This October it becomes a legal requirement for companies to enrol staff in a pension scheme. Many businesses don’t yet seem ready; here's how to prepare.
In October, employers’ pensions obligations are radically changing. For the first time, employers will be legally required to automatically enrol workers into a suitable pension plan and make contributions to them. But are you aware what this means for your business?
From October 2012 employers of all sizes will have to automatically enrol into a pensions plan ‘workers’ who are aged between 22 and state pension age, earn over £8,105 per year and work in the UK. These workers are known as ‘eligible jobholders’ and employers must pay minimum contributions to a pension plan on their behalf.
The duty will come into force in October for the largest employers and is expected to be phased in for smaller employers over a period ending in February 2018.
The gist of it
Employers can use existing or new pension plans. These can be defined benefit (DB) or defined contribution (DC) plans operating on a trust or a contract basis provided they meet one of several qualifying tests.
Alternatively, employers may use the National Employment Savings Trust (NEST). NEST is a nationwide trust-based DC pension plan which will be open to all employers. Employers do not have to offer the same provision to all employees.
Broadly speaking, the total minimum contribution required for DC plans from October 2018 will be eight per cent of a specified band of earnings. The eight per cent breaks down as three per cent employer contribution, four per cent employee contribution and one per cent tax relief. However, it's the overall level of contributions that matters: an employer can contribute in excess of the three per cent minimum.
A reduced contribution rate applies for a transitional period. For employers, this is expected to be a contribution rate of one per cent up to September 2017, and two per cent between October 2017 and September 2018.
In contrast, specific funding standards apply to DB plans and no minimum contributions apply. For DB plans transitional arrangements will allow the employer to defer automatic enrolment, even if the employer’s staging date is earlier – subject to a number of conditions.
Once an employee has been automatically enrolled into a pension plan he can choose to opt-out. If he/she opts-out within a month, their contributions are returned. Employers will need to keep careful records of opt-outs. Approximately every three years opters-out will have to be automatically re-enrolled (although they can opt-out again).
Employers can choose to postpone the auto-enrolment of an employee for up to three months, provided the appropriate notice is given.
The pensions regulator will police compliance with automatic enrolment duties and can issue substantial penalty notices to employers. It's imperative that businesses take action. Failure to comply could also amount to a criminal offence.
Summary: What do you need to do as an employer?
1. Identify how your workforce will be affected. As well as your employees, you may also have duties towards other ‘workers’ such as contractors and agency staff.
2. Determine your ‘staging date’. That's when the new regime will apply to you. Look here for the staging dates timeline.
3. Work out what your extra cost will be. There may be ways to offset this.
4. Make sure someone ‘owns’ the issue. It will not go away and requires coordination across several areas including HR, Benefits and Payroll.
5. Decide whether to use an existing pension plan, a new one or the National Employment Savings Trust (NEST).
Charmian Johnson is a partner in the pensions practice at Squire Sanders.