FORCING THE POPULATION TO SAVE FOR RETIREMENT
With increased life spans and lack of public funding the pressure is on for better
provision for retirement to be made by all and, whilst it’s hard to deny that this
is sensible, it puts a significant burden on employers in terms of cost, admin hassle
and, importantly, strict obligation.
Where have we been until now?: The encouragement up to 2012 came from the requirement
for employers to facilitate employee pension contributions by making deductions through
the payroll when requested and paying the money over to the employee’s scheme. This
was stakeholder pensions which was just a load of hassle for the already beleaguered
employer and was met by apathy by most employees. There had been no requirement for
the employer to contribute and employees obviously didn’t feel compelled to get stuck
in alone.
Where are we going now?: Clearly the only way to get the majority of the employed
population (yes, this does apply only to those on PAYE and not the self employed)
to provide for their retirement is to force it upon them and that’s pretty much what’s
happening. That’s not strictly true - employees don’t have to join the band wagon
but the way the new rules are set up means that in practice most are likely to. This
level of ‘encouragement’ has been produced by a three-fold attack (1) if the employee
plays ball then the employer is forced to make some contributions as well , (2) although
the employee can opt out he can’t do that until he has joined in the first place
and that bit is not optional, (3) the employer is (quite rightly of course) prevented
from encouraging the employee to opt out. Put more simply - we have Automatic Enrolment.
This started 1 October 2012 however, despite the hype, it is in fact only the very
largest of employers who come under the new regulations from that date and for many
small employers (less than 50 employees) they will not bite until 2016 or even 2017.
The date the rules start for you is known as your “staging date”. Armed with the
last two digits of your PAYE scheme reference, you can find out your staging date
from the pension regulator here.
Let’s be very clear, this is the law of the land and is not optional. It is overseen
by The Pension Regulator whose primary role will be to educate and encourage compliance
but they have teeth - employers face substantial penalties and even imprisonment
if they don’t comply.
LOOKING AT THE EMPLOYER’S DUTIES
The main duties of the employer will be to provide a qualifying pension scheme, to
inform jobholders about the scheme, to automatically enrol those eligible, to allow
opt-in by some others, to deduct contributions through the payroll and to pay employer
contributions. The employer will need to establish a robust system to constantly
monitor the workforce to ensure the right notices and the right information are given
to the right people at the right time. The employer will need to keep certain records.
There are safeguards to prevent employers from discouraging people from scheme membership
such as implying that their chances of promotion might be improved if they choose
to opt out. There is “prohibited conduct” for the employer both during the recruitment
process and after people have joined. Read about the safeguards.
Employers will not need to become pension experts - but they will need to become
super hot administrators pronto or run the risk of penalties or worse. Despite the
cost of actually making contributions, the additional admin costs of ensuring compliance
(or indeed the cost of penalties for failure) could be just as, if not more, significant.
There is no doubt that pension providers will make available to employers standard
forms, letters, notices and the like but it is extremely unlikely that they will
provide a service which looks after the employers obligations. Some companies may
have the in-house resources, skills and systems to get it right and thus protect
themselves but many will not - for them perhaps a specialist service will need to
be paid for in order to provide the effective monitoring which is needed to ensure
compliance.
LOOKING AT THE KEY POINTS
- Employers will be required to register with the Pension Regulator.
- This is not a government based pension fund and each employer will need to choose
a qualifying pension scheme to use. Employers with existing schemes may be able to
use them (sometimes with amendment) for this new purpose.
- All eligible jobholders must be automatically enrolled by the employers staging date
and those starting after that date must be automatically enrolled on starting.
- Eligible jobholders are those aged between 22 and state pension age and earning above
the trigger level for automatic enrolment. The trigger level is, using the 2012/2013
rate, £8,105 ie the level of the personal tax allowance.
- Some other jobholders may be able to opt-in too.
- Eligible jobholders can opt out - but only after they have already been automatically
enrolled and they must do so within a window of approximately one month. Having opted-out,
such employees will be automatically enrolled again 3 years later (and again can
then opt out).
- Eligible jobholders can also get out after that window has closed but in this case
they do so by “ceasing active membership”. This is also the exit route for those
who opted to join but who were not “eligible jobholders”.
- There is a minimum level of total contributions ie from the employer and the employee
in total - phased in over a short period and by 1st October 2018 reaching 8% (of
qualifying earnings).
- There is a minimum level of employer contributions - phased in over a short period
and by 1st October 2018 reaching 3% (of qualifying earnings). Employer contributions
must be paid for all eligible jobholders and for non-eligible jobholders who have
opted in. For mere entitled workers, who have the right to join a scheme (but not
necessarily the scheme used for automatic enrolment), there is no requirement for
employer contributions.
- Qualifying earnings are, using the 2012/2013 rates, earnings between £5,564 and £42,475.
So for someone earning £10,000 pa, contributions will be required on £4,436 (£10,000
- £5,564).
- The employer may pay the minimum or greater but whatever the employer does the employee
must do the rest and this will be deducted through the payroll. The employee can
choose to pay more than their minimum (but this would not reduce the employers contributions).
- On opting-out, the employee will be treated as never having joined and any contributions
(including the employers) will be refunded. Depending on certain factors, there may
also be refunds where someone exits by “ceasing active membership”.
- Contributions must be paid to the scheme within 19 days of the end of the month in
which they were deducted and in the meantime the money must be held in a trustee
bank account separate from the employers account.
The regulations refer to “jobholders” which has a wider definition than just “employees”
and for example may include, depending on contractual arrangements, the likes of
agency workers. See the categories of workers.
DOES THE EMPLOYER NEED A SCHEME
If there are eligible jobholders then yes. Even if all employees were to decide to
opt out, this cannot be done until after they have joined the scheme so the employer
must have a scheme into which the employees can be automatically enrolled in the
first place. If there are non-eligible jobholders then, although they do not need
to be automatically enrolled, the employer must advise them of the right to opt-in
so again a scheme would be required. Entitled workers, although not having the right
to join the scheme used for automatic enrolment (unless the employer chooses to allow
this) and although not required to benefit from employer contributions, have the
right to receive information about joining a pension scheme so even here some process
needs to be in place.
So it seems that you won’t get dragged into this affair just by running your own
company if you are the only employee and are paid the common low salary which keeps
you below the tax and NI limits - that make you merely an entitled worker and automatic
enrolment does not apply. The fact that you (in your capacity as an employee) are
entitled to receive information from yourself (in your capacity as an employer) surely
can’t mean there is in practice anything to be done or documented at all … and in
fact it appears that directors will be exempt providing there are no other employees.
CHOOSING A PENSION SCHEME
The regulations don’t limit where the employer can get a scheme from providing it
is a qualifying scheme (ie one which meets the rules). Qualifying schemes will no
doubt be offered by a number of providers. These are likely to be group personal
pension plans ie the one overall plan is in fact a collection of individual plans
for each employee and, amongst other things, on leaving the job they can take their
slice away with them.
As an alternative to commercially available schemes, the government has built a ‘basic’
scheme which employers can use to meet their obligations. This is the National Employment
Savings Trust (NEST) and, although not government funded, is accountable to Parliament
and has a public service obligation to accept all employers who apply to join it.
It might perhaps be considered the ‘budget option’ as it has a number of restrictions
which may make is less attractive to employers and employees alike.
There appears to be no reason why an employer should restrict itself to having only
one scheme - perhaps different scheme with different facilities might be appropriate
for certain types or grades of staff.
With the employer’s scheme in place, the employee has no choice - it’s that scheme
or nothing ie the employee can’t demand that the employers pays contributions to
another scheme. The employer could choose to do so but that is perhaps unlikely to
be commonplace.
The Department of Works and Pension (DWP) have produced a booklet called ‘Automatic
enrolment - the key facts’ which is simply written and easy to digest. As an alternative
it is worth reading a commercial offering - we understand that one of the main players
emerging in the market is Scottish Life who have produced a similarly simply written
booklet called ‘A guide to automatic enrolment and the employer duties’. Scottish
Life have also produced a factsheet about NEST. Note that we mention the Scottish
Life publications purely as a source of interesting and useful reading but without
implying any recommendation of the company or its products.
Whilst many may turn to their existing financial adviser to advise, in the meantime
the Association of British Insurers website is perhaps worth a visit.
PREPARATION
Whichever way you look at it, and despite the fact that this might not be just yet
for you, as an employer you need to start thinking about this. You need to be thinking
about your future costs and you need to be thinking about how you will proceed and
when you will do so. Subject to checking your staging date as we have described above,
you’ll want to be formulating a plan in your mind even if for the moment you’ll be
waiting to see what the market has to offer - there is no doubt that financial intermediaries
will be offering their services … that’s once they have worked out what it’s all
about and have digested what pension providers are offering!
From The Pensions Regulator website, you may wish to view the Main steps in the processs
where you’ll also find detailed guidance on other specific areas. The guidance is
in logical sections and is worth a browse even if you for the moment look only at
the list of section headings. The Pensions Regulator site also a number of tools
and templates aimed at the smaller employer.
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