Pension Reform

There will be more pensioners in the future and those pensioners will live longer. This will put a massive strain on the State pension system.

To alleviate this burden, the Pensions Acts 2007 and 2008 make changes to the Basic State Pension, the State Second Pension and introduce new employer duties for pensions.The employer duties

From October 2012, employers will be required by law to:

• automatically enrol all their eligible employees not already in a good quality pension scheme into a Qualifying Workplace Pension Scheme (QWPS) on the day the employee becomes eligible, and
• pay contributions for every employee who does not opt-out of the QWPS.

Timetable

The employer duties will be staged in over 4 years from 2012. Larger employers will have their duties imposed first, smaller employers last. Any employer with less than 50 employees will have their staging date set depending on the last two digits of their PAYE reference number.

The costs

The amount of contributions that must be paid in order for a scheme to be treated as a QWPS is being phased in as follows:

All employees earning more than the personal income tax allowance of £7,475 will be automatically enrolled into a pension scheme from 2012

* The minimum difference includes tax relief available on employee contributions.

Quality Qualifying Workplace Pension Scheme (QQWPS)

Employers can avoid much of the administration burden associated with automatic enrolment by setting up a QQWPS where:

• the total minimum contribution is 11% of qualifying earnings, of which

at least 6% must come from the employer,

• there is no option to phase in contributions, and
• automatic enrollment dates can be postponed up to 90 days allowing a ‘sweep up’ of eligible employees all at once at the employer’s convenience.

Eligible employees

All employees will have to be auto-enrolled unless:

• they are already in a qualifying workplace pension scheme,
• they are under the age of 22,
• they are over the State Pension Age, or
• they earn less than £7,475 a year (in 2011 terms).

Employees can only ‘opt-out’ once they have been auto-enrolled.

Non-eligible employees must be given the option of opting in to pension saving.

Auto-enrollment is the responsibility of the employer, not the Government or the pensions industry. The Pensions Regulator will oversee employer compliance and has the power to fine employers for non-compliance.

National Employment Savings Trust (NEST)

Employers who do not have, or who will not set up, their own QWPS will have the option of using NEST. This scheme is designed to be low cost and is specifically aimed at low to medium earners. There will be certain restrictions applying to NEST:

• there will be a general ban on transfers in or out,
• there will be an upper contribution limit (currently £3,600 each year),
• limited retirement options and
• limited investment options.

Effect on your business

These changes represent a substantial opportunity to set up QWPSs or QQWPSs ahead of 2012 to minimise the impact of the employer duties on your corporate clients. There are also risks:

• employers with existing schemes will level down contributions to the legislative minimum, and
• individual clients paying regular contributions may stop after 2012 when they are auto-enrolled into their employer’s pension scheme.

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. The information provided is based on our current understanding of the Pensions Acts 2007 and 2008.