Pension Reform and Employers

The 2008 Pensions Act will introduce Auto Enrolment, a major pension reform starting in October 2012.

Employers (starting with the largest) will be required to offer a workplace pension scheme that satisfies the new legislation. Requirements will be phased in over four years. From Oct 2016 all employers will be required to comply with the legislation.

Auto-enrolment is being introduced to tackle the issues that currently prevent employees saving for retirement and to make it easier for individuals to contribute to pension arrangements.  This is required because people are living longer and therefore spend more time in retirement.

Employers will be required to contribute a minimum of 3 per cent on a band of earnings, although they can contribute more than this. The total minimum contribution for eligible employees must be 8 per cent of the band of earnings. This is made up of employer and employee payment plus tax relief.

Contributions will be phased in gradually for employers and employees, starting at 1 per cent and increasing over a number of years to the minimum level. This will help employers and workers adjust to the contribution costs.

Employers can choose the type of pension scheme they want to use.  NEST (National Employers Savings Trust) is one type of pension scheme that has been designed to provide a straightforward, low-cost option. This type of scheme might be helpful for smaller firms who are not currently operating a company pension scheme.

Pension contributions must be reconciled and records must be kept. There will be strict rules regarding contributions and when the employer is obliged to make the payments to the chosen scheme. This will have an impact on the payroll. Any accountant or payroll service the employer uses. Third parties also need to ensure contributions are deducted correctly from the employee’s salary.

Businesses must ensure that auto-enrolment into a qualifying workplace pension is communicated to staff effectively and that they are not dissuaded from joining the scheme. When communicating the changes, employers need to consider factors such as staff demographics and allowing employees easy access to scheme information.

It will be a requirement to provide the scheme information to employees but employers will not be allowed to provide advice or act in an investment service role. This will create a dilemma for many businesses as employees will almost certainly ask questions about the relevant scheme.

If you would like to find out more information about the new pensions legislation please contact us.