Louise Price, Employment Law partner at Hugh James, gives us an overview of the pension auto-enrolment requirements. Are you prepared?
According to the government adverts, we’re all ‘in’ on the new auto-enrolment pension requirements. Compliance consultants, however, have had their work cut out for them trying to explain exactly what this means for firms of all sizes across the UK. It doesn’t just apply to the ‘big guys’ either – COLPs and COFAs of small firms across the country have to download reams of pdf files to make sure that they’re in line with the requirements. So here’s a brief guide to what auto-enrolment is, why it’s coming in and what it means for your firm.
What is auto-enrolment?
Despite repeated attempts to get us all to save for our old age, the UK workforce is still falling woefully short of projected targets. Currently, there are just three people working for every pensioner drawing a state pension. This means that there are fewer people paying into the tax kitty to cover these pensions. The population is ageing, and by 2050 the government’s statistics as published in their ‘Auto Key Facts Enrolment Booklet’ estimates that only two workers will be paying in tax to every pensioner drawing a state pension.
This is unsustainable, and the only option is for workers to take responsibility for their own pensions and pay into a private pension – supported by their employer. This has been initiated by the government, so in reality it’s a ‘state’ private pension scheme.
What are employers’ obligations?
Employers are also required to pay into the scheme. This is not optional – it’s law and Compliance officers will need to ensure that they familiarise themselves with the specifications, as well as being ready for their ‘staging’ date when the scheme kicks in. All firms with employees that are eligible for auto-enrolment must ensure that they have been enrolled into the scheme and that the firm contributes towards workplace pensions.
Employers are also obligated by law to ensure that all information provided by employees is correct, and to ensure that employees are aware of how auto-enrolment will affect them.
Be warned; employers are forbidden from actively trying to dissuade employees to auto-enrol (termed as “prohibitive recruitment conduct”) or offer incentives for employees to opt out.
When does all this start?
Enrolment really depends on the size of your firm. There have been several dates set to make the transition easier and to allow companies to prepare, especially smaller firms. Legal Compliance Officers should make a note of the following dates and ensure that their firm is ready on time:
• Large firms with more than 250 employees will need to start automatically enrolling from October 2012 through to February 2014.
• Medium sized firms with between 50 to 249 employees have from April 2014 until April 2015 to complete the process.
• Smaller firms (under 49 employees) must begin the auto-enrolment process from June 2015. The final cut-off date for small companies is April 2017.
• New firms and start-ups established after April 2012 have a slightly wider window, and must start auto-enrolment from May 2017 until February 2018.
• Finally, employers who select the Defined Benefit or Hybrid Schemes can put off auto-enrolment until 30th September 2017.
How much will it cost?
Minimum contribution levels have been set that will effectively ‘phase in’ the scheme to avoid making too high a financial impact both on workers and employers. Any worker earning over £9,440/year will be automatically enrolled into the scheme by their employer. However, the minimum contribution amount will not kick in until the employer has earned over a certain threshold (similar to the way that income tax works) – in this case £5,668. The scheme is also capped at £41,450.*
Over the next few years the minimum amount will go from 2% initially, to 5% and then finally 8%. Employers who use a defined contribution (“DC”) pension scheme are required to pay at least 3% of an employee’s qualifying earnings every year.
Is there any help for firms?
The Pensions Regulator is overseeing the scheme and will contact each employer before the due date to inform them of their obligations. Those responsible for Compliance risk management need to ensure that they are ready to activate the scheme on or before their due staging date to comply with the law.
* Figures are for the 2013/14 tax year and will be subject to change.