New regulations which came into effect on 1 October last year appear to be a far more serious attempt to address the UK’s pensions saving gap than other recent initiatives.
Employers will in future be obliged to pay pension contributions for all eligible workers and all eligible workers will have to join a so-called certified workplace pension scheme (WPPS).
The key difference is that this time the regulations affect all employers, even those with just one employee. The process is known as auto-enrolment and the obligation to comply with it is being staggered, with the largest and some specific employers being required to do this first.
Each employer has been allocated what is called a staging date and must introduce a workplace pension scheme from the weekly or monthly pay period in which their staging date falls.
Full compliance with the new regulations from the staging date includes choosing the WPPS, enrolment of employees and administering deductions from pay and refunds of contributions.
When are the staging dates?
Staging dates run from October 2012 to 1 April 2017 and depend on the number of employees in the workforce on 1 April 2012 and the employer’s PAYE reference number.
The pensions regulator will notify employers of staging dates at least six months in advance of that date. However, most employers are not aware that they can choose to advance or postpone their staging date by up to 90 days.
Those with the fewest employees can wait for two years or longer before they must act. However, with more than 900,000 employers affected, many would be wise to review their options and make decisions sooner rather than later, given the bottleneck likely to be caused by thousands who will leave complying until the last minute.
Recent publicity campaigns in the national press and on TV have raised awareness of the new legislation on workplace pensions but for the most part employers still seem to be under the impression that there is no urgency.
Unfortunately, for most this is not the case and in a number of key areas they could already be running the very real risk of breaching the new regulations.
Popular misconceptions about the new pensions
The most common misconceptions relate to potential fines, opting-out, contribution levels, employer duties and the identification of eligible workers:
Potential fines – most employers aren’t aware that the pensions regulator’s fines for non-compliance can be imposed on individuals and not just on companies, that they can levied daily and that, in extreme cases of non-compliance, they can include imprisonment.
Opting out – all eligible workers must be auto-enrolled into a certified workplace pension scheme before they can exercise their right to opt-out of the scheme.
Contribution levels – most employers aren’t aware that they must choose the definition of pensionable earnings on which their and their employees’ pension contributions will be based – there are five definitions to choose from.
Smaller employers – for most, minimum contribution levels will increase twice between their staging date and October 2018.
Duties – emphasis is placed by the pensions regulator on the employer’s record-keeping. There could also be practical difficulties involved in deducting pension contributions from employees’ pay and dealing with contribution refunds.
Eligible workers – in order to identify all eligible workers, employers will need to find out more about employees and provide more personal and historical PAYE information. Eligibility will have to be reviewed at least monthly, so good payroll processes will be key.
What type of workplace pension scheme should an employer choose?
Employers will need to consider whether National Employment Savings Trust (NEST), the government’s off-the-shelf solution is best for them, or whether they would be better off with an alternative ready-made or a bespoke scheme.
Employers are not obliged to consult employees on the scheme they choose, nor are employers obliged to contribute to an employee’s existing pensions scheme.
However, employers must register the scheme they choose with the pensions regulator and to certify that it complies fully with the regulations.
The key issues to consider when choosing a scheme are the charges, the range of investment options, the flexibility of the arrangement as well as contributions, transfer (in and out) and retirement options; specialist advice may well be needed.
Most small businesses in the agriculture sector, especially those with fewer than 10 eligible workers are likely to be best off using NEST, or the People’s Pension, considered by most commentators to be the best alternative and without the additional fee costs and charges likely to be associated with setting up a bespoke scheme.
Contracts of employment
Contracts of employment will need to be reviewed and may need to be amended in light of these changes, especially those that are not silent on employee pensions. Where there is no contract of employment these will have to be put in place.
Payroll, auto-enrolment and refunds
The introduction in April of the government’s new Real Time Information (RTI) regulations, combined with employers’ new duties under workplace pensions, will force many to move from paying employees weekly in favour of monthly.
Employers still using manual payroll systems will struggle to deal with deductions and refunds and most will now need to use either software and/or the services of an external payroll service.
Review existing workplace pensions
The pensions regulator has placed the onus on employers to certify that their workplace pension scheme complies fully with the new regulations. Those who operate existing employee pension schemes will need to ensure that they can comply fully with the practicalities of auto-enrolment, refunds and so on.
Where should you seek advice?
Since 1 January 2013 a change in financial consumer advice legislation has resulted in fewer independent financial advisers. There is a new category of restricted advisers, who can only advise on products from a limited number of providers. Independent advisers have access to the whole of the market, but will charge a fee for their advice.
Before seeking advice from a corporate pensions adviser, employers should take time to confirm and fully understand the status of any adviser, fees and charges.
More information on the new pensions legislation is available from http://www.thepensionsregulator.gov.uk/automatic-enrolment.aspx
Telephone 0845 600 0707 or email firstname.lastname@example.org
The Pensions Regulator
Brighton BN1 4DW
Or from Albert Goodman – email email@example.com. Telephone 01823 286 096
Recent pensions initiatives and how we got to “auto-enrolment”
In 1988, the Conservative government decided to allow individuals to opt-out of employer-sponsored pension schemes and to pay their pension contributions instead into a personal pension arrangement.
While many took advantage of this, only a minority set up a pensions scheme of their own and by 2001, almost 4m UK workers were making no pension provision whatsoever.
In 2001 the Labour government tried to reverse the trend by introducing stakeholder pensions. These required employers with more than five permanent employees to choose a stakeholder pension scheme which their employees would then be invited to join.
However, with no obligation for employers to contribute to these schemes, nor any obligation on employees to join them, the take-up of stakeholder pensions was very poor. There are now thousands of “ghost” stakeholder schemes in the UK with no active members.
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