Under the new pension auto-enrolment scheme, all employers will have to automatically enrol eligible jobholders into a qualifying pension scheme. This could, for example, be an existing pension scheme (if it meets, or can be changed to meet, the necessary automatic enrolment criteria), or the new National Employment Savings Trust (NEST). Eligible workers Workers for whom automatic enrolment will be required are those who are:
- Aged between 22 years and the State Pension Age (SPA)
- Earning over the minimum qualifying earnings threshold (£9,440 in 2013-14)
- Working or ordinarily working in the UK
- Not already a member of a qualifying pension scheme.
These are categorised as ‘eligible jobholders’. Most workers will fall into this category unless the employer already has a qualifying pension scheme. Qualifying earnings Earnings cover all of the following pay elements (gross):
- Statutory sick pay
- Statutory maternity, paternity and adoption pay.
Contributions will be payable on earnings between the lower threshold of £5,668 and the higher threshold of £41,450 for 2013-14. The earnings between these amounts are called qualifying earnings. The thresholds will be reviewed by the Government each tax year. What is a qualifying scheme? A qualifying scheme may be a UK scheme (one with its main administration in the UK) or a non-UK scheme (with its main administration outside of the UK). For a UK pension scheme to qualify it must:
- Be an occupational or personal pension scheme;
- Be tax registered; and
- Satisfy certain minimum requirements (the requirements differ according to the type of pension scheme).
Further information on the minimum features required can be found on the Pensions Regulator’s website. Employer contributions All businesses will need to contribute at least 3% of the qualifying pensionable earnings for eligible jobholders. However, to help employers to adjust, compulsory contributions will be phased in, starting at 1% before eventually rising to 3%. There will also be a total minimum contribution which will need to be paid by employees if the employer does not meet the total minimum contributions. If the employer only pays the employer’s minimum contribution, employees’ contributions will start at 1% of their salary, before eventually rising to 4%. An additional 1% in the form of tax relief will mean that there is a minimum 8% contribution rate. Timescales Auto-enrolment is being phased in over a number of years, starting from 2012 (larger employers first, smaller employers last). Each employer will be allocated a ‘staging date’ from when their duties will begin. The staging date is based on the number of people in the employer’s PAYE scheme. Employers with the largest numbers of workers in their PAYE schemes will have the earliest staging date. The date is based on their size (fixed by the number of HMRC employee records on file as at 1 April 2012) or the letters in their PAYE scheme reference. Employers can check their staging date at www.thepensionsregulator.gov.uk/staging. Postponement offers additional flexibility for employers, by allowing them to choose to postpone automatic enrolment for a period of up to three months. NEST (National Employment Savings Trust) From the relevant staging date, unless employers are following the company scheme route, they will have to enrol each eligible worker into NEST. This is designed to be a simple low-cost way for low to moderate earners to save, based on the following features:
- NEST is free of charge for employers to use
- NEST charges for members have been set at a 0.3% annual management charge and an initial 1.8% charge on contributions. For many people these charges will be lower than alternative defined contribution schemes
- There will be a limited choice of investment funds and a default fund for those who do not make a choice
- An annual contribution limit will apply. This is the combined total from the member, their employer and the Government (via tax relief).
Compliance In summary the employer must do the following in respect of eligible jobholders:
- Provide information to the pension scheme about the eligible jobholder – This includes their name, gender, date of birth, automatic enrolment date, residential address and national insurance number.
- Give enrolment information to the eligible jobholder – The employer must provide the eligible jobholder with certain enrolment information. The information must be provided in writing or via email and should inform the employee that they have been, or will be, automatically enrolled and what this means to them. It should also tell them about their right to opt out and their right to opt back in, as well as where to find information about pensions and retirement planning.
- Arrange active membership for the eligible jobholder – They can do this by making arrangements with either the trustees or managers of an occupational pension scheme, or the provider of a personal pension. These arrangements differ depending on the type of pension scheme the employer chooses to use.
Key steps for employers Whatever your staging date, it is essential for employers to plan for the changes in good time. Consider the following action points:
- Nominate a point of contact
- Know your staging date and develop a plan
- Assess your workforce
- Review your pension arrangements
- Communicate the changes to all workers
- Automatically enrol eligible jobholders into a pension scheme
- Register with the Pensions Regulator and keep records
- Contribute to your workers’ pensions
Further information on pension reform is available at www.thepensionsregulator.gov.uk
If you would like any further information please do not hesitate to contact us.
Andrew Hamilton & Co Limited 38 Dean Park Mews Edinburgh EH4 1ED
Telephone: 0131 315 2469 Fax: 0131 624 7222