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PENSION AUTO-ENROLEMENT

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It is estimated that around 7million workers in the UK do not have any, or adequate, financial provision for their retirement. As a result the government has introduced ‘auto-enrolment’ to pension schemes to overcome either fear or lethargy on employees’ parts when they are faced with a long term financial decision.

What this means is that with effect from 1^st October 2012 employers will be obliged to automatically enrol eligible employees into a qualifying workplace pension arrangement.

Eligible employees are those between the age of 22yrs and State pension age, earning above the income tax personal allowance (£7475 in 2011/12) including part –time & fixed term workers and those employed on a consultancy basis. The financial impact on employers could therefore be significant.

Employers may choose to enrol employees into an existing scheme (at current contribution levels) or contribute toward a National Employment Savings Trust (NEST) for the employee. In either case, minimum contribution levels must be met. Employers can of course contribute more than the minimum levels if they wish. If employees elects to opt out of the scheme employers are not obliged to continue to make contributions.

By 2017 contribution levels will be set at

Employee - 4% of salary*

Employers - 3% of salary*

State - 1% in the form of tax relief.

*Contributions are payable on earnings over the National Insurance Primary Threshold (£7228 in 2011/12)

However, employers’ contribution levels will be phased in between 2012 and 2017 depending on the size of the employer’s PAYE bill and so many small companies will not be affected until 2015.

The Government has however confirmed that automatic enrolment will begin on time in autumn 2012 and all employers will remain in scope. Small businesses (with less than 50 employees) though will be given additional time to prepare for the implementation of automatic enrolment, and won’t be expected to enrol staff until 2015. The rate of pensions contributions will remain unchanged until all businesses have started automatic enrolment. This measure will benefit all employers.

Minister for Pensions Steve Webb said:

"Our society and economy needs to be based on a foundation of saving, not debt. Automatic enrolment will help millions save, and to not act will leave people poorer in retirement. That is why I am confirming today that automatic enrolment will start on time and all employers will be part of it.

"We recognise that small businesses are operating in tough economic times so we are softening the timetable for implementation to give them some additional breathing space. This is a sensible step that ensures long term pension issues are addressed while meeting the short and medium term needs of small business.

"We are committed to ensuring the employees of these small businesses get the chance to save and that is why no one will miss out."

Under the revised timeline, small business would begin automatically enrolling their staff in May 2015, instead of the current timing of April 2014. Half of all workers will still be automatically enrolled before the end of this Parliament.

Further details will be published in January 2012.

We strongly advise that even employers who won’t be affected until 2015 or later, start planning now for these changes. The administrative burden of auto-enrolment will be significant (ensuring schemes are eligible; ensuring schemes provide appropriate returns, especially in comparison to existing schemes; immediately enrolling new employees whose details may not be complete, immediately collecting contributions via payroll and immediately ‘dis-enrolling’ employees who wish to opt out) and employers will face hefty fines if they fail to comply with the new rules. See the Pensions Advisory Service Auto-Enrolment Planner for more help.