Compulsory pension contributions
Thursday, 3rd February 2011
From 1 October 2012, new laws will begin to come into force requiring all employers in Great Britain to automatically enrol eligible jobholders into a qualifying pension scheme and to contribute to that scheme. There will be a staging process starting with the largest employers in 2012 and moving down to the smallest from 2014. Employers need to start preparing for these changes which may result in additional costs and administration, as well as changes to your existing pension scheme or possibly a new scheme.
Employers will be able to choose to use their existing pension scheme so long as it meets certain standards or another qualifying pension scheme. If neither of these options is used, they will have to pay into the new National Employment Savings Trust (NEST).
All eligible jobholders, including existing employees and new starters (with some minor exceptions) will need to be auto-enrolled from the appropriate start date for your organisation. An eligible jobholder who will qualify for auto-enrolment must meet the following criteria:
• They ordinarily work in Great Britain under a contract;
• They are aged 22 or over and have not reached state pension age; and
• They are paid ‘qualified earnings’ by an employer.
Will I need a new pension scheme?
Your existing pension scheme will be a qualifying scheme if it is either an occupational or personal pension scheme, is a registered pension scheme under the Finance Act 2004 and meets the quality requirements that have been set out.
For Defined Contribution (DC) Schemes and Personal Pension Schemes, there are set quality tests that must be met. If an employer has an existing Defined Benefit (DB) Scheme and they want to use that scheme for auto-enrolment, they must ensure that the scheme meets a test scheme standard.
When will this apply to me?
Whilst the requirements for auto-enrolment will take effect from 1 October 2012, this will take the form of a gradual and staged process over a four year period. The staging will be based upon the size of the employer (using PAYE information).
As well as a gradual introduction of auto-enrolment, there will also be a gradual increase in the contributions that are required for DC Schemes and NEST. The minimum contribution will eventually be 8% of qualifying earnings of which the employer is required to pay a minimum of 3%. If the employer pays 3%, then the employee will be required to pay 4% with a further 1% paid as tax relief by the government all of which must be done over a 12 month reference period. The contributions will be phased towards this level between October 2012 and October 2017.
Employees can op-out of the scheme and, if they do, no contributions need to be made on their behalf. Fines will be in place for those Employers who coerce employees in to opting out. Employers need to re-enrol employees who opt-out, at least once every three years, so that the employee is presented with the option of joining the scheme again.
What do I need to do in the next few months?
• Check when auto-enrolment will commence for you
• Consider whether any existing pension scheme will qualify and is the most effective method of compliance
• Budget for additional costs
• Plan your process and administrative needs
• Allow sufficient time to consult with employees
• Take professional advice if you are unclear
These new laws will be policed and enforced by The Pensions Regulator and employers will be heavily fined if they do not comply so act now and be prepared.
For advice about employment law matters, please contact Neil Largan at Crombie Wilkinson Solicitors on 01904 624185.
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