From October 2012, there will be a big change to employee pension schemes – with significant financial and administrative implications for employers.
The Pensions Act 2008 means that employers will have to enrol jobholders into a pension scheme and contribute a minimum of 3% of qualifying earnings a year.
The Act attempts to deal with a looming demographic crisis – many people in the UK have little pension provision other than the state pension and are living longer. Related recent measures include the abolition of the default retirement age of 65 (taking effect in October 2011) and the increase in the state pension age – to 66 for both men and women by 2020.
Although some employers contribute to their employees’ pensions, there is currently no obligation to do this. Employers have to provide access to a stakeholder pension scheme (involving no financial contribution on the part of the employer) once they employ 5 or more staff. The stakeholder pension scheme will disappear once the new scheme applies.
Who will be eligible?
All "jobholders" between age 22 and the state pension age – currently 60 for women and 65 for men – will be automatically enrolled in a pension scheme once they earn £5,035 or more per year (2006 figure – to be adjusted upwards and reviewed annually). Employees can opt out, but in practice, any opt-out is likely to take effect only after enrolment. Enrolment must take place within one month of a jobholder starting work (or becoming eligible) – with limited exceptions.
A "jobholder" is an employee or worker who works in Great Britain under a contract. This will include temporary workers and agency workers.
When does it start?
The scheme is to be phased in over 4 years from October 2012 to September 2016 and will apply initially to employers with 120,000 or more staff on the payroll. Last to be included will be employers with 50 or fewer staff (from 1st July 2014 to 1st January 2016) and new employers (from 1st February to 1st July 2016).
Contribution – how much and when?
Employer contributions are also to be phased in – over 5 years in three tranches – 1%, 2% and finally 3%, so that the maximum contribution (3%) applies to all employers from 1st October 2017.
Employees themselves will contribute 3% per year, deducted at source from salary, with a further 1% tax relief, making a combined total contribution of 8%.
The maximum total contribution will be £3,600 a year (2005 figure – subject to adjustment).
What kind of scheme?
Employers who already operate a pension scheme may not need to change anything (provided their scheme meets qualifying requirements and pays the minimum contribution), but most are likely to have to change administrative procedures (to ensure enrolment) and widen the scope (to include all eligible employees).
Otherwise, employers will use the National Employment Savings Trust (NEST), the government’s pensions saving scheme, set up to complement the Pensions Act 2008 provisions.
The Act restricts employers from offering inducements to opt out of a workplace pension scheme and extends protection for employees (against unfair dismissal and being subjected to a detriment) where employees try to enforce rights granted by the Act.
Employers’ compliance with the Act will be dealt with by the Pensions Regulator and penalties up to £50,000 can be imposed.
Employers across the board are going to feel the financial and administrative impact of the Pensions Act, but those with a high turnover of staff and those employing temporary and seasonal workers on relatively low salaries, perhaps the most.
