The law on workplace pensions has changed. All employers are legally required to automatically enrol certain staff into a pension scheme and make contributions. This is “Auto Enrolment”. But how many know what it means for them?
The Pensions Regulator has set staging dates for employers based largely on the number of employees each employer has. Those with more than 60 employees have already passed their staging date, and employers with less than 30 employees will reach their staging date between 1 June 2015 and 1 August 2017.
Companies such as IT contractors with a single director and no other employee are exempt, but the simple act of taking on the director’s spouse as an employee will bring the company into the Auto Enrolment system.
Employees who earn at a rate higher than the personal allowance (£10,000 in the 2014/15 tax year) who are over 22 and under the state pension age are auto enrolled. All other employees earning more than the lower earnings level (£5,772 in 2014/15) have a right to opt in so long as they are over 16 and not older than 74. Finally, those earning less than the lower earnings level and between 16 and 74 have a right to join the pension scheme, but the employer is not compelled to contribute.
Contributions will be a percentage of band earnings. Band earnings are those that fall between the lower earning limit and the upper earning level (so between £5,772 and £41,865) for the 2014/15 year. Until 30 September 2017 the total contribution level will be 3% and the employer must pay at least 1%. This will increase to 5% from 1 October 2017 and 8% from 1 October 2018. The employer’s minimum contribution will increase to 2% and then 3% over this period.
All employees have a right to opt out after they have been enrolled, but their employer must not encourage them to do so with for example a system of inducements and penalties. Their recruitment procedures must not in any way mean that offers of employment are more likely to those who are expected to opt out.
There is a legal requirement for employers to register their schemes with the Pension Regulator. They must do so within 5 months of the staging date.
Contributions can be paid into a range of pension schemes including Group Personal Pensions, Stakeholder Schemes and Final Salary Schemes. But an alternative that may well appeal to small businesses is NEST which is a government scheme. The attraction of NEST to small businesses is that they will accept all employers on the same terms.
Businesses will have to keep records in place to deal with changes such as employees joining, leaving, changing age and seeing their income increasing above the personal allowance level. The Pensions Regulator has estimated that the cost of implementing Auto Enrolment will be an average of £9,100 for employers with 1 – 4 employees.