Pensions have not been far from the headlines in 2010 and the coming years will be no different. In this Alert, we look at the key aspects of proposed Government pension reforms.
The proposed reforms are a response to the findings that people are living longer but not saving enough to live on when they retire. To solve the problem, the previous Government mooted the idea of automatically enrolling people into a pension in order to “force” employees to save for their retirement. The coalition Government commissioned a report on the issue, the findings of which it has said it will implement, with legislation to be drafted. However, the plan is for implementation on 1 October 2012.
The proposed workplace pension reforms have potentially far-reaching consequences for the costs and administration of a business. Therefore, whilst legislation is pending, employers should be aware of what is on the horizon.
Between October 2012 and October 2016, all employers will have to enrol eligible jobholders into a qualifying workplace pension scheme. Current thinking is that eligible jobholders will be workers who are:
working or ordinarily work in Great Britain
aged at least 22 but have not yet reached State Pension Age (65 at present)
earning more than the lower limit of the income tax personal allowance (£7,475 in 2011/12)
Automatic enrolment is being rolled out by a method called “staging”. The “staging date” (or start date) is determined by size of employer, with the largest employers having to enrol their workforces first. The employers who are due to enrol between 1 October 2012 and 1 November 2012 will be allowed to start auto enrolment from as early as July 2012.
A new national pensions saving scheme, the National Employment Savings Trust (“NEST”), will be available to support automatic enrolment, providing a scheme for employers who do not currently have one. Employers with established pension schemes may use NEST as an alternative scheme for some or all of their workforce.
What the proposed reforms mean for employers
Implementation of the currently proposed reforms will mean that employers will have to:
make a 3% contribution on qualifying earnings between approximately £5,700 and £33,500 (figures to be finalised);
enrol all eligible jobholders during a one-month joining window;
let all eligible jobholders know they have the right to opt-out in the month after enrolment;
register with The Pensions Regulator and provide the Regulator with information on how the employer met its duties;
administer opt-outs and refunds;
re-enrol jobholders who opt out every 3 years; and
keep records (for at least 6 years) showing how they have complied with their statutory duties.
The Report recommends that legislation allows employers a 3 month waiting period before enrolling new employees. Also beneficial from the employer’s viewpoint, is the Report’s recommendation that the Government should introduce a simple certification scheme for employers already offering defined contribution pensions, to ensure that these pensions meet the standards required for auto-enrolment.
Employers should soon turn their minds to the impact the reforms will have on their business, reflecting on whether administering the scheme will require adaptation of payroll systems, staff training, or possibly even outsourcing of some functions.
The Pensions Regulator will police compliance. Financial penalties (of up to £10,000 a day) and criminal penalties are threatened for non-compliance.
What happens next?
The Pensions Regulator will inform employers when their staging date is and what they must do to comply with their auto enrolment duties. Employers should expect to hear from the Regulator 12 months ahead of the relevant staging date (so expect a letter no earlier than October 2011). We would be delighted to assist you through the process, or to answer any questions you may have in advance of your staging date.