Pension Change… Compulsory Employer Contributions… Getting Ready
Not long ago most people thought pensions were boring. Not now! Pensions often top the news headlines. And more and more people are worrying about how they’ll afford a comfortable standard of living in retirement.
Changes that will impact on you…
There are major pension reforms on the way that will affect every UK employer. So what’s it all about? And what are the solutions?
The background to all this is that:
- The government estimates about 7 million people are not saving at all for retirement, or not saving enough.
- Life expectancy is increasing – people will live longer in retirement and the size of their pension fund needs to be greater to fund this.
- The government may not be able to afford to keep state pensions at their current level in the longer term.
So there’s an obvious need to encourage far more people to save for the retirement. The government’s solution (which has cross-party support) is to introduce:
- auto-enrolment and compulsory employer contributions, and
- the National Employment Savings Trust (NEST).
Both will take effect from 1 October 2012 but there are staged implementation dates, with the largest employers going first.
So what does auto-enrolment mean for you?
All employers operating in the UK will have to automatically enrol staff into a qualifying pension scheme who:
- are aged 22 to state pension age
- earn more than the minimum earnings threshold – this will be set by the government and may be the same as the income tax personal threshold (£7,475 in the 2011-12 tax year), and
- are not currently in a qualifying pension scheme.
The employer could choose NEST to provide their auto-enrolment scheme or another pension scheme company such as Aviva. Or they could have different providers for different sections of their workforce.
For a scheme to be qualifying it must pay a minimum level of contributions. The lowest is 8% of a band of earnings (£5,715 to £38,185 using the figures for the 2011/12 tax year), but the lower and upper levels will change from time to time, probably each year.
The employer must contribute at least 3% and can ask employees to pay the remaining amount up to the 8% total. These percentages apply to the employee’s total earnings within the band, so they include overtime and bonuses not just basic pay.
You can, however, choose another contribution basis if you wish, based on the employee’s earnings starting from £1 rather than £5,715. And you and your employees can contribute more than the minimum if you wish.
What are your duties as an employer?
In summary, you will need to:
- make payments into a pension scheme that complies with the auto-enrolment requirements
- auto-enrol or re-enrol all qualifying staff (they can opt out of the scheme if they wish but will need to be re-enrolled approximately every three years)
- monitor all earnings to make sure your scheme meets the minimum contribution levels
- collect contributions and forward them, and any necessary supporting information, to your pension scheme provider
- register your auto-enrolment scheme with the Pensions Regulator not later than four months after your staging date, which is the latest date by which you need to have an auto-enrolment scheme. (If you change your pension scheme provider, you will need to register the new scheme with the Pensions Regulator.)
- provide information about the pension scheme to your employees
- process opt-outs and make refunds
- keep records.
You must not:
- offer investment advice to your employees about the pension scheme
- discourage employees from joining the scheme
- provide any employee with an opt-out form
- encourage members to opt out of the scheme
- employ someone on the condition that they will opt out of the scheme.
If you already have a pension scheme for your employees, you’ll need to change it. If you don’t have one yet, you’ll need to set one up. The important thing is to give yourself plenty of time to prepare:
- Check when your staging date is likely to be. You can do this by visiting Aviva’s auto-enrolment site for employers at www.aviva.co.uk/auto-enrolment/
- Take a look at other sections of the Aviva site, such as the Frequently Asked Questions (FAQs), to get you started and ‘Tell me more’ for more details. Or go direct to the very comprehensive information on the Pensions Regulator’s site.
- Talk to a financial adviser about your concerns and requirements.
Introducing auto-enrolment will give many employers a lot of challenges. But you are not alone – there is help available. And it’s important to remember why it’s happening: auto-enrolment will improve the living standards of millions of people when they retire.
Pensions Marketing Manager, Aviva