Here comes auto-enrolment
This year, 1 October marks the beginning of the latest effort to increase private pension coverage. From this date, the largest employers – those with over 120,000 employees – will be required to enrol all eligible jobholders automatically into a qualifying pension scheme and to make minimum contributions based on their qualifying earnings. The smallest employers – those with fewer than 250 employees – will have start dates between April 2014 and April 2017.
Eligible jobholders These are workers aged between 22 and the state pension age – who are not already in a qualifying workplace pension scheme – earning more than £8,105 a year.
Qualifying pension scheme An existing pension scheme will have to meet certain minimum requirements if an employer wants to continue using it for active members or for other jobholders eligible for automatic enrolment. Where there is no existing scheme, employers have the choice of providing an occupational scheme, contributing to a personal pension scheme, or using the National Employment Savings Trust (NEST) – a low-cost government scheme aimed at smaller employers and lower earners.
Minimum contributions An employer’s contributions will initially be a minimum of 1% of employee earnings between £5,564 and £42,475 a year, rising to 2% from October 2016.
The automatic enrolment requirement raises some important questions. For example, should an employer contribute more than the required minimum? If not, then employees’ contributions will be correspondingly higher – with a possible backlash because of the reduced take home pay. Will an employer be able to maintain contributions into an existing scheme if it is opened to all employees? Lower contributions could be made for auto-enrolled employees, but this might disenfranchise them. Alternatively, would it be worth reducing contributions for all employees? However, this could cause resentment among existing scheme members. Using an alternative arrangement for auto-enrolled employees may be preferable, especially where an existing scheme is final salary based.
But these decisions cannot be left until the last minute. Please contact us well in advance of your start date, and we can assess your workforce, advise you on pension scheme options, and help with budgeting for the increased costs. The Pensions Regulator will write to you at least twice prior to your start date, which can be found at www.tpr.gov.uk/staging.