Feathering the Nest
Pension reforms in 2012 – including the introduction of Nest schemes – should encourage staff to save more for retirement. Anna Scott looks at how firms can prepare now for the changes
Date:
25 February 2010
Source:
Guide to reward
Page:
14
The government’s workplace pension reforms may have registered on employer radars, but whether they are ready for the legal changes is another matter. With two years to prepare, we outline what needs to be done.
Why the need for change?
The fact that an estimated 12.4 million members of the UK private-sector workforce do not pay into an occupational pension, combined with a growing elderly population, has pushed the government to encourage more UK workers to save with a private pension. The Pensions Act 2008 is part of a body of regulations that the government hopes will deliver these workplace pension reforms.
How will the regulations work?
Employers must automatically enrol workers aged between 22 and 75, earning in excess of £5,035 a year, into a Qualifying Workplace Pension Scheme (QWPS) from the first day of their employment. Staff aged 16 to 22 can also be enrolled if they want.
Contributions into a scheme must total at least 8 per cent of qualifying earnings, with a minimum of 3 per cent to come from the employer. The remaining contribution is made up by the employee and tax relief (1 per cent). Qualifying earnings refer to total earnings, including bonuses and overtime, between £5,035 and £33,540. These levels will be reviewed annually.
What if the employer doesn’t have an occupational pension scheme?
Eligible workers from any size or sector of company can be automatically enrolled onto the independent pension scheme set up by government, Nest – national employment savings trust – formerly known as personal accounts. Both employers and employees can contribute to Nest and, like QWPS, tax relief makes up a proportion of the contribution. The annual contribution limit is £3,600.
Employers and Nest scheme members will be able to contribute more than the minimum and structure their contributions in different ways. And the scheme is flexible for members who frequently change jobs, where their different employers choose the personal accounts scheme to meet their auto-enrolment duties. However, transfers in and out of Nest are banned. The scheme will mainly be delivered online or via text message.
What penalties do companies face if they fail to comply?
It is the Pensions Regulator’s responsibility to ensure that employers comply with their duties. Failure to comply could lead to a fixed penalty notice of £50,000, with additional penalties of £10,000 for each day that an employer fails to take the necessary remedial action.
“It will be a criminal offence for an employer to wilfully fail to comply with their duties,” warns David Hix, associate director, Jelf Employee Benefits.
The DWP will be informing organisations of what they need to do via a communications strategy in the run up to 2012. Even with a possible change of government, there is party consensus on the reforms and it’s likely that any changes to the legislation made by a future government will only be “tweaks”, says Karen Thomson, associate director of policy and research at the Institute of Payroll Professionals.
When do the changes kick in?
From October 2012, firms with over 120,000 employees will need to start contributing, and smaller firms will be phased in over the following four years up to 2016. The level of contributions will also be phased in, starting at 1 per cent and increasing gradually to the minimum level.
What does an occupational pension scheme need to qualify?
A scheme must be an occupational or personal pension scheme to qualify and must be registered under the Finance Act 2004. Defined benefit schemes must have contracted out of the state second pension and have a valid certificate for doing so.
Defined contributions scheme (DC) that qualify must provide the minimum contributions from employer and employee. Such qualifying DC schemes must have their main administration in the UK.
What do employers need to do?
“The administrative burden will have a big impact,” says Colin Mayes, senior pensions adviser, Enrich Reward.
Employers need to talk to their pension provider to make sure the pension qualifies for auto-enrolment, or to decide which option is most suitable. If, for example, employers have a policy of allowing employees to join the occupational pension scheme after six months’ service, this will have to be changed, as under the new rules, all employees (including casual staff) must be enrolled from their first day of employment.
Software will play a leading role in the process, and the company’s HR or payroll software provider needs to be consulted. “[Employers] will need to get reports [from their software] – on the age of their employees, the status of their employees [whether permanent, temporary or casual], their current pension scheme and whether it qualifies and when someone starts,” says Thomson.
Companies must also ensure that they provide information (not advice) to employees about the scheme when the employee first becomes eligible. “Employees need to understand the mechanics behind auto-enrolment and the fundamentals of saving for retirement,” says Sean McSweeney, principal consultant, AWD Chase de Vere Consulting. Peter Smith, managing director, Benefex Financial Solutions, adds: “Employee queries will be high and therefore employers must know how to respond to them consistently.”
Thomson believes that HR and payroll will need to work together to communicate the changes to employees. “Payroll will have to deduct money from people’s salaries – it won’t have a choice,” she says. “But HR should encourage employees to join their scheme and highlight how it is part of their remuneration package. For all those employers who didn’t provide pay rises in the recession – this is another form of return.” It’s vital for HR to consider who its different audiences are within the organisation and what message should go to them.
Organisations must also ensure that they are prepared for the extra deductions from their coffers afforded by the changes. Paul Macro, senior consultant, Towers Watson, says: “Get an estimate of the potential costs of putting all employees into a pension scheme, noting that some will opt out, but that this number may be less than many expect.” McSweeney suggests that it will be difficult to gauge the potential opt-out population without being accused of promoting such action.
Budget planning is necessary, adds Smith, to ensure that net benefit cost will not need to be found at the last minute. He suggests that companies without a pension scheme start phasing in a small contribution in advance of when it is needed to “spread forward the effect and enable budgets to be used better”.
Thomson says that smaller employers may prepare for the increase in the salary bill by tying the pension contributions in with a flexible benefits offer, or as part of a pay rise. “We would like to encourage employers to show their pensions contributions on payslips,” she adds. Mayes says: “Employers will need to decide how important pensions are as part of their total reward and decide on their strategy.”
What happens if employees want to opt out?
Employees cannot opt out until they have been auto-enrolled, says Smith. But, once auto-enrolled, if they decide to opt out of either the occupational scheme or Nest, they must contact the scheme administrator, says Hix.
“While the opt-out is being processed, contributions into the scheme must continue as normal,” Hix adds. “If an employee does opt out, the employer has to remember to re-enrol the employee into the scheme exactly three years after the date that they first become eligible for scheme membership.”
There is a time limit in which employees can opt out. As PM went to press, the detail had yet to be clarified, but the government is expected to do this in about 28 days. Macro says that among the issues that HR will need to deal with are the implications of “putting people into a pension scheme who don’t want to be in one”.
Lynda Whitney, consultant, Hewitt Associates, adds: “As ever, the key hurdles for HR departments will be to engage employees in valuing a benefit that is difficult to understand.”