How to keep up with new pension rules

In a bid to reduce employees’ reliance on the state pension, the government has introduced a requirement for all employers to automatically enrol their workers in an approved pension scheme.

Regardless of whether they have one part-time employee or hundreds of seasonal labourers, farmers will have to comply with the rules, which include casual and seasonal workers. The law will come into force for large employers from October 2012 and will be phased in over four years for smaller employers

Who will be affected?

All employers, regardless of size, will have to meet these new obligations, says Comron Rowe, head of pensions at solicitor Foot Anstey. They will have to auto-enrol “eligible jobholders” (those between 22 and the state pension age, who are being paid more than £8,105 in taxable wages) into an approved pension scheme, and pay an employer’s contribution to that scheme.

Other workers must also be informed of the scheme and can insist on being enrolled. Failure to comply with the rules could result in financial or criminal penalties.

When do the rules come in?

The UK’s largest employers, those with more than 120,000 employees, must comply from 1 October 2012. Thereafter, employers will be staggered by size and their PAYE reference code, with all employers brought in by 2017.

Most farmers will not have to comply until at least June 2015, says Farmplan’s product co-ordinator Sally Ashwell. “Those with fewer than 30 employees on the payroll will start to be phased into the scheme from then and may not have to comply until 2017 – although businesses can choose to comply earlier than their legal requirement.

“However it is worth starting to prepare for the changes now and to ensure that your payroll software has been updated to cope with the new legislation.”

The dates by which different employers must comply are known as staging dates. Farmers with seasonal workers may find their staging date is earlier than expected, as the date depends on the PAYE scheme on 1 April 2012. (See www.tpr.gov.uk/pensions-reform/staging-date-timeline.aspx for more information)

What about seasonal workers?

Employers can choose to postpone auto-enrolment for up to three months – so providing seasonal workers are not employed for longer than three months, they will not have to be enrolled. However, if workers request to join the scheme over that time, they must be allowed to.

Do workers have to agree to enrolment?

Employees can opt out of the pension scheme at any time. If they do so within a month of joining both they and the employer may be entitled to a refund on any payments already made. However, employers cannot encourage workers to opt out of the scheme. They must be auto-enrolled again after three years, at which point they may choose to opt out again.

How can I find a suitable pension scheme?

As part of the pension reforms the government introduced the National Employment Savings Trust (NEST) – a simple, low-cost scheme which may be suitable for many farmers. For more information visit www.nestpensions.org.uk.

Independent financial advisers will give tailored advice on other schemes but not all meet the legal requirements so schemes should be checked to see if they comply.

How much will I have to pay in?

Ultimately, employees will have to pay a minimum of 5% of their wages into the scheme, with the employer paying 3%. However, this will be phased in, with funding at 1% each from October 2012, 3% and 2% respectively from October 2017 and the full 5% and 3% split from October 2018. Employee contributions will attract tax relief.

What if I have an existing pension scheme?

Employers who already provide a pension scheme for workers need to review those to check that they qualify under the new scheme. To qualify, minimum contributions must be made, or schemes must provide a minimum rate at which benefits will build up. Those which don’t qualify may be changed.

What else do I need to consider?

It may be sensible to refer to automatic enrolment in any contracts of employment, and be prepared for the additional burden on payroll, finance, paperwork and computer systems.

“Employers will eventually have to pay an extra 3% of employees’ wages into their pension, which is going to make the cost of UK labour more than our EU competitors,” says James Potter, senior legal advisor at the NFU.

“It’s also going to add about 3% to the cost of payroll – a greater increase than other sectors because of the number of small businesses and seasonal workers in agriculture.

“It’s very important for workers to have good pension provision, but margins are very tight, which is a concern. Phasing in the new rules will also mean some businesses will be paying higher contributions than others, undermining their competitiveness.”

As part of the process, employers will need to register with the government’s pensions regulator shortly before their staging date.

Are there any other rules employers should know about?

Employers must not:

  • Encourage workers to opt out of the qualifying pension scheme
  • Use recruitment practices that will benefit job applicants who indicate they are prepared to opt out
  • Treat a worker unfairly or put them at a disadvantage because of automatic enrolment

What action should I take?

  • Be aware of the timescale for your business
  • Consider whether your payroll system can cope with the new rules, and look into new software packages or payroll providers
  • Add the known increase in cost of labour to budgets for 2016-17
  • Take independent financial advice about available pension products and whether your existing scheme is compliant
  • See www.thepensionsregulator.gov.uk for more information

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With BPS being phased out and new schemes being put in place in the next few years, it’s an important time for farmers to start planning retirement and the best way to secure their pensions. Whether you are considering a succession process or would like to retire from the industry outright, our panel of experts will go through all the options you need to consider no matter what your life plan looks like. Join the session at 17.00 - 18:15 on Thursday 19 August 2021.
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