The government wishes to encourage pension savings and is introducing mandatory auto-enrolment of employees into a pension scheme commencing from 2012.
An employer (of any size) will be required to maintain a “qualifying workplace pension scheme”. You may use your current pension scheme if it meets qualifying conditions or alternatively you will be required to set up a new pension scheme or use the national employment savings trust (NEST) scheme.
Employers will be required to make minimum contributions as shown below:
Minimum employer Minimum total
01/10/2012 – 30/09/2016 1% 2%
01/10/2016 – 30/09/2017 2% 5%
01/10/2017 onwards 3% 8%
For small businesses, the date from which this becomes a requirement will vary between October 2012 to September 2016, dependent on the size of the firm’s PAYE scheme. For example, if you employ between 250–349 employees your staging date will be 1 February 2014; between 240–249 your staging date will be 1 April 2014, and if you employ 50–89 employees your staging date will be in 2014 and will vary according to your PAYE reference.
New employers will be required to apply these contributions to between March and September 2016.
It is believed that this will increase the proportion of employees who contribute to a pension scheme because of the significant change between having to invite employees to join and having to auto-enrol an employee within the first three months of employment.
Most employees will be included in this arrangement, and could include anyone to whom you pay the national minimum wage or an apprentice. Employees who earn less than the minimum income tax threshold, or are aged under 22 or over the state pension age will be exempt, but could choose to opt in if they wish.
Employees may decide individually to opt out of these arrangements but employers must not encourage this behaviour. The Pensions Regulator will be checking this and can impose fines.
As an employer you will need to register your qualifying workplace pension scheme with the Pensions Regulator and will be required to report on the number of employees you have automatically enrolled.
One complication about auto-enrolment is that the minimum contributions set out above will apply to all earnings in a band, broadly equivalent to the band within which the 12% National Insurance contributions are paid by employees. Most pension schemes at present only apply contributions to basic earnings. This may put an additional strain on payroll reporting and compliance with the requirements. For a current scheme to quality it must meet certain requirements:
Defined benefit schemes
All schemes that are currently contracted-out to State Second Pension and hold the valid contracting-out certificate will meet the requirement.
Not contracted-out schemes need to meet benefit tests which is broadly an accrual rate of 1/120th per year defined benefit accrual.
Defined contribution schemes
Broadly, to qualify there must be at least 8% of the qualifying earnings being paid into a pension scheme, of which the employer must pay at least 3%. There are different arrangements for hybrid schemes.
A qualifying scheme must not require any choices to be made by employees or any requirement to provide information in relation to joining or remaining a member of the scheme including application forms.
Small businesses may view this legislation as an unnecessary burden; “micro-employers” employing only one or two employees may be dealing with pension provision for employees for the first time. It is clear that for some employers this will increase employment costs, will increase regulation and may do little to enhance the recruitment and retention of valuable staff.
A number of concerns remain about the introduction of auto-enrolment; perhaps the most contentious points are:
- Employers currently providing a pension arrangement may decide to reduce contributions to the minimum required under auto-enrolment, promoting the view that these minimum levels of contribution are sufficient to provide a suitable level of income in retirement. Plus, the new administration processes could become burdensome.
- At the minimum level of contributions required, pension benefits are likely to be fairly modest and could result in the reduction or elimination of other means-tested state benefits unless Ian Duncan-Smith’s pension reforms are adopted. Retirees in this position could actually find themselves worse off, losing more means-tested state benefits than they gain with a pension arising from the minimum level of auto-enrolment pension contributions.
- Although the government recently eased the position somewhat, seasonal workers are working for longer than three months will be required to be auto-enrolled. Many seasonal workers come to the UK to work for a short period and it is doubtful that they will receive much value from a UK based, fairly minimal, pension fund; indeed many may not actually claim these benefits.
- The cost of setting up the government-backed national employment savings trust (NEST) scheme is likely to be substantial and this will be reflected in higher than average charges for the NEST scheme in the early years until NEST becomes self-financing.
Clive Grimley is a partner at pensions actuary firm Barnett Waddingham,