Hartley Wadsworth & Partners guide provides you with information on the future implementation of auto-enrolment and the National Employment Savings Trust (NEST) pensions.
Whilst NEST is receiving the headlines, it is auto enrolment that it the main issue. As part of the general pension changes, there have also been changes to the state pension and tax relief. Auto-enrolment will have an impact on every employer in the UK.
Auto-enrolment fundamentals
By 2012 for larger employers, and January 2016 for every employer, all employers will have to offer to pay into a pension scheme for nearly all their employee’s (between the ages of 22-65). Employers will also need to provide information about the scheme, deduct the employee’s contributions and send these to the relevant pension company.
The use of a private pension rather than NEST will allow you to outsource the administration whilst sharing the burden of cost with your employees.
Employees must be enrolled into a pension scheme, and if there is not one already in place then they will need to be into the NEST pension within 3 months of starting employment.
The way in which company pensions are joined has been reversed as there will be no application form to join the scheme, but Employees are going to have to make an active decision to opt-out of the scheme.
Ordinarily within the NEST scheme employees will have their pension contributions invested in a default investment fund. There will be extremely limited fund choice, and one which is targeted at lower earning individuals.
NEST - made simple
The National Employment Savings Trust was previously recognised as the Personal Accounts pension and can be used by any employer to meet their auto-enrolment compulsion. It is not however the only pension that will meet the regulations, employers can use an alternative qualifying scheme. Employers can use Group Personal Pensions and Stakeholder pensions to meet the requirements.
Companies will have a choice as to how they meet their pension compulsion. Some of the NEST pension limitations are;
· Limited investment options
· Cap on total contributions (£4,200 per annum)
· No transfers in or out of the scheme
Those who must be automatically enrolled
The new auto-enrolment pension compulsion is intended to cover most employees. The exceptions are based on age, earnings and how long people have been employed for.
In general an employee must be automatically enrolled if they are over the age of 22 and earn above £7,475 (this figure includes overtime, bonuses, commission and benefits).
Those who do not automatically qualify can ask to join and the employer must also contribute.
Exception to Auto-enrolment
With only a 3 month period before employees need to be automatically enrolled; there will be some employees on short term contracts who won’t apply, however, if the employee on a short term contract wishes to enroll from day 1, the employer must oblige.
Auto-enrolment cost implications
Contributions will eventually be at a minimum of 8% of band earnings, these bands are between £7,475 and £33,540. Although to start with, contributions will start at a much lower level.
If you decide against using NEST, there will be various other measurements of minimum contribution levels for the scheme to be compliant.
These contribution levels will range from 7% to 9% of pensionable pay depending on your circumstances.
Using your own pension scheme allows reduced National Insurance costs through salary exchange which is not available through the government scheme.
The earlier you start planning, the better chance of a remuneration strategy being in place to match your increased costs. You may wish to implement a pension scheme in advance of auto-enrolment.
One relevant piece of recent detail lies around staging – the dates at which employers will be forced to comply.
As well as staggering the dates at which employers need to comply, the contributions are staged, with the full 8% not being reached until Autumn 2017. The starting cost for those not already in the pension scheme will be 1% of mid band earnings. For example, a non-pension member who does not opt out with total earnings of £30,000 p.a will cost £249 in new pension contributions in 2013. The effective cost being even less once corporation tax relief is taken into account.
Your current pension scheme may well be able to absorb the additional members and Hartley Wadsworth has access to a software system whereby the additional cost to payroll of compulsion can be estimated. We are working with many employers to stagger roll out of an acceptable (internal) alternative to NEST in order to absorb the cost over time through inclusion within salary negotiations. Call Chris Jones at the office to discuss.
There will be other costs for employers, such as administration and communication being the largest.
Employees will need to be monitored, so that when an employee becomes eligible, through an increase in salary or qualifying through age, they have are given the opportunity to enrol as well as people who have previously opted out. The employer has to make clear to their employees what is proposed, with major penalties for a company who actively promotes opting out.
Contributions Breakdown
Dates | Employee | Employer | Total |
Nov 2014 – Sep 2016 | 1% | 1% | 2% |
Oct 2016 – Sep 2017 | 3% | 2% | 5% |
From Oct 2017 | 5% | 3% | 8% |
When this all starts
The point at which you will have to start making contributions depends on the size of your business.
· 1,250 and 10,000 employees – between April and September 2013
· 50 and 1,249 employees – between October 2013 and July 2014
Other important dates
Here is a list of the dates in which various size employers will have to meet their auto-enrolment obligations:
Dates | Size of business (employees) |
Oct 2012 | 120,000 + |
Nov 2012 – Mar 2013 | 10,000 – 120,000 |
Apr 2013 – Sep 2013 | 1,250 – 9,999 |
Oct 2013 – Jul 2014 | 50 – 1249 |
Jun 2014 – Oct 2016 | 49 or less |
What are your options?
There is no compulsion to have a NEST (government) Pension. The compulsion is that every employer to have a Qualified Workplace Pension Scheme (QWPS). There are a variety of alternative approved schemes.
Group Personal Pensions and Group Stakeholder Pensions can also meet the criteria, dependant on contribution levels and investment choices.
Hartley Wadsworth will be able to advise the start date specific to your company and undertake an audit to project your costs after 2012
What you should do next
Speak with us about reviewing what you already have in place. Hartley Wadsworth & Partners can help analyse your payroll, discuss your NEST alternatives and provide a strategy to help support and support you with the upcoming changes.
