THE current plans for pensions’ reform consist of a package of changes to both state and private pensions. The main objective of these changes is to get more people to save more. Put simply, the State pension cannot be relied on as the sole source of retirement income. The government is therefore keen to make sure people are steered in the direction of making better provision for their retirement. Some of the finer details on pensions’ reform have still yet to be finalised but it’s clear that the new legislation will completely change the face of the pensions industry in the UK. In this article I will attempt to provide you with most of the information you will need to ensure your business stays ahead of the game and adheres to the new rules as soon as they are staged in by the government.
New responsibilities for employers
As an employer, your new responsibilities under pensions’ reform are built on two main principles:
- the auto-enrolment of working individuals into a pension scheme, and
- compulsory pension contributions.
Auto-enrolment of working individuals into a pension scheme
Put simply, auto-enrolment means that an individual is automatically enrolled into a pension scheme and doesn’t need to do anything or make any decisions: or example, choose a fund or sign an application form. The new legislation defines working individuals as workers and job-holders. You’ll have different duties towards your employees depending on the criteria that
each employee meets. You can choose to auto-enrol jobholders into a qualifying auto-enrolment private pension scheme or into the National Employment Savings Trust (NEST). You will have different autoenrolment
duties depending on the criteria your employee meets.
- For example, any job-holder aged at least 22 and under state pension age with earnings of at least £7,336 (in 2010-11 terms) must be enrolled automatically into a pension scheme unless he or she is already an active member of a “qualifying scheme”.
- In contrast, any job-holder aged at least 22 and under state pension age who earns between £5,715 (in 2010-11 terms) and £7,336 must be given the chance to join an auto-enrolment scheme unless he or she is already an active member of a qualifying scheme. If a person chooses to opt into the scheme, you also have to contribute on his or her behalf at the minimum level.
- Job-holders outside this age range, in other words aged at least 16 and under 22, or over state pension age but under 75, must be given the chance to join if they want to, as long as they’re receiving qualifying earnings and not already an active member of a qualifying scheme. If they choose to opt into the scheme, you also have to contribute on their behalf at the minimum level.
- Workers aged at least 16 and under 75 who earn below the qualifying earnings threshold must be given the chance to join a registered pension scheme (not necessarily a qualifying scheme) if they are not already active in one, but you won’t have to contribute on their behalf.
- Finally, job-holders aged at least 22 and under state pension age who aren’t active members of a qualifying scheme at the time of their automatic reenrolment date (generally every three years) must be re-enrolled automatically.
Compulsory pension contributions by employers
The total minimum level of pension contributions that must be paid to a
defined contribution scheme, once phased in, is 8% of the job-holder’s qualifying earnings. You have to pay at least 3%, and the job-holder has to pay the balance up to the total 8%. The job-holder’s contribution will include tax relief. For example, for a job-holder’s contribution of 5%, the job-holder will only actually pay 4% with 1% tax relief provided by the government.
What are qualifying earnings?
Qualifying earnings are based on a band of earnings, between £5,715 and £38,185 (in 2010-11 terms) within a 12- month pay period, and include: salary or wages; commission; bonuses; overtime; and certain statutory payments, for example maternity or sick pay. Under pensions reform, this minimum contribution only applies to job-holders who are auto-enrolled, have opted in or are existing members of a qualifying scheme that is a defined contribution scheme. No minimum contribution is required for job-holders who opt out or choose to leave a qualifying scheme or for workers who don’t qualify as jobholders.
Self-certification for qualifying schemes
The Pensions Act 2008 allows for a process known as self-certification. This
allows you to certify with the Pensions Regulator that, overall, your scheme
meets the quality test for a defined contribution scheme. The pensions industry and employer groups have worked very closely with the Department for Work and Pensions (DWP) to develop a workable self-certification model. So far the model is still a proposal, but the approach has been accepted in principle by the government. Any qualifying scheme (for example, any pension scheme you may already have in place for your employees) that meets one of the following criteria can self-certify and will meet the minimum contribution test:
- minimum 9% contribution of pensionable pay (including a 4% contribution made by you), or
- minimum 8% contribution of pensionable pay (with a 3% contribution made by you), as long as pensionable pay makes up at least 85% of the total bill, or
- minimum 7% contribution of pensionable pay (with a 3% contribution made by you), as long as the total pay bill is pensionable.
An important point to note is that employers will have to self-certify their
scheme every year to ensure it continues to comply with the new pensions legislation. If your business does not choose to provide its own qualifying scheme for employees, then the remaining option is to provide a version of the government’s National Savings and Employment Trust (NEST) pension
schemes instead. The notable points about NEST schemes are:
- It is a scheme that you can use to enrol your eligible job-holders in, instead of a private pension scheme.
- It is a large, defined contribution occupational pension scheme designed for low and medium earning employees.
- It is run by the private sector at arm’s length from the government.
- It is governed and administered by a trustee corporation (NEST Corporation).
- It is fairly basic in terms of the options and facilities it provides employees. For example, it will be ebased where appropriate and will have only a few choices for individuals who join the scheme. This is in contrast to the far more sophisticated and flexible qualifying pension scheme that could be put in place by the employer if desired.
- The investment strategy is fairly cautious – the focus is on members not losing the value of their contributions rather than investment return. There will be a default fund with six to eight alternative funds in total.
- Each member will have his or her own “personal account” within NEST.
In reality, it is likely that employers will want to provide their own “qualifying” scheme to ensure they are seen as caring employers who take the provision of their employee benefits seriously. By choosing to provide your own qualifying scheme you will get to have far more influence on the type of scheme offered to staff members and provide them with a far more
comprehensive and holistic means of saving for their retirement.
When will the changes start?
Starting dates are based on the size of the business. Practices with fewer than 50 employees will have a “staging date” between 1st March 2014 and 1st September 2016 (depending on PAYE reference). Those with between 50 and 89 staff, begin on 1st July 2014; larger concerns begin earlier, starting next October for firms which employ more than 120,000 people.
