As from 1st October 2012, larger employers will be required to automatically enrol all eligible workers into a qualifying pension scheme and to make a minimum level of contributions on behalf of those workers. The reforms have been introduced in an attempt by the Government to assist individuals in saving for their future retirement.
Existing pension schemes can be used as long as they meet minimum standards in relation to the benefits they provide or the amount of contributions paid, or employers can instead opt to use the Government scheme, NEST (National Employment Savings Trust).
Auto-enrolment will be introduced on a staged basis, starting with the largest employers (120,000 or more) this year, and rolled out to smaller businesses over the next few years, according to company size. The original timetable aimed to have the roll-out completed by April 2014, however for employers with fewer than 50 employees this has now been delayed until May 2015 in order to give more time to comply. It has been reported that the Government was forced to delay timings following calls from smaller businesses already facing financial hardship as a result of the current economic climate.
As a result of the reforms, employers will have to:
- enrol eligible workers into a qualifying workplace pension scheme;
- choose the qualifying scheme(s) they wish to operate;
- make a minimum 3% contribution into a defined contribution (DC) scheme or NEST, or offer membership of a defined benefit scheme.
An eligible worker is an employee aged between 22 and state pension age and earning above the income tax personal allowance (currently £7,475).
Where there is auto-enrolment into a DC scheme or NEST, there will ultimately be a minimum total contribution of 8% of qualifying earnings (currently set between £5,035 and £33,540), of which the employer must pay at least 3%. If the employer opts to contribute only 3%, the worker will pay 4%, with the remaining 1% paid as tax relief by the Government. However, these minimum contribution levels will be phased in between October 2012 and October 2017:
- October 2012 – September 2016: total minimum of 2% of qualifying earnings, with at least 1% from the employer;
- October 2016 – September 2017: total minimum of 5%, with at least 2% from the employer;
- From October 2017: total minimum of 8%, with at least 3% from the employer.
Although auto-enrolment is not an immediate issue for many employers, it is advised to establish the introduction date of auto-enrolment for your organisation sooner rather than later, to plan early and to get the right advice. General free advice can be found at www.pensionsadvisoryservice.org.uk
