From 1 October 2012, new laws come into force requiring all employers in the UK to enrol employees automatically in a pension scheme. Employers will be able to rely on employees’ own existing occupational pension schemes or personal pension schemes if they meet statutory qualifying requirements. Otherwise, they will need to enrol employees in The National Employment Savings Trust (NEST), a central scheme to be set up by the Government.
Auto-enrolment will mean workers being automatically enrolled into their employer's qualifying pension scheme without any active decision on their part. Auto-enrolment will be regulated by the Pensions Regulator. Each qualifying scheme must meet minimum standards in respect of the benefits it provides or the amount of contributions paid to it. Employers will have the freedom to choose which scheme they use.
The Government is staggering implementation of automatic enrolment over a five-year period from 1 October 2012, with employers separated into bands according to their payroll size. Once enrolled, an employee will only be able to opt out of the employer's designated pension scheme by giving notice to the employer. But so long as an employee remains an active member, the employer will be required to pay a minimum level of pension contributions. This is the first time that employers will be obliged to pay pension contributions on behalf of employees in the UK.
Who are Eligible Employees?
Eligible employees are those aged at least 22 years old but who have not yet reached state pension age and who earn more than the personal tax allowance (£8,105 for the tax year 2012/2013). Other employees will also be able to choose to opt into a pension scheme.
- Employees aged between 16 and 22 who earn more than £8,105. If they choose to opt in, employers will need to pay contributions.
- Employees aged between state pension age and 75 who earn more than £8,105. If they choose to opt in, employers will need to pay contributions.
- Employees who earn below £8,105 a year may also opt in but their employers will not be required to make a contribution.
Eligible employees can choose to opt out of the scheme. However, every three years, an employer will be required to re-enrol an opted out employee. Please note that the self-employed are not covered by the legislation and do not need to be automatically enrolled into a qualifying pension scheme.
What are the Obligations of the Employer and the Employee?
Employers will have to:
- Enrol eligible employees into a qualifying scheme if they are not in one;
Choose a qualifying scheme by either;
- making a minimum 3 percent contribution towards a qualifying scheme; or
- offering a qualifying scheme which is either a defined benefit scheme or a combined defined benefit/defined contribution scheme which has a contracting out statement or which meets the test scheme standard;
- Maintain qualifying pension provision for workers who are already members of a qualifying scheme or become members of such schemes.
There are associated auto-enrolment costs such as administration, IT and set-up costs in addition to the contribution costs. The Government predicts that the administration costs of auto-enrolment will be approximately £20 per employee for larger companies and £40-50 for smaller companies.
As the Government has set a minimum percentage that has to be contributed in total into the pension scheme, this means that employees will also need to make a contribution after the employer's contribution and the tax relief are added together. Employers can choose to contribute more than the minimum amount if they want to. Assuming that the employer pays the minimum contribution only, the employee’s contribution will reach 1 percent, 3 percent and 5 percent (minus any tax relief) by September 2017, September 2018 and October 2018 respectively (see below).
Auto-enrolment will be introduced during a transitional period between October 2012 and October 2018.
- October 2012 to September 2017: Minimum total contribution of 2 percent of qualifying earnings with minimum 1 percent of employer contribution.
- October 2017 to September 2018: Minimum total contribution of 5 percent of qualifying earnings with minimum 2 percent of employer contribution.
- Completed by October 2018: Minimum total contribution of 8 percent of qualifying earnings with minimum 3 percent of employer contribution.
Employers will be separated into a number of bands according to their size, with each band being assigned a particular monthly "staging date" from which they will be obliged to start the enrolment process. Large employers will become subject to enrolment duties before small employers. Employers with under 50 employees are allowed to delay auto-enrolment until June 2015.
More details on automatic enrolment can be found at http://www.thepensionsregulator.gov.uk/index.aspx.