NOTE: This article is subject to changes – especially if NEST is pulled or ISAs included following nest’s review. Once the dust has cleared on the budget cuts and how the DWP is affected, you may want to do a very practical check list of things to do to prepare for auto-enrolment.
How employers will be affected by pension auto-enrolment
In just two years the Government’s long awaited plans to get more workers saving for their retirement is launched. This includes the introduction of auto-enrolment of employees into a qualifying pension scheme and minimum levels of contributions for both employees and employers.
The Government believes that if employees were automatically enrolled in a pension scheme through work rather than relying on the worker to start a pension plan, then more employees would save for their retirement.
To give business a low-cost pension savings vehicle for employees with low earnings the Government also plans to introduce the National Savings Employment Trust (NEST), to support auto-enrolment. As part of the new Government’s spending review, the NEST pension scheme is currently being re-assessed, with a decision due in October 2010.
The basics of auto-enrolment for employers
The new pension legislation come into effect from October 2012, and the individual duties of each company are being phased-in over four years based on a company’s PAYE size. The plans are for employers with 120,000 or more employees to start from 1 October 2012 and the scheme should be fully introduced by 2016.
Employers must enroll employees who are older than 22 and earning more than £5,035 in qualifying pension scheme. This can be the soon to be launched NEST, a qualifying defined contribution scheme or a defined benefit pension scheme. Some employees who are not eligible for auto-enrolment can asked to join a scheme if they so wish.
If an employee is automatically enrolled in either NEST or a defined contribution scheme, the legislation requires that there is a minimum contribution of 8% of qualifying earnings paid into the pension scheme – 3% of which must be from the employer. So, if an employer decides to make contributions of 3%, the employee would be required to pay 4% and the Government would contribute 1% tax relief. Minimum contributions amounts are also being phases in from 2012 between October 2012 and October 2017 to ease the costs to businesses.
Employers may use a salary-related pension scheme to fulfil their auto-enrolment duties – assuming the benefits it provides meets certain minimal levels.
If an employee decides that they do not want to join a pension scheme, they may opt out during the ‘opt out period’ and they should receive a refund of any contributions paid. Every three years employers will be require to re-enroll an opted out member of staff.
Costs associated with auto-enrolment
The obvious costs to employers associated with the introduction of enrolment are employer contributions. These will need to be at least 3% of the qualifying earnings (5,035 and £33,540) for each employee.
To help ease the burden of the cost of these contributions the Government has decided to phase in the minimum contribution requirements. Accordingly, from October 2012 to September 2016 the minimum contribution level will be 2% of qualifying earnings with at least 1% from the employer. Between October 2016 and September 2017 this rises to 5% of qualifying earnings, with at least 2% employer contributions. From October 2017, the minimum contributions level will be 8% of qualifying earnings, with at least 3% from the employer.
Companies should not overlook the administration requirement of compliance with the employers’ duties under the auto-enrolment legislation and the added expense of this administration. This could be £50 per employee for smaller businesses and £20 for large organisations, or even more.
The administrative requirement to comply with employer auto-enrolment duties are complex and will present a challenge to many employers. Companies should examine their current administrative procedures and establish a strategy to meet their new responsibilities under auto-enrolment. And they may want to do this sooner, rather than later.
Common questions regarding auto-enrolment
Which pension schemes qualify?
To qualify, a pension scheme must meet certain minimum standards with regards to the benefits it provides or the level of contributions paid into it. A qualifying scheme must also be able to auto-enroll all eligible employees that are not yet a member, as well as new recruits when they become eligible.
May I use an existing pension scheme?
Yes, you may use your existing pension provision if it qualifies and the relevant contributions are made. You may auto-enroll your eligible employees into a qualifying money purchase scheme (such as a GPP, stakeholder, defined contributions) or a salary-related scheme – otherwise you must use NEST.
Must I use NEST?
YES, unless eligible employees are a member of a qualifying pension scheme with the relevant level of contributions paid or benefits provided. You must auto-enroll your eligible employees in NEST, unless you replace it with another qualifying pension scheme.
I have an existing pension scheme, should I switch to NEST?
NEST is meant to complement other company pension schemes not replace them. It is designed for low to moderate earners, who are not currently in a pension scheme. It is not meant to replace your existing pension provision.
Which scheme should employers use?
It is up to employers to choose suitable pension provision for their staff. They can use an existing scheme, set up a new one, use NEST – or a combination of these pension schemes.
Turning to an expert to help you plan your pension provision before auto-enrolment becomes mandatory would be a good idea. An independent financial advisor can explain the legislation and what it really means for you, your business and your staff, and offer solutions to meet your requirements.
An IFA can help you examine whether any changes need to be made to your current provision or help you establish a company pension scheme to fulfil your duties under auto-enrolment. Your local IFA will also be able to tell you where NEST (or another qualify pension scheme aimed at this market) could fit into the equation for some employees. If you want to get in touch with an IFA for advice on preparing for auto-enrolment fill out the form below.