Beginning in 2012, the government will be implementing workplace pension reforms that impose new duties on employers to make mandatory pension provision for their employees. The Government estimates that about seven million people are currently under saving for retirement.
The purpose of this bulletin is to provide you with important information that you the Employer will need to consider and take into account with regard to the proposed reforms.
Summary of proposed reforms
The government have recently undertaken a full review of pensions as a whole and this review has lead to various proposals being made which include the reform of the State Pension to make it simpler and more generous, extending people’s working lives by removing the default retirement age and also putting the onus on employers to help encourage more people to save for retirement. As an employer, you will be required to carry out the following:
- Automatically enrol all qualifying employees into a ‘qualifying pension’ scheme.
- Contribute a minimum of 3% of each employees eligible earnings into a ‘qualifying scheme.
The government do recognise that these reforms will create a burden on employers and therefore to help minimise this burden they:
- will allow the phasing in of minimum contributions
- use simple, straightforward, qualifying criteria for existing company schemes, meaning many existing schemes will meet them, perhaps with minor changes
- use a ‘light touch’ but effective compliance regime for new employer duties such as auto enrolment.
Between 2012 and 2016 you will have to automatically enrol all ‘eligible employees’ in a qualifying scheme and male contributions to their plan. You will be contacted by the Pensions Regulator 12 months in advance of your staging date to and this correspondence will set out your requirements. You will then be contacted again 3 months in advance of your staging date to confirm that your staging date is imminent.
‘Eligible employees’ will be:
- Those who are not already active members of a qualifying scheme; and
- Are aged between 22 years and the State Pension age; and
- Have earnings in excess of the income tax personal allowance (£7,475 in 2011/12)
The qualifying scheme can be your own scheme, if it meets certain criteria or an alternative arrangement as long as the minimum contributions are met. These contributions rates and phasing dates are detailed in the table on the following page:
|Contribution Phasing Period
||Min Employer Contribution
||Min Employee Contribution
||Min TOTAL Contribution (gross)
|Staging Date – Sept 2016
|Oct 2016 – Sept 2017
|Oct 2017 onwards
Qualifying company schemes
Should you wish to use your own Company Scheme to meet the new requirements, it will have to meet certain qualifying criteria which have been designed by the Government.
- Does it permit auto-enrolment?
- Are employees auto-enrolled within 90 days of joining the company?
- Does it have a default investment fund?
- Does it deliver a minimum accrual rate or minimum contribution?
Where you calculate contributions based on different rates, earnings bands or definitions of pensionable pay, your scheme will still be ‘qualifying’ provided the contributions meet the following criteria:
- 9% of pension pay (including a 4% employer contribution) or
- 8% of pensionable pay (including a 3% employer contribution as long as pensionable pay is at least 85% of total pay; or
- 7% of pensionable pay (including a 3% employer contribution) as long as total pay is pensionable)
Whichever qualifying scheme is adopted, you will have additional regulatory requirements to be aware of.
The requirements are being introduced to ensure that employees’ rights are safeguarded. This will stop non-complying employers achieving any competitive advantage, and should minimise the need for compliance action. You will have the following requirements:
- Risk to auto-enrolment – Register with the Regulator to confirm how you will meet your enrolment duties for each of the PAYE schemes you run. Failure to register will be detected by comparing records with HMRC.
- Risk to the opt-out process – Comply with new statutory employment rights. These will include the right of employees not to be dismissed on grounds related to pension membership and restrictions on agreements which limit your new duties and employees’ rights.
- Risk to pension payments – Your payments will be monitored by the pension scheme trustees or administrator/insurance company, who will be required to report any failures to the Pensions Regulator.
What this means for you
The proposed new regime will place three potential additional costs on your business:
- The costs associated with increased membership and contributions
- The administration costs of registering and meeting your new enrolment duties. There are detailed rules covering what you have to tell the Regulator and your employees and also the processes for enrolling staff and dealing with opt-outs.
- The fines that may be levied by the Regulator in the event of non-compliance. These fines can vary between £50 and £10,000 per day.
The government has accepted the proposals made by the review team and they will now be implemented.
Employers must take action now to familiarise themselves with these key concepts, and also understand the role of The Pensions Regulator, an agency the vast majority of businesses will not have come across or dealt with before.
Wingate Benefits Solutions are here to assist you in planning for the new reforms. Should you wish to discuss the above in more detail or any other aspect of your pension scheme please do not hesitate to contact your usual Wingate Benefit Solutions adviser or call us on 0844 406 0027.
Tax and legislation are liable to change. This information is based on WBS’s current understanding of UK law and HM Revenue & Customs practice and legislation we believe may apply in the future. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of the information contained herewith. It is recommended that professional advice is sought prior to entering into any financial arrangement.