May 2015 to begin automatic enrolment, as opposed to their original staging date of April 2014.  According to the Department for Work and Pensionswebsite, no employer with an existing staging date on or before 1 July 2013 will be affected.  Based on the existing timetable, this suggests that staging dates for any employers with fewer than 3,000 jobholders may also be delayed.  Clarification on this point, by way of a detailed staging profile for all employers, is to be published in January 2012…

Steve Webb has also proposed using this year’s London Olympics as inspiration for further encouraging better saving.  He has suggested that the current minimum contribution rates should perhaps be awarded a bronze “medal”, 10% a silver and 15% a gold.  These silver and gold medals would currently earn the National Association of Pension Funds Quality Mark and Quality Mark Plus.

Especially with the above in mind, it would not come as a huge surprise if what we are looking at here, is very much the “thin end of the wedge”.  It is easy to imagine that the minimum contributions will, over time, be cranked up (towards that gold medal status…)  Perhaps we shall eventually end up with a system a little more like the one in Australia, where the contribution rate from employers, is a mandatory 9%.

Anyway, enough speculating and back to the point.  To comply with the new duty, employers will need to use either the National Employment Savings Trust (NEST) or a new or existing pension scheme, which meets a minimum standard (and some providers are already coming to market with products which compete directly with NEST).

If using a scheme other than NEST, employers will need to review their arrangements and certify to the Pensions Regulator that their alternative scheme meets the minimum standard.  The vast majority of staff will be automatically enrolled into such a scheme without any active decision on their part and although these staff may subsequently opt-out, they will need to be automatically re-enrolled, every three years!

Another brief pause for thought.  What is actually going on here?  It is safe to assume that a few options were available to government, in terms of encouraging/ enforcing adequate saving for retirement.  A more simple approach, would have been to up national insurance contributions and in turn, the Basic State Pension.  Of course, this would have been politically unacceptable (and who would trust government not to spend the money elsewhere, before it were actually required!?)

It could be argued that automatic enrolment is essentially a private sector version of the same solution.  Far more palatable, of course (mostly because of the employee option to opt-out but also, for ring-fencing the money away from government).  However, relying on the private sector to meet the implementation and maintenance costs is not so great, especially if increased minimum contributions and other unknowns lurk ahead…

Again, back to the point.  This is happening.  Key issues for preparation will include budgeting for the minimum contributions and making sure that HR, finance, payroll and IT are ready to deal with the administration of these new requirements.  It will be particularly important to understand who will be eligible and then to keep accurate records in relation to all staff, to be used for making sure that automatic enrolment occurs on time and that opt-outs and re-enrolment also take place correctly.  Employers also have a duty to communicate the new requirements to staff and there are penalties for encouraging staff to opt-out, in any way.

Preparing for and complying with these new duties is going to take a lot of work (particularly for employers with complicated payrolls).  Small/ medium sized employers, who may not have a large HR or finance team to call on, will need to think carefully about how they deal with these new duties.  More directly, there is also the financial burden of the minimum employer contributions to budget for over the next few years.

I would recommend employers investigate this new duty and keep it firmly on their radar. For employers with fewer than 500 staff, I would recommend starting preparations over the next 6 to 12 months and for employers with more than 500 staff, that the wheels are put into motion now, if they have not been already.

(at the time of writing Tobias Hole was a Pensions Lawyer  with Foot Anstey)

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From → employment law

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