Originally published 9 July 2010

Keywords: UK Pensions, pension contributions, occupational pension scheme, National Insurance Contributions, stakeholder pension,

Do Employers Have to Pay Pension Contributions for Employees in the UK?

Only if they have chosen to set up an occupational pension scheme that requires them to pay. If not, they must pay National Insurance Contributions to the State; and they must designate a stakeholder pension, but they do not have to pay contributions to it.

Is This Going to Change?

Yes. There will be new employer duties to make minimum pension contributions. Employers will have to contribute at least 3% of qualifying earnings into a suitable arrangement. Broadly, qualifying earnings are gross earnings between £5,035 and £33,540. Employees must be "auto-enrolled" in a suitable plan.

When?

The new employer duties will be phased in over five years starting on 1 October 2012, with larger employers affected first.

Does It Catch All Employees?

Broadly, yes as it applies to all "jobholders" who:

  • mainly work in the UK;
  • are aged between 16 and 74; and
  • are paid gross earnings over £5,035.

Different rules apply for jobholders under age 22, and for those earning less than £5,035. The term "jobholders" is wider than just employees. Agency workers are covered for example; the new duties apply to whoever pays the agency worker.

Can Employees Opt Out?

Yes. Once automatically enrolled, a person has one month to give the employer a valid notice to opt-out. There is a strict procedure laid down in regulations.

So I Can "Encourage" Them to Opt Out?

There are penalties for avoidance: the Pensions Regulator can penalise employers who encourage employees to opt out of membership, or make job offers conditional on opting out. There are criminal penalties, and large employers could be liable for escalating penalties of £10,000 a day.

Will the New Duties Increase Costs?

In some cases, yes. Employment costs could increase for employers with:

  • no current pension plan;
  • an existing pension plan that:
    • doesn't meet the quality tests; or
    • has a low take up of members.

How do I Know if our Existing Plan will be Suitable?

There are quality tests which have to be met.

  • for defined contribution (money purchase) schemes, there are minimum employer contributions of 3% of qualifying earnings, although in the first four years a 1% minimum applies;
  • for defined benefit (final salary) schemes, they must provide a certain level of benefits.

What Should I be Focusing on Now?

Employers should check whether their existing pension arrangement meets the criteria for a "qualifying scheme". If not, could it be amended or will the government sponsored scheme (NEST) be used?

Are There Likely to be Changes Now Following the Change in the UK Government?

There is no suggestion that the new duties will be reversed – although there is an independent review of how they should be implemented, specially auto-enrolment.

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