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Pension reforms – what do they mean for employers?
The Pensions Act 2011 came into force on 4 November 2011 introducing amendments to the Pensions Act 2008 and implementing long-awaited pension reforms.
From October 2012 to September 2016, a process will begin whereby all employers in Great Britain will be required automatically to enrol their employees into a pension scheme. Employers will then pay a minimum level of contributions for those enrolled employees. Employers in Great Britain will be placed into 43 bands according to their size. The four-year staged implementation process will begin on 1 October 2012 with very large employers, and each subsequent band has been assigned a monthly staging date.
Who is eligible to be auto-enrolled?
The new scheme applies to eligible “jobholders”, who are described as any employee or worker, who:
works (or normally works) in Great Britain under a contract of employment
is aged between 22 and state pension age (although employees aged at least 16 and over can opt-in)
earns above the “qualifying earnings trigger”. This is £7,475 for 2010/11 but will be reviewed annually by the government
Once an employee is enrolled in a scheme, any pension contributions will be payable on his “qualifying earnings” band which will be reviewed annually to allow for inflation. The current band is annual earnings of between £5,035 and £38,185.
An employer is under an ongoing duty to ensure that all jobholders remain part of a scheme save for in certain circumstances. Employees do, however, have a right to opt out of the scheme and opt back in again at a later date (provided that they only opt back in once in a twelve month period). Employers must also automatically re-enrol all eligible jobholders every three years to make sure that jobholders who have opted out of a scheme are given a chance to reconsider their position.
What schemes must an employer offer?
Employers can set up or use their existing pension schemes provided that these are either occupational or personal pension schemes, are registered with HMRC and satisfy certain qualifying criteria. The scheme can also be either defined benefit (“DB”) or defined contribution (“DC”).
The qualifying criteria for an employer’s DB scheme are that the scheme must be an occupational pension scheme providing that members will have a pension for life from the age of 65, must provide for accrual at a rate of at least 1/120th of average earnings in the previous three years multiplied by years of service (up to a maximum of 40) and also provide for revaluation and increases in accordance with the statutory minimum.
The qualifying criteria for an employer’s DC scheme are that there must be a total minimum contribution of 8% of the employee’s qualifying earnings. The employer must also contribute a minimum of 3% to this minimum contribution (though it is free to contribute more).
In the alternative, employers can use the central National Employment Savings Trust (“NEST”) which is a DC scheme. This has been set up to allow employers who do not have their own existing schemes to comply with their auto-enrolment duties and is specifically aimed at low earners and those who are new to pension saving.
Employers must be aware of how the new pension obligations will apply to them. In particular, they must start identifying eligible jobholders and deciding which scheme will apply to them. The Pensions Regulator is responsible for providing employers with information and guidance about their responsibilities up until the implementation of the scheme. From that point it will be responsible for enforcing compliance with the obligations and is able to issue penalty notices and/or a fine or even imprisonment for wilful failure to comply.
For further information on any of the points raised in this article, please contact a member of our employment team.