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PENSIONS REFORM 2012 - 2016

Major changes to pension provision are on their way.

In order to encourage more people to save towards retirement, the Government is to introduce compulsory workplace pensions, starting with large companies in 2012, and phasing in smaller companies over a period of four years. The commencement date for each company will depend on the size and reference number of the company’s PAYE scheme.

For example, those with 350 or more staff on their books will have to set up and contribute into a workplace plan for employees by the end of 2013. Companies with less than 50 employees will have to set up a pension scheme by dates ranging between 1 March 2014 and 1 February 2016, depending on their PAYE reference number. A schedule of dates is available from www.thepensionsregulator.gov.uk/pensions-reform/duty-datestimeline.aspx

The Pensions Regulator will be sending letters to employers in advance of their staging date with information compliance and where to find further information.

Under the new rules all employers will be required to provide a qualifying pension scheme and make minimum contributions into it. Qualifying schemes meet certain minimum standards set by the Government. Employers can choose a certified occupational scheme or use the Government’s National Employment Savings Trust (NEST) or a combination of the two, for example it may be appropriate to enrol senior staff into an occupational scheme and other staff into NEST, (visit www.nestpensions.org.uk/). NEST has been set up with the intention of catering for the needs of small employers and low to moderate earners but there are concerns about high charges.

Companies will need to examine any existing pension schemes already in place to check that they meet the qualifying criteria and to see if they are appropriate for all staff.

ENROLMENT AND OPTING OUT

Whichever scheme is chosen, employers with one or more employees must automatically enrol their eligible jobholders into the pension scheme after three months. Eligible jobholders are workers aged at least 22 and under state pension age, earning more than the minimum earnings threshold, (currently the Government plans to set this threshold at £7,475pa). Jobholders may opt-out after they’ve been automatically enrolled and will get a refund of any contributions they have made. Employers must give employees information about the scheme and automatic enrolment, so they can make an informed decision on whether opting out is the right choice for them. Employers should cover:

Details of the scheme and automatic enrolment
Value of employer and employee contributions (a percentage or amount for defined contribution schemes)
Information about the right to opt out and the consequences
The opt out process and where to get a form
Information about opting back in and automatic re-enrolment.

Automatic enrolment will not apply to everyone, for instance there are special rules applying to:

Employees aged between 16 and 22 or between state pension age and 75. These won’t be automatically enrolled, but they can ask their employers to opt them into their qualifying scheme
Workers who earn below the minimum earnings threshold. These can also choose to opt into a pension scheme. However, there is no requirement for the employer to make contributions themselves and the scheme doesn’t have to be a qualifying scheme. People can choose to leave the scheme at any time and will still be able to re-join later. If any jobholders have opted out, employers will have to automatically re-enroll them after approximately three years, so that they have the opportunity to reconsider pension saving.

DEFINED CONTRIBUTION SCHEMES

Employers must make:

A minimum contribution equivalent to three percent of qualifying earnings for each employee in the scheme (although they could choose to pay more)
And make a total contribution equivalent to eight percent of which they could choose to pay the full eight percent or choose a combination of employer and employee contributions.

Qualifying earnings includes basic salary, commission, bonuses, overtime and statutory payments.

The minimum contribution levels will be phased in to help both employers and jobholders adjust gradually to the additional costs. The obligations will be built up over three phases for defined contribution schemes. The minimum contribution levels (including tax relief) for each phase are set out below.