Pension Reform in 2012

2012 will not only be a landmark year in the UK with the arrival of the summer Olympics. From October of that year, all employers will be faced with a raft of new employer duties connected to pension reform.

Included in those duties is, for the first time in the history of UK pensions, the requirement for employers to automatically enrol millions of eligible employees in to a qualifying workplace pension scheme (QWPS).

This is a major change to UK pensions. The Government has estimated that some 7 million people are either not saving enough or not saving at all for their retirement. To deliver their aims, the Government is placing the onus on employers to help in encouraging more people to save.

The key issues are:

• Employers must auto-enrol all jobholders in a pension scheme if they are aged between 22 and state pension age and earn more than £7,475 (in 2011/2012 terms)
• Qualifying earnings are those that fall between a specific band of the National Insurance Primary Threshold (£5,715 pa in 2010/2011) and £38,185 in 2010/2011
• Contributions will be made by the employer, the employee and the addition of tax relief
• Between October 2012 and October 2017, contributions will be 2% of banded earnings with at least 1% from the employer
• Between October 2017 and October 2018, contributions will be 5% of banded earnings with at least 2% from the employer
• From October 2018, contributions will be 8% of banded earnings with at least 3% from the employer
• Jobholders can opt-out of the scheme if they so wish
• Employers must re-enrol jobholders who choose to opt out at least every three years
• Employers can choose to use a good quality private scheme, a National Employment Savings Trust or a combination of the two

It will be possible to gain an exemption from a National Employment Savings Trust if you offer a QWPS that meets the following criteria:

• The scheme permits auto-enrolment
• Has a minimum contribution rate matching those detailed above
• Has a default investment fund

Auto-enrolment is a major issue. Under current legislation, employees cannot be auto-enrolled into a group personal pension or group stakeholder pension scheme. But this will be amended by 2012.

Research has shown that auto-enrolment is one of the most effective ways of triggering pension scheme membership and contribution. So it is highly likely that your business will incur significant additional costs from 2012. The increase will be much higher for those employers who do not currently offer a company pension scheme or who do not contribute to it for their employees.

Further information on auto-enrolment can be found here  and on our factsheet entitled "Government Pension Reform 2012".

As an employer, it is vital that you receive professional independent advice on 2012 and the impact that it will have on your business. Please contact us to arrange a free no-obligation meeting.