Pension Auto Enrolment - Employers guide

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  1. 1. Workplace pensions reformsPreparing for Auto-enrolmentEmployee Benefits
  2. 2. 2 Preparing for Auto-enrolmentWill our business need to comply with theautomatic enrolment requirements and, ifso, when?Yes, the new employer duties will apply toall UK employers, irrespective of how few orhow many employees they have. However, theeffective date for compliance is being phasedin between 1st October 2012 and 1st February2018, with the earlier dates applying to largeremployers. A sample of the staging dates isgiven below:You can choose to bring forward your stagingdate, but you must inform The PensionsRegulator of your intention to do so and be ableto demonstrate your ability to discharge thenew duties.What is meant by automatic enrolment?This means that an employee must be admittedto membership of a Qualifying Schemeautomatically, without the need to completeany forms or obtain anyones permission. Thismust happen no later than three months afterbecoming an Eligible Jobholder. Until now, themajority of UK pension schemes have operatedon the basis of employees opting in to a pensionscheme, often after meeting some eligibilitycriteria determined by the employer. In future,the default position will be that employees mustbe included in the pension scheme unless theyopt out.Which of our employees will need to beincluded?The requirement to be automatically enrolledinto a Qualifying Scheme will apply to allEligible Jobholders in the UK, aged between 22and State Pension Age, providing that they earnabove a minimum earnings trigger, expected tobe set in line with the income tax threshold eachyear. Those outside these age limits or on lowerearnings will be able to opt in.If an employee opts out, is that the end ofour duties as an employer to him/her?No, where an employee opts out of theemployers chosen pension scheme, he/she mayopt back in at any time and the employer mustthen pay the appropriate level of contributions.Furthermore, there is a duty on employers toautomatically re-enrol any employees thathave opted out previously, at each three yearanniversary of the original staging date (theemployee can opt out again each time).What level of contributions must be paid?Once the full provisions are in place, thecombined employer and employee contributionsmust be equivalent to at least 8% of theemployees Qualifying Earnings. The employerscontribution, within the 8% total, must be atleast 3% of Qualifying Earnings and the employeemakes up the difference (with tax relief included).For 2013/2014, qualifying earnings will be anemployees earnings between 5,668 and41,450. These figures are expected to bereviewed annually.Between October 2012 and September 2017, theminimum required contribution rates will be just1% each for the employer and employee. Then,from October 2017 the employer must pay atleast 2% included in a total of 5%, before thefull contributions take effect in October 2018.Employers who use a Defined Benefit (FinalSalary) scheme to meet the new requirementscan defer their automatic enrolment date untilthe end of the staging period (October 2017),although employees can opt in before then.If the scheme is closed before October 2017,contributions must be backdated to the originalstaging date.Can we offer our employees analternative cash sum or other benefitinstead?No. You must make arrangements for thepayment of pension contributions at theprescribed rates and must not offer anyinducement or incentive which may be seen asencouraging employees to opt out. Employersoperating flexible benefit schemes may needto pay particular attention to their existingarrangements, to ensure that the minimumpension requirements are met.Ive heard of NEST in connection with thenew pension regime, but what is NEST andwill this be useful to our business?NEST is the National Employment Savings Trust,a centralised, defined contribution occupationalpension scheme, which may be used byemployers to meet their new duties in relationNumber of employees Staging date10,000 - 19,999 1 March 20136,000 - 9,999 1 April 20134,000 - 5,999 May/June 20133,000 - 3,999 1 July 20131,250 - 2,999 Aug/Sept 2013800 - 1,249 1 October 2013500 - 799 1 November 2013350 - 499 1 January 2014250 - 349 1 February 201450 - 249 1 April 2014 - 1 April 2015Less than 50 1 June 2015 - 1 April 2017New employees Up to Feb 2018You will have heard about Workplace Pensions Reform and the requirement to automatically enrolemployees into a workplace pension scheme. From 1 October 2012, this became a reality for the UKs largestemployers. Below, we provide a brief update on the key features that will soon be part of the daily lives ofanyone involved in the administration of pension schemes for employees.
  3. 3. Connect to 3to some or all of their employees. Although it isavailable to all companies, it is primarily aimedat low to moderate earners and their employers.In the build up to the automatic enrolment,several new pensions schemes have beenlaunched in direct competition to NEST.Is NEST just like any other definedcontribution company pension scheme?In many ways, yes, although it will have a limiton contributions that can be paid and, at leastfor the first five years of its operation, it is notexpected to allow transfers of funds in or out.There are also some differences in relationto benefit options for those who leave after ashort period of membership and, in the eventof a members death before retirement, thebenefits will not be exempt from Inheritance Tax(although this is not expected to be a concernfor the target membership).Will there be an upper limit on thecontributions an employer must pay?Yes, there will be a maximum contributionan employer must pay on behalf of any oneemployee, which will be determined by theupper limit on Qualifying Earnings. That said,an employer can pay significantly highercontributions if it wishes to do so, and manysenior employees and directors will alreadybe enjoying significant, tax-efficient pensionrewards.Note that there will be a maximum contributionthat can be paid to NEST by and on behalf ofeach employee. For the 2013/14 tax year this is4,400 p.a.
  4. 4. 4 Preparing for Auto-enrolmentCan we make use of our existing companypension scheme?Yes, an existing scheme can be used forautomatic enrolment, providing it meets certainstandards. A combination of two or moredifferent schemes, including NEST, may be usedto meet the requirements.Broadly, a Defined Benefit (Final Salary) schemewill be qualifying if it is made available to allEligible Jobholders and if it is either contractedout of the State Second Pension (S2P, formerlySERPS) or offers a pension accrual rate ofat least 1/120th for each year of PensionableService.A Defined Contribution (Money Purchase)scheme must meet the minimum contributionrequirements as explained above i.e. a minimumtotal contribution of 8% of Qualifying Earningswith at least 3% being paid by the employer.What if we do not currently have apension scheme for all employees?In the circumstances where a suitable pensionscheme is not already in place, options willinclude joining NEST; changing the eligibilityterms of any existing scheme or setting up anew scheme for those employees who wouldotherwise be excluded.What happens if we do nothing?The Pensions Regulator (TPR) will be responsiblefor ensuring that employers meet theirobligations in relation to Workplace PensionsReform. Although TPRs approach will be toeducate and encourage compliance, persistentoffenders could face substantial fines or evenimprisonment.Apart from paying the contributions, isthere anything else we need to do?The Pensions Act 2008 places certain duties onemployers in respect of communications andrecord keeping. A formal statement must beissued to each Eligible Jobholder on or beforejoining, including, amongst other things, fulldetails of the proposed scheme; the effectivedate of joining and informing them of their rightto opt out. The employer must also maintainrecords of any opt-outs and submit an annualreturn to The Pensions Regulator.Where can we get advice on exactly howall this affects our business?There is generic information on the websitesof The Pensions Regulator, the Department forWork and Pensions and NEST Corporation, butmany employers will need detailed advice onwhat the new employer duties mean to theirbusiness and, perhaps more importantly, how toensure that they meet these obligations in themost appropriate and cost effective way.Employers will have different dutiesdepending on the type of worker. Employerswill need to identify each type of worker andperform the relevant duties for each type.
  5. 5. Connect to 5Guidance notesSince October 2012, any UK employerwho employs at least one person will belegally obliged to:nSet up and register a pension schemesuitable for automatic enrolmentnAutomatically enrol certain workers (knownas eligible jobholders) into that pensionschemenArrange membership of a pension schemefor certain other workersnMake contributions for eligible jobholdersand certain other workersnManage the automatic enrolment, joiningand opt out processesnProvide specific information to workers,pension scheme providers and The PensionsRegulator (TPR)nKeep records of how they have fulfilled andcontinue to fulfil their duties1. Assess your workforce - the different types of workerEmployers will have different duties dependingon the type of worker. Employers will need toidentify each type of worker and perform therelevant duties for each type.Workers are defined as anyone who works undera contract of employment or who works for orperforms services personally for another partyto the contract. Exclusions are the self-employed,the armed forces and directors of companieswhere there is no contract of employment and/orthere are no other workers.Earnings Age16 - 21 22 - state pension age State pension age - 745668 or less Entitled workerOver 5668up to 9440Non-eligible jobholderAbove