Under changes introduced in the 2011 Pensions Act, businesses of all sizes will soon be required to enrol their employees into workplace pension schemes, with both the employer and individual workers making contributions. If you haven’t done so already, now is the time to consider your obligations under the new legislation and take appropriate action.
Under the new legislation, ‘eligible’ members of staff must be enrolled in approved pension schemes or the low-cost National Endowment Savings Trust (NEST). Ultimately, all occupational schemes will be funded on the basis of a minimum 8% of salary. Of this, 3% will come from the employer, 4% the employee and the remaining 1% from tax relief. Initially, employers will be required to pay a minimum of 1% of salary, rising to the full amount by 2018.
The roll-out of the auto-enrolment regime initially affects large companies. Starting on 1 October 2012, companies with 120,000 workers or more will be required to auto-enrol workers and collect contributions through the payroll system. In November, the regime is extended to cover companies with between 50,000 to 199,999 employees. From there, the roll-out continues progressively for the next four years or so, and by April 2017 it will apply to businesses with less than 30 workers on their PAYE systems.
A full breakdown of the staging points is available on the website of the Pensions Regulator. There is some flexibility to allow staging dates to be moved back or forward; these details are also available from the Regulator. The staging dates are based on the size of each employer’s PAYE scheme and all ‘eligible’ employees must be enrolled. Essentially, eligibility is defined as employees resident in the UK, aged from 22 years old to state pension age and earning £8,105 or more.
Assessing who is and isn’t eligible is a major part of the preparation and for some employers – those employing large numbers of transient staff, for example – this may not be straightforward. Those not eligible for auto-enrolment are not entirely out of the picture as they may have the right to opt into the occupational scheme.
Choosing a pension provider
Employers will have to choose a pension provider. This could mean opting for NEST itself, a competitor, or an existing in-house scheme. NEST may well be the cheapest option, but there will be other factors to take into consideration. For instance, NEST has restrictions on contribution and employers may feel a competitor scheme offers a better deal for employees.
Employers already providing an occupational pension scheme for certain members of staff face potentially tricky choices. For instance, if the existing pension scheme is tailored for senior executives or key workers it may not be appropriate to extend the provider’s cover to the whole payroll. Options in these circumstances include moving everyone to a new scheme or introducing a two-tier system.
During the run-up to their staging point, employers should also be putting the systems in place to implement auto-enrolment and administer contributions. If you haven’t done so already, talk to your payroll/HR software supplier or outsource provider about the practical steps required.
Employees won’t necessarily thank you for administering auto-enrolment in an efficient and timely fashion. For those who have not previously been a member of a pension scheme, the most immediate effect will be a cut in the bottom-line monthly wage. It’s therefore vital that employers large and small explain the changes to staff and provide details of the benefits.
This process cannot be sidestepped. Ideally, companies should communicate directly with each and every member of staff. Managers should be well briefed and able to answer any questions from employees. You may also wish to bring in external financial advisors to provide a detailed breakdown of the arrangements.
All schemes must be registered with the Pensions Regulator, who will also require companies to keep and submit records of how each scheme is being administered. All in all, there is a lot to think about and preparation should begin as far ahead of your company’s staging date as possible.
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