UK: Pensions Auto-Enrolment - A New Horizon - April 24th 2015

"A qualifying worker will be anyone aged between 22 and state pension age, with earnings equal to, or greater than, the earnings trigger salary (currently £10,000)."

Following a review commissioned by the coalition government on the 27 October 2010, pensions auto-enrolment was ratified by the Department for Work and Pensions. The Government is targeting employers that are not offering a qualifying workplace pension scheme (QWPS) and employees who are not saving for their retirement.

Auto-enrolment is considered to be the simplest way to quickly get more employed people to save for their retirement.

The review also recommended that a low-cost default scheme be introduced alongside automatic enrolment to ensure that "supply could meet demand". The Government has launched a suitable scheme under the banner of NEST (National Employment Savings Trust) which is aimed at those on low incomes.

Key facts about auto-enrolment

  • Between 2012 and 2017 every employer has a duty to designate a QWPS into which it will automatically enrol all of its qualifying workers and make contributions on their behalf.
  • No employer is exempt from this requirement. The main choice employers now face is which pension scheme or schemes to use to comply with the new regulations.
  • Even if the employer has an existing workplace pension scheme, it will have to review it and possibly make changes, to ensure the scheme complies with the new regulations.
  • Business costs to employers will rise.
  • The government-instigated NEST scheme is available for employers to use.
  • The Pensions Regulator polices and enforces auto-enrolment. Failure to comply will lead to fines proportionate to non-compliance fines and could ultimately result in criminal prosecution.
  • Employers will need to educate their employees about the implications of auto-enrolment and the direct effect it will have on them.
  • Employers will need to create systems and processes to ensure that both new and existing employees are provided with information and joined into the scheme at the correct time.

The timetable

All employers will have to comply with auto-enrolment. In order to make this as manageable as possible, a staged implementation process has been adopted. The table below provides details of the staging dates which are dependent on the size of each employer's largest PAYE scheme. Please note the Pensions Regulator will contact each employer 12 months prior to the staging date to inform it of its duty to comply with the auto-enrolment laws.

Employer duties

  • Provide information to employees about the QWPS in place for them within strict timescales.
  • Automatically enrol all eligible employees onto a QWPS.
  • Make employer contributions for every employee who does not opt-out of the QWPS.
  • Employers will be permitted to delay auto-enrolment for a period of up to three months. However, an employee who wishes to join immediately is entitled to do so and may benefit from an employer contribution.

From April 2015, Employers must ensure that the QWPS meets the Department of Work & Pensions' minimum quality standards, which will include full transparency on all costs and charges.

All QWPS Schemes will have a 0.75% charge cap on default funds. From April 2016, all commission and Active Member Discounts will be banned.

The level of contributions

The minimum level of contributions will be phased in over time, in line with the table below and starting on the employer's staging date.

Employees with earnings equal to, or higher than, the earnings trigger salary (currently £10,000) should be automatically enrolled. Minimum contributions will then be calculated using a definition of 'banded' earnings, currently between £5,722 and £41,865 per year.

The minimum total contributions include tax relief granted by the Government so, looking at the final level of contributions, if the employer pays the minimum contribution then the 8% total contribution will be made up of:

  • 3% from the employer
  • 4% from the employee
  • 1% from tax relief

"The responsibility to opt-out is the employee's alone."

Employees' opt-out

Employees can opt-out of the QWPS; this can only be done after they have been auto-enrolled. If an employee does opt-out, automatic re-enrolment must be executed by the employer every three years within a three-month window around the anniversary of the employer's original staging date.

Importantly, an employer is not permitted to dissuade an employee from joining the arrangement or to employ any business practices which would encourage an employee to opt-out. In particular, an employer is not permitted to provide a member with an opt-out form; it should instead be obtained from a third-party source.

Protection

Employees with Enhanced Protection, Fixed Protection 2012 or Fixed Protection 2014 must be aware of protection being breached as a result of the employer complying with auto-enrolment duties. These individuals must remember to opt-out immediately after they are auto-enrolled to ensure no contributions are deemed to have been made.

NEST

For employers that do not have a qualifying scheme and who do not wish to establish one, or employers who simply do not want to use their existing scheme for all employees, the NEST is the scheme they can use.

NEST has been designed specifically to meet the needs of low-to-moderate earners and their employers. It operates as a trust-based occupational pension scheme, with a trustee body, and is subject to regulation by the Pensions Regulator.

NEST is designed to be low cost, and has a combination charge, which consists of an annual management charge of 0.3% and a charge on contributions of 1.8%. While this is low cost for those who remain invested for an extended period, it could prove expensive in the short term.

Pension providers are entering the market all the time with competitive solutions, so careful thought is required to select an appropriate arrangement.

NEST is intended to be:

  • open to any employer that wants to use it to meet the new duties:
  • an online scheme that's intended to be easy to use;
  • easy for employers and employees to understand; and
  • run in members' interests by NEST Corporation.

It should be remembered that the 'death benefits' from a NEST plan will fall within a member's estate, unlike conventional pension plans/schemes. However, this can be avoided if NEST members complete and sign a Nomination form confirming who they would like to receive their benefits in the event of their death.

Employer actions and choices

All employers should conduct an analysis to see how many employees will be affected and if their existing schemes meet the qualifying requirements.

Even if they do have a qualifying scheme, employers need to decide whether to use this scheme or simply auto-enrol employees into NEST. The introduction of these requirements will almost certainly impact directly on the pension costs an employer faces, and so they may also want to use this as an opportunity to review the benefits strategy.

How can Smith & Williamson help?

The changes outlined will have a wide-ranging impact on costs to employers and the suitability of existing pension arrangements.

At Smith & Williamson we view each client as unique and we structure our solutions to meet an employer's individual circumstances and objectives.

We listen to the employer's needs and provide pragmatic solutions to small and medium sized enterprises, as well as to larger employers.

Smith & Williamson provides partner-led project management; we guide employers through the changes needed to ensure their responsibilities and obligations are satisfied. We work with our clients to deliver the communications necessary to manage any changes effectively, and to educate employees about the need to save for their retirement.

Our clients can expect:

  • to be able to reach senior people and decision makers when they need to
  • an efficient and professional approach from us to our work
  • flexibility and empathy from us in the delivery of our services.

Our clients should feel they have made the right choice.

Whether we are providing advice to individuals or corporations this principle must hold true; all our clients should be happy to recommend us.

We have taken great care to ensure the accuracy of this publication. However, the publication is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.

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