PENSIONS REFORM IN THE UK - TIME TO START PLANNING
By Christina Morton, Withers LLP
The Pensions Act 2008 put in place a framework for the next stage of the UK government’s pensions reforms which takes the form of an ‘auto enrolment’ scheme for pensions, with mandatory employer contributions, beginning in October 2012. Regulations setting out the detailed requirements for employers began coming into force in July this year.
What will employers have to contribute and when?
The new regulations mean that employers will have a duty to arrange for eligible jobholders to be enrolled automatically into pension schemes. The rules will be introduced in stages, over six years, with larger employers being required to comply with them first. The very largest employers, with 120,000 or more employees, will be affected from 1st October 2012. The smallest, with fewer than 50 employees, will be affected from 1st March 2014 at the earliest. There will be delayed implementation provisions for new businesses.
Overall, employers will be required to pay contributions of 1% of a jobholder's qualifying earnings in the first four years, rising to 2% in the fifth year and the full 3% from the sixth year onwards. Employers will need to bear in mind these new obligations and the costs connected with them when assessing their finances and planning budgets.
The employer will be required to ensure that eligible jobholders are automatically enrolled into an occupational or personal pension scheme. It can use existing schemes, as long as they comply with certain quality standards, or else it can arrange for the jobholder to be enrolled in the government scheme called the National Employment Savings Trust (NEST).
The regulations contain tests to determine whether the employer’s existing pension scheme is of a high enough quality, with different tests applying to defined benefit and defined contribution schemes. If the employer has a high quality existing pension scheme it will be able to postpone the auto enrolment of new employees for up to three months.
Eligible jobholders must earn at least £5,035 a year and be between 22 years old and state pension age. The definition of ‘jobholders’ includes not only permanent employees but also temporary employees and agency workers.
Jobholders will have the right to opt out of the scheme but they will be automatically re-enrolled every three years. Employers will not be able to ask potential employees to opt out of enrolment as a condition of a job offer or induce employees to opt out in any other way.
NEST will be an occupational defined contribution scheme.
If an employer chooses to enrol its employees in NEST it will be required to make contributions of at least 3% on earnings between £5,035 and £33,540 and the jobholder will have to contribute enough to make the overall contribution at least 8% of earnings. The limit on contributions per year will be £3,600. These requirements will not come in straightaway, and will be phased in over a period of 5 years. At the moment transfers in and out of NEST are not permitted, but this rule will be reconsidered in 2017.
Consequences of not complying
Employers who fail to implement the new rules will face fines of up to £10,000 a day (for large employers). Where an employer wilfully fails to comply with its new duties it could face criminal penalties.
If a worker is subjected to any detriment because his or her employer breaches the regime, they will be able to bring a claim in the employment tribunal. Employers will not be permitted to contract out of or exclude any of their new duties, except when compromising an employment tribunal claim.
What will happen to stakeholder pensions?
The Pensions Act will also remove the statutory duty on employers to designate a stakeholder pension scheme. However employers which have designated existing stakeholder schemes (whether or not they contribute to them) can continue with these after 2012 if they wish, provided they satisfy the criteria for qualifying schemes and start to make contributions to them, if they do not already do so.