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Pension Reform: Nest and Automatic Enrolment
As has been widely reported in the press, pension reform and automatic enrolment has started to be rolled out this week.
At present if you employ five or more staff, you are obliged to have a stakeholder pension scheme in place to offer staff. The employer does not have to make any contributions to the stakeholder pension scheme however, and take-up has consequently been low.
The Pensions Act 2008 (the “Act”) sets out a requirement for all employers to automatically enrol certain workers into a qualifying pension scheme.
This obligation will be phased in from October 2012 with the largest employers (those with over 120,000 workers) being required to comply from 1 October 2012 and smaller employers being gradually phased in depending on the size of their workforce. >
The smaller employers will be required to comply at a date between 1 March 2014 to 1 February 2016 depending on their PAYE reference date. In addition employers will be required to make contributions to the plan and to provide specified information to workers. To find out when your business will be affected, click staging date.
The duties applicable to an employer will depend on the makeup of their workforce. In order for the duties to apply, an employer must employ someone who is classed as a ‘worker’. The definition of a worker in this context is wider than that of an employee.
Broadly, a worker includes employees and individuals who have a contract with the employer to perform work personally (provided they are not undertaking this work as part of their own business). Specific workers including self employed contractors are excluded. To qualify, workers must work or ordinarily work in the UK. The Pensions Regulator states in its guidance that employers may need to seek legal advice when assessing their workforce.
At the heart of the Act is the requirement that all workers aged between 22 and State Pension Age who earn more than the income tax personal allowance (£7,475 in 2011/2012) and who are not members of a qualifying pension scheme be automatically enrolled in an automatic enrolment scheme.
However, other duties apply where workers fall outside the age bracket or earnings threshold and to distinguish which duties apply, the Act categorises workers based on age and qualifying earnings. There are three categories:
- eligible jobholders;
- non eligible jobholders and
- entitled workers.
Different duties and obligations apply for each category of worker.
- October 2012 to September 2016 – total minimum of 2% of qualifying earnings with at least 1% from the employer.
- October 2016 to September 2017 – total minimum of 5% of qualifying earnings, with at least 2% from the employer.
- From October 2017, total minimum of 8% of qualifying earnings, with at least 3% from the employer.
Employers must choose the qualifying scheme they wish to use to fulfil their obligations. This could be a defined contribution (money purchase) scheme, the National Employment Savings Trust ‘NEST’) or a defined benefit (final salary) scheme which either has a contracting out statement or meets a minimum standard.
Employers with existing pension schemes for their workers should check if their scheme meets the criteria for a qualifying pension scheme.
NEST will be a national, low charge, workplace pension scheme any employer can use to comply with their duties imposed by the new pension regulations and has apparently been set up to help millions of people who currently don’t have access to a workplace pension, and who presumably don’t yet have a nest egg (apologies for the weak pun).
NEST will:
- Be a trust-based occupational pension scheme.
- Be run by NEST Corporation which will have a legal duty to act in the interests of scheme members.
- Be one of the qualifying pension schemes employers can use to fulfil their new duties under the pension reforms.
- Allow employers to hand over their administration to a third party if they wish.
- Belong to the individual, meaning employers will not have to look after the pots of ex-workers. This also means several different employers can contribute to the same member’s pot over their working life.
If employers chose to use a defined contribution scheme or NEST, they must make a minimum level of contributions on workers’ qualifying earnings
The level of contributions will be 8% of qualifying earnings with the employer being required to pay at least 3%. However, the level of contributions will be phased in from October 2012 starting with a requirement for employers to pay a minimum contribution of 1% of qualifying earnings. (Qualifying earnings is earnings between £5,715 (2010/11) and £33,540).
For many employers that don’t currently provide pension schemes, this will be a big and unwelcome additional cost, and which they may recoup by not making incremental pay increases in those years. However the more people that get adequate pension cover in place, the more that will actually be in a position to retire when they reach the age of 65. Go to pensions reform for more information.
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