One of the biggest changes in UK pensions is taking place right now. Because people are living longer but not saving adequately for their retirement, the country has been facing a pensions financial ‘black hole’ for some time, leading to the introduction of pensions auto-enrolment.
So what does this mean for your business? Well, auto-enrolment means that employers will need to offer a minimum standard of pension to all of their employees. Rather than ‘opt in’, the UK will have an ‘opt out’ system, where employees will have to make the effort to tell their employer in writing that they don’t want to be part of the pension scheme offered. The government is hoping that this will create a culture of saving for retirement.
When will this happen?
Very large companies that employed more than 120,000 people as at 1 April 2012 had to comply with the new regulations from 1 October and more businesses will have to fall in line over the next year. However, if you’re a smaller employer, you’ve been given some breathing space. For example, those who employ between 62 and 89 staff will need to start auto-enrolment on 1 July 2014 while those who employ fewer than 30 workers will have a start date of sometime between 2015 and 2017, depending upon your PAYE reference.
This may seem like a long phasing in period but it reflects the huge number of small businesses that will need to be admitted to the scheme. You can check your exact deadline by checking your PAYE reference and workforce numbers at 1 April 2012 against the timetable published on The Pension Regulator’s website. However, you’ll also receive a letter 12 and 3 months before your staging date so that you know when you need to take action.
How much will this cost?
The contribution rates associated with auto-enrolment will hit both employers and employees and will increase year on year. The employers’ contribution will be 1% of salary until 30 September 2017, 2% for the next year and then 3% from 1 October 2018 onwards. These, of course, are minimum rates and employers can certainly pay in more.
Employers will also need to deduct employee contributions, which will increase over the transitional period to 4% from 2018, and calculate tax relief on those contributions.
When you are considering how much this will add to your annual wages bill, you should also remember to factor in the extra time it will take to process and administer the new scheme.
There has been some criticism of the timing of the introduction of auto-enrolment, when people and companies are still feeling the pinch. To be honest, though, there would never be an ideal time to implement such a whole scale change and many experts agree that something needs to be done about poor retirement planning.
What do small businesses need to do?
If you don’t currently offer a contributory pension scheme to your staff, you will need to set one up that qualifies under the terms of the new regulations. There are many different types of qualifying pension products available on the market so take some time to browse them and decide which scheme will be right for your company. Basically, a defined contributions scheme is assessed on the basis of the contributions levels on earnings while a defined benefits scheme is assessed on the benefits they will provide upon retirement.
Of course, the pension scheme must not prevent workers from automatically enrolling or re-enrolling after opting out.
If you already offer a pension scheme, you will need to check that it meets the standards set under auto-enrolment. Fortunately, the Pensions Regulator has published a tool on its website to allow you to check if your defined contributions scheme will meet the requirements. If it does qualify, you will need to decide if you’ll include all staff in it or open up a new scheme for employees from your staging date. Your decision will probably be based on costs but please bear in mind any possible disgruntlement caused by one set of employees being in a better scheme than others.
Do all workers qualify?
Almost all employees will qualify. To be eligible, they must be between 22 years old and the state retirement age, working in the UK and earn above a certain amount (currently £8,105 each year).
If employees don’t meet the criteria, they either become ‘non-eligible job holders’ or ‘entitled workers’ based on the reason(s) for the ineligibility. It’s currently quite a cumbersome system and we expect tools and software to be developed to help employers to decide whether a worker qualifies or not. If you have a number of part-time staff on relatively low weekly working hours, they may not be fully eligible or may choose to opt out so your payroll software or provider will need to be more flexible than it currently is.
Our recommendations
Our advice to small employers would be to:
- Find out when your staging date is so that you are able to plan at the appropriate date
- Calculate how much additional cost you’ll need to factor in to your budget in future years
- Check the tools and guidance on the Pension Regulator’s website
- If you need to, start asking questions about qualifying pensions products on the market
- Review your payroll procedures to make sure that they will cope with deductions, contributions and eligibility
- If you’re in any doubt, seek professional advice from a reputable pensions expert.
