Although not the most exciting of topics there are important changes afoot that employers need to plan for in respect of pension provisions. This issue attracted a lot of questions during our recent Essential Employment Law seminars and it was clear that not all employers were up to speed with this.

The provisions of the Pensions Act 2008 stipulate that from 2012, employers will be required to automatically enrol all eligible employees into a qualifying workplace pension scheme or the Government’s NEST scheme, and make contributions on their behalf. This will cover all employees between 22 and the State Pension Age who earn in excess of £7,475 per annum.

The level of contribution the employer will be required to make will be gradually increased. Once the new rules are fully in force by 2017, a minimum total contribution of 8% of salary will be required, with at least 3% of this being contributed by the employer. The employer can contribute more at their discretion.

Employers will be able to continue using their own existing pension scheme if it meets the statutory requirements. These requirements are set out in sections 20-28 of the Act and depend upon the scheme’s benefit structure. If the employer does not have a pension scheme in place, or if the existing scheme falls short of the quality requirements, then they will be obliged to enrol jobholders into NEST, which is designed to meet the needs of low-to-moderate earners and their employers.

Those who have been automatically enrolled can opt out within one month of enrolment and will no longer be considered active members of a scheme. However, employers have a duty to automatically re-enrol eligible employees every three years and the employee will then have to actively opt out again. There is a set procedure for opting out of active membership which must be followed and has been designed to prevent employees being pressured to opt out by employers.

Employees who are not classed as eligible jobholders and who are therefore not automatically enrolled or have previously opted out, can choose to opt into a scheme by notifying their employer, but can only do so once every 12 months.

These changes will impact on all employers as no business is exempt, regardless of size, and it is therefore important that employers prepare in advance for the changes by re-evaluating any existing pension scheme against the quality requirements and by considering the financial consequences of making contributions, if this is not already the practice. Although the provisions will not start to be phased in until 2012, it is important to consider the implications in advance given the additional financial and administrative burdens that the provisions are likely to bring to many employers.