We’ve recently been introduced to what politicians are calling “the biggest shake-up in UK pensions for over 100 years.” Under the new “automatic enrolment” programme, millions of people will be put directly into a workplace pension scheme, which is paid into by both the worker and their employer.
The aim of the programme is to get up to 11m more people saving in a workplace pension. Auto-enrolment is being phased in over several years, starting with the largest employers and eventually taking in small businesses.
Are business leaders ready for this? Smaller and mid-sized firms have mixed feelings about the scheme. A major survey of pension trends in smaller firms with 250 or fewer employees conducted by the Association of Consulting Actuaries (ACA) found that two thirds of business leaders do not support the push for enrolling their employees in large multi-employer schemes, as outlined in the government’s recent workplace pension reinvigoration paper.
In the survey, some 67 per cent of firms did not believe that fewer, larger schemes result in better value for money for savers and/or employers, and only a fifth feel government should encourage scheme consolidation in the pensions market.
These findings are telling, seeing as there are over 1.2m of these smaller firms which employ over half of the UK’s private sector employees and generate a half of all private sector turnover, amounting to £1,500bn per year. Presently across the UK as a whole, around 75 per cent of smaller firms provide no workplace pension scheme at all, but between 2014 and 2018 all will have to auto-enrol employees aged 22 and above.
According to ACA chairman, Andrew Vaughan: “In my view, it would be disastrous if smaller firms’ employees are auto-enrolled en masse into products from 2014 that offer poor value and weak governance. It places immense pressure on government to make sure its reinvigoration programme is pursued at some pace, ideally supported by the Opposition so legislative changes can be agreed in quick time. It would be a missed opportunity if providers and employers are unable to offer some new designs because of reforms moving too slowly over the next year or so. We are encouraged that the Pensions Minister seems aware of the challenges ahead.”
At the same time, it is worth remembering that for millions of employers and employees, nothing is changing. If an employee is already in a pension at work and it meets the government’s new standards, this shake-up will not affect them.
For businesses, the basic facts you need to know are these:
- Anyone on the national minimum wage and working more than 25 hours a week will be auto-enrolled. That means, employers have to enrol workers who are at least 22 but below state pension age, who earn more than a minimum amount of £8,105 a year for the current tax year, and are not in a workplace scheme.
- Workers not in that group can opt in. If an employee is at least 16, but under 75, earns more than £5,564 a year and asks to be enrolled, you will have to put them in the scheme and pay contributions.
- For workers aged 16-74 who earn less than that, and who ask to be put into the scheme, you will need to enrol them as well, but do not need to pay contributions for them.
- The total minimum contribution will start at two per cent of earnings; that’s typically one per cent from the employer and one per cent from the worker. By October 2018 this will have risen to eight per cent – at least three per cent from the company, up to four per cent from the employee and one per cent tax relief.
- All existing employers (including private individuals who employ a nanny or gardener) must have enrolled their employees by April 2017. The scheme began on 1 October 2012 for companies with more than 120,000 staff. A full timetable of dates is on the Pensions Regulator’s website.
- Employers who don’t comply with the rules can face a whole range of potential sanctions. Those who ignore the Pensions Regulator’s first request could get a fixed penalty of £400. Employers who “willfully and persistently” fail to comply face between £50 a day fines (for those with fewer than five staff) up to £500 a day (for those with five to 49 staff), or even £10,000 a day for larger firms with more than 500 workers.
Can you opt out of the scheme? If so, how? And what are all the legal facts connected with auto enrolment? We’ll be exploring the new pension scheme from a business perspective over the course of this month.
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