You’ve heard about pension auto-enrolment. But what does it all mean?
From 1 October 2012, employers will be under a duty to designate a qualifying pension scheme into which all of their ‘eligible jobholders’ must be automatically enrolled. Employers, as well as the eligible jobholders themselves, will have to make a minimum contribution to those pensions. Auto-enrolment has been referred to as the biggest headache to hit businesses in the UK in recent years. Our advice? Get advice and plan early.
Key Points about Auto-enrolment
Some of the main things you need to know are:
– Implementation will be phased in over a period of 4 years, starting from 1 October 2012. Large employers will begin the process sooner than small and new business as the requirements will be phased in over a period of years. The commencement, or ‘staging date’, for enrolment depend on the number of employees. The dates are set out on the Pensions Regulator’s website at http://tinyurl.com/6xe47mk
– Auto-enrolment applies to ‘eligible jobholders’ which are those employees who are aged between 22 and state pension age, and who earn at least £7,475 a year (in 2011/12). It applies to permanent and temporary employees, and agency workers. Eligible jobholders must be automatically enrolled into a pension scheme.
– These employees will have a statutory right to opt-out provided they do so within one month of enrolment. Those who opt-out will need to be automatically re-enrolled every three years.
– Employers can impose 3 month waiting periods for enrolment for new jobholders.
– Employers can enrol eligible jobholders into their existing pension schemes (provided those schemes meet certain requirements), or in NEST, the government-established National Employment Savings Trust. Existing schemes will need to be tested for compliance against statutory requirements.
– For all jobholders enrolled, employers must contribute a percentage of earnings each year to their pension. The amount of the contribution depends on various factors. We recommend you discuss this with your accountant or financial adviser.
– Workers who are not automatically enrolled can opt-in by giving their employer notice. In some cases, employers will be obliged to make contributions to the employee’s pension. In other cases, they will only need to arrange for contributions to be made by the employee.
– Employers who do not comply will be faced with significant financial penalties and may even face criminal charges.
Compliance is not likely to be an easy or straightforward mater for employers. Employers do not only have to worry about navigating the relevant legal provisions, they also need to ensure they have the necessary administrative systems in place to take care of practical things such as paying the pension contributions. The rules of employers’ existing pension schemes will need to be looked at, both to check the schemes compliance with statutory requirements and to ensure that the jobholders are actually eligible to join the scheme. Alternative pension schemes may need to be set up.
The Pensions Regulator has set out a 7 step plan for employers to follow when they begin preparing for auto-enrolment. The plan is as follows*:
1. Know your staging date. The staging date depends on the number of people in your PAYE scheme as at 1 April 2012. For a staging date timeline see the link given above.
2. Assess your workforce. As soon as possible, employers need to look at their workforce and see which different categories of people they need to deal with. There are 3 types of workers for the purposes of the auto-enrolment scheme and employers will need to work out into which category each of their workers falls.
3. Review your pension arrangements. It may be that your existing pension scheme can be used for automatic enrolment as it is. However, it may be that either your existing scheme will need to be adapted or else a new scheme set up. Any changes will take some time and employers will need to speak with their pensions providers to discuss their options as soon as possible. New contracts may need to be made with pension providers.
4. Communicate the changes to your workforce. Employers are obliged to provide jobholders with certain information and there are specific dates within which the information must be given. For further information, ask your legal advisor.
5. Automatically enrol your eligible jobholders. This is self-explanatory. Rules relating to opting in and out will need to be considered.
6. Register with The Pensions Regulator and keep records. Employers will need to set up administrative systems and record-keeping systems as soon as possible, and, preferably, before the staging date. Registration is relatively straight forward but there are strict guidelines as to the records employers are obliged to keep and appropriate advice should be taken to ensure compliance.
7. Contribute to your workers’ pension, Contributions will be ongoing and have to be made in accordance with statutory calculations. Employers will need to ensure that cash-flow issues have been considered well in advance of the date when the first contributions are made.
Other issues that will need to be considered by employers in the coming months include terms of contracts of employment. Many employees are likely to already have a contractual entitlement to employer pension contributions or to voluntary participation in an occupational or personal pension scheme. Employers will need to consider whether contracts of employment need to be amended and whether employees’ overall benefits packages need to be renegotiated. The rules that govern auto-enrolment are complex to navigate and the cost of failing to comply potentially high. Further detailed guidance can be obtained by calling our firm or on the Pensions Regulator’s website.
By Kim Hurley