Pension reforms: Pensions Act 2008: Get set to go with the flow

If you read nothing else, read this …

• From October 2012, every employer, starting with the largest by payroll size, will have to automatically enrol eligible workers into a qualifying workplace pension.

• Employers must ensure they offer access to a compliant pension scheme. One option is to use the government-devised Nest. Different rules apply to defined benefit plans.

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• Employers must set up appropriate payroll processes and communicate with all employees about the scheme.

• Penalties for not complying will be stiff: up to £10,000 for each day for the biggest employers that miss their staging date on top of a fixed £400 fine. It will be a criminal offence to encourage staff to opt out.

All employers must be ready to comply with the new pension rules or risk hefty penalties, says Sally Hamilton

Employers across the land are being encouraged to start preparing for the 2012 pension reforms now, if they have not done so already. Their new duties, to be faced by the biggest organisations in autumn next year, are compulsory and there are hefty penalties for failing to comply.

The rules, set out in the Pensions Act 2008, are designed to get up to eight million workers who are not currently saving, or are not saving enough, into a pension to start salting away cash with financial assistance from their employer and the taxman.

The Pensions Regulator is sending letters to employers reminding them of the deadline for ensuring they offer a compliant scheme. This could mean adapting an existing plan or setting up a new one, which could be a workplace scheme or the national employment savings trust (Nest), to automatically enrol eligible staff aged from 22 up to the state pension age, earning more than the minimum earnings threshold.

Employers’ systems must also be able to accept younger employees and those on lower earnings who opt into the scheme, although employers will not be obliged to contribute. They must also keep records of employees’ status in the scheme.

To help cushion the administrative and contribution costs, compulsory employer contributions will be phased in, starting at 1% until September 2016, then rising to 2% and then to 3% from October 2017. This percentage is not based on the worker’s whole salary, but on the qualifying earnings thresholds, currently set at more than £5,715 and less than £38,185.

Compulsory employee contributions will be also phased in, starting at 1% until 2016, before rising to 3% from October 2016 and 5% from October 2017, inclusive of tax relief.

First swathe of employers

From October 2012, the first swathe of employers, those with more than 120,000 staff, must have their pension and auto-enrolment systems in place. Other employers, in descending workforce sizes, will follow at monthly intervals. The deadline for those with fewer than 50 employees is February 2016. All must register their schemes with The Pensions Regulator by their staging date.

Sean McSweeney, principal corporate consultant at benefits adviser AWD Chase de Vere, says: “The larger employers have had it on their radar for a while. We are already working with employers with 3,000-4,000 employees, but many smaller employers that have never had a pension scheme do not know what is going to hit them. There will have to be a lot of education.”

Doing nothing is not a good idea because the regulator has promised stiff penalties for employers that miss the deadline, starting with a £400 fixed fine plus penalties ranging from £50 a day for smaller organisations to £10,000 a day for the biggest employers.

Employers that already offer a pension could reduce their overall contributions to the minimum required. Mike Morrison, head of pensions development at Axa Wealth, says: “It is likely some will opt for levelling down in the current economic climate or will make contributions from the bottom line. The danger is there will be nil pay rises. Some employers are acting early to get employees signed up before the staging date. That way, they can say ‘aren’t we a good employer, we are doing something before we have to’.”

McSweeney has also seen encouraging signs. “Some employers are going beyond the minimum compliance because they know it is good for recruitment and retention,” he says. “My analogy is with the minimum wage. How will minimum compliance look to potential recruits? Not very good.”

Read more about the 2012 pension reforms