In just over four months time, the new obligation to auto-enrol workers into a qualifying pension scheme and make minimum contributions will apply to the first employers.
The Government predicts that this radical change to workplace pension provision will bring around 7 million workers into pension saving for the first time. We take a look at Government progress in finalising the detail of the new requirements and consider what the new law means for your business....
What is auto-enrolment?
Automatic enrolment is the name given to the process you will have to follow to make your eligible jobholders active members of a qualifying pension scheme. The individual must be enrolled without them having to do anything at all, although they can choose to opt out at a later date.
The main employer obligations will be to:
- automatically enrol eligible jobholders in a qualifying pension scheme and make a minimum level of contributions;
- automatically re-enrol those that have opted out every three years;
- provide specific information within set timescales to all workers;
- allow workers who are not eligible for automatic enrolment to opt into a pension scheme;
- keep records of the process; and
- register with the Pension Regulator.
The legislative framework for these pension reforms is nearly finalised. There have been the following recent developments:
Increases in thresholds
The duty to auto-enrol applies to jobholders who earn more than a certain trigger amount each week, fortnight or month (depending on how often they are paid). When the law is fully implemented, contributions rates will be 8% (with a minimum 3% employer contribution) on a band of qualifying earnings.
Regulations which revise the earnings trigger level and qualifying earnings rates were recently put before Parliament. These draft Regulations propose:
The earnings trigger for auto-enrolment will £8,105 per year (pro-rated for weekly, fortnightly and monthly paid workers).
Contributions will be payable on a wider band of qualifying earnings: between £5,564 and £42,475 per year.
We expect these Regulations to be approved shortly.
The new obligations are being introduced in stages:
The new duties will not apply to all employers at the same time. Instead, employers are allocated a staging date at which point the new duties will apply to them. This is based on the size of employer’s largest payroll in April 2012. The largest employers will go first.
The level of contribution rates will be introduced incrementally, starting with a requirement for a total contribution of 2% of the band of qualifying earnings, with a minimum employer contribution of at least 1%.
The government’s consultation on extending the staging timetable has recently closed and we expect its proposals to be approved. It proposes:
extending the staging timetable for employers with less than 50 workers, so they are not obliged to auto-enrol until June 2015 at the earliest
keeping contribution rates at 2% of banded earnings for longer, so that they increase to 5% (with a minimum employer contribution of 2%) in October 2017 and 8% (with a minimum employer contribution of 3%) in October 2018.
We are also hoping that the Government will include an easement to allow employers with fewer than 50 on their payroll to delay their staging date – even if they share their payroll with other companies in the group.
A key – and onerous – part of the new law relates to the provision of specific detailed information to workers about their rights, within strict deadlines. Different information must be given to different workers, depending on the situation.
We are pleased that the Department for Work and Pensions has announced that it will publish template information letters in June. This will ease some of the administrative burden, but employers will still need to be on top of the complex rules covering what letters to send to whom and when to send them and will need to ensure that the template letters are adapted to include the right specific information for each individual.
Using your own scheme
There are a number of outstanding technical issues which the Government is still consulting on relating to the appropriate tests to assess if a particular pension scheme will qualify for use as the savings vehicle for the new auto-enrolment duties.
In addition, there are unresolved difficulties relating to workers who are employed in EEA countries and have dual pension status.
What auto-enrolment means for you
The implications of this change in the law are wide-ranging for employers. We recommend that you start planning for the changes well ahead of your staging date. There is a lot to do, for example:
- If you currently offer a pension to your workforce, you will need to check if it will count as a qualifying scheme. You may need to make changes to the scheme or move providers.
- A number of member companies have already found that their pension provider will not continue with their existing scheme, requiring them to switch schemes even if they did not want to.
- If you don’t have a pension scheme for some or all or your workers, you will have to decide which scheme or schemes you will use.
- If you are proposing changes to your pension provision, you may need to comply with the pension consultation regulations.
- The administrative burden of the new obligations will be large, especially around your staging date. You need to plan for this and allocate the necessary resources.
- You will start to get questions from employees and their representatives. You need to work out how to deal with them.
How we can help
In June 2012, we are running a series of two hour breakfast seminars, Auto-enrolment for beginners: what you need to know and do now about their new pension obligations and NEST. These will explain the key features of the new regime and focus on the practical steps your business needs to take in the run up to your staging date.
Delegates will be given a detailed to-do list and timeline to take away, as well as materials to help them brief their Board on the implications for their business.
learn more about our auto-enrolment seminars