This February the States of Guernsey is set to debate the introduction of a system of pension auto-enrolment for Guernsey. The debate is an attempt to address what is a demographic time-bomb arising from a dual problem of an ageing workforce coupled with low pension participation levels. The States has estimated as little as 40% of the working population have pension provision, so it is little surprise that they have sought to follow the model of auto-enrolment that has been implemented by the UK Government. Whilst there have been and continue to be challenges for employers of all sizes in the implementation of auto-enrolment in the UK, it has resulted in a significant jump of pension participation over the first two years from 55% in 2012 up to 70% in 2014, according to the latest figures.
The Proposals
The key elements of the proposal which are outlined in a Policy Letter published on the States website (click here) can be summarised as follows:
- The States would establish a new low cost pension vehicle called the Secondary Pension Scheme which could be used by any employer or self-employed individuals;
- Employers would have a legal duty to automatically enrol eligible employees into either a qualifying scheme or the Secondary Pension Scheme;
- Multi-member Retirement Annuity Trusts (RATs) which have been set up by employers could operate as qualifying schemes, but individual RATs would not;
- Both individuals and employers would be required to make minimum contributions into either a qualifying scheme or the Secondary Pension Scheme;
- Employees would be able to opt-out of the Scheme, but would then be re-enrolled potentially every 2 years unless they opted out again; and
- Employers would not be permitted to offer inducements for employees to opt out of the Scheme.
- The States is looking at various options in relation to the level of contributions, but the indicative figures suggested in the Policy Letter envisage an initial combined contribution level of 2% in 2020, which is probably the earliest that the new Law could come into force. The contribution would rise to 10% in 2027 as follows:
|
Year |
2020 |
2021 |
2022 |
2023 |
2024 |
2025 |
2026 |
2027 |
|
Employee |
1% |
1.5% |
2% |
3% |
4% |
5% |
6% |
6.5% |
|
Employer |
1% |
1% |
2% |
2% |
3% |
3% |
3% |
3.5% |
|
Total |
2% |
2.5% |
4% |
5% |
7% |
8% |
9% |
10% |
Comment
The basic model proposed by the States is very similar to that adopted in the UK. However, it is noticeable that a great deal of focus within the proposals has been applied to the Secondary Pension Scheme, to alleviate some of the potential administrative burden for small employers and those who are self-employed. Given the number of small employers within Guernsey, the majority of whom currently do not offer any pension provision, it is critical to the success of these proposals that the Secondary Pension Scheme is both simple to use and low cost, otherwise the potential negative impact on Guernsey's economy is all too obvious. For those employers who already offer a pension scheme, aside from ensuring contributions at least match the minimum levels, they will need to review and some will need to amend their scheme rules in due course to ensure that they are compliant.
In addition, interestingly the ultimate rates proposed by the States are actually higher than those adopted in the UK, where the maximum level has been set at 4% for employees, 3% by employers and topped up with an additional 1% tax relief. Whilst the details of the provisions such as the level of contributions and timescale for introduction, are likely to be subject to significant debate over the coming months and years, it seems almost inconceivable that Guernsey will not adopt some form of auto-enrolment in the near future. If it does not, it will certainly face a real risk of its demographic time-bomb exploding.
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