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.

And don’t have the false sense of security that an election and change of Government will make automatic enrolment an irrelevance. The Pensions Act 2008 is on the statute book and it has wide cross-party support.

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 £5,035
• A contribution of 8% ‘band earnings’ must be paid with the employer paying at least 3% - band earnings are between £5,035 and £33,540 (in 2006/2007 terms) – these contributions will be phased in from October 2012 with ‘large’ employers having to comply first – see below for more details
• 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 of 8% (including at least 3% from the company)
• 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 in 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.

Phasing in of Auto-Enrolment Contributions

The Government’s plans for employers to auto-enrol eligible employees into a Qualifying Workplace Pension Scheme (QWPS) are to be phased over a longer period, five years instead of four.

Small employers are not expected to have to auto-enrol before October 2015.  This means that the 1% employer contribution will apply until October 2016. Only at that point will the level of required contribution increase.  The revised timetable of contributions is expected to be:

• October 2012 to October 2016 – minimum of 2% of qualifying earnings with at least 1% from the employer
• October 2016 to October 2017 – minimum of 5% of qualifying earnings, with at least 2% from the employer
• from October  2017, minimum of 8% of qualifying earnings, with at least 3% from the employer

Further details are expected in January 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.