Countdown to auto-enrolment: time to attend to your pension; As the countdown begins to one of the biggest changes to the benefit systems for years, Stephen Hart, legal director at DLA Piper and Craig Thomas, solicitor at DLA Piper, urge firms to have a strategy in place.
On October 1, 2012 new laws contained in the Pensions Act will come into force. For the first time, employers will be under and obligation to automatically enrol most of their work-k force into a pension scheme and to make employer pension contributions.
With unprecedented pressure on public sector spending and changes to life expectancy, there is undoubtedly a need to reform the pensions system. In the UK, the over-85 group is projected to more than double over the next 25 years to reach 3.3 million, yet many people are still failing to save for their future. The new laws will mean that workers do not need to make any active decision in order to be part of a pension scheme.
However, the laws will place significant new burdens on employers. The implica-a tions will not be limited to the direct costs of pension contributions. Employ-y ers will also need to invest in HR staff and systems in order to process and monitor pension schemes on a new scale.
The new legislation will impact upon firms at different times and in different ways, largely depending upon the size of the company and the number of people on its payroll. It is essential that employ-y ers are fully up to speed on their responsibilities and timescales.
There will also be a range of ways in which companies can comply with the new legislation. The best approach for an individual business will vary depending on its size, sector, patterns of employ-y ment and current pension provision.
However, it is extremely important for companies to plan ahead so that they are not making snap decisions, but have a strategy for addressing the new requirements in a way that satisfies their business needs.
What does the new legislation require of employers? Under the new legislation an employer will be required to enrol all eligible jobholders into an automatic enrolment scheme. An 'eligible jobholder' is an employee between the age of 22 and state pension age who earns more than pounds 7,456 a year.
Employers will have to ensure that arrangements are in place for automatic enrolment for any 'jobholders' who elect to opt into the scheme. Jobholders also include any employees aged between 16 and 22 or state pension age and 75 who earn more than pounds 5,035 a year, but less than pounds 7,465 a year.
Finally employers must provide the option to 'opt in' to a pension scheme to their other employees, those aged between 16 and 75 who earn less than pounds 5,035 a year. However, in the case of these workers, the employer is not required to contribute.
The employer will have to carry out an automatic autoenrolment process every three years following its 'staging date', including the automatic re-enrolment of any employees who have previously opted out of autoenrolment or have ceased to become a member of a qualify-y ing scheme more than 12 months before the re-enrolment process.
It is important to note that communication is a key part of an employer's duty. Once autoenrolment takes place it is the employer's duty to provide both the employee and the auto-enrolment scheme with the necessary details. It is also the employer's responsibility to inform jobholders and workers of their right to opt in to a scheme.
Finally, if an eligible jobholder chooses to opt out, it is the employer's responsibility to ensure that the opt-out form has been validly completed and to notify the auto-enrolment scheme.
When does this come into effect? Different employers will have different 'staging dates' between October 1, 2010 and September 1, 2016 depending upon their size. Broadly speaking the largest companies will be required to comply first. Staging dates can be found on the Department for Work and Pensions website.
What schemes can an employer use? Employers can comply by providing access to an autoenrolment scheme, or a qualifying scheme, or both.
A qualifying scheme is a pension scheme that meets certain minimum requirements known as quality requirements, but employees who are already members do not have to be automatically enrolled. In the case of a money purchase pension scheme it is reasonably clear to see whether or not these minimum requirements have been met.
For pension schemes that are based on defined or hybrid benefits rather than money purchase, the quality requirements are more complex and individual advice should be sought.
The minimum requirements will be phased in stages and will be set in terms of a percentage based on earnings. Starting at October 2010, the total contribution from the employee and employer must be a minimum of two percent with the employer contributing at least one percent.
By October 2017 this will rise to a total contribution of eight per cent with the employer contributing a minimum of five per cent.
Automatic enrolment can be into any tax-registered pension scheme, including an occupational pension scheme (defined benefit or defined contribution), a master trust, a group personal pension or stakeholder pension.
A new National Employment Savings Trust ('NEST') has been set up to provide a convenient scheme for employers without one.
An employer without a suitable pension scheme in place may choose to use NEST to minimise the cost and risk factors involved in setting up a scheme from scratch.
Companies in fast turnaround sectors may also choose to use NEST and make the minimum contribution in the simplest way for a large volume of staff.
What effect is this likely to have on the pensions landscape? It is hard to say what the changes will mean in practice. There has been some concern within the industry that enrolling millions of new workers into pension schemes will cause employers who contribute generously to decrease their contributions to the minimum requirements.
On the other hand, we do not know how many employees will join. This is not the introduction of a compulsory pension scheme and many workers may well choose to opt out because they do not feel they can afford the minimum requirement of three percent of their salary.
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|Publication:||The Birmingham Post (England)|
|Date:||Apr 14, 2011|
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