Research suggests that the number of private sector companies offering their employee some sort of pension has declined substantially over recent years, with just 27% of private sector workers belonging to a work based pension scheme. As a result of these long-standing concerns about the adequacy of pensions saving in the UK, new laws will be introduced in 2012 which will require all employers in Great Britain to automatically enrol eligible jobholders into a pension scheme ("Auto-enrolment"). A move which according to the Department of Work and Pensions will result in between 5 to 9 million people saving more.

Auto enrolment will begin in October 2012 and will be phased in over a four year period with larger employers being affected before smaller employers and start up businesses. Each employer will be given a start date for the process known as their 'staging date'. It is however thought that employers will also be able to voluntarily start the process of auto-enrolment as early as July 2012.

Although generally employers will have to automatically enrol jobholders from their staging date, there will be a right to impose a three month waiting period for new jobholders.

In order to understand the impact of the new laws it is important to understand the terminology. A key definition is an "eligible jobholder"

A jobholder is defined as an employee or worker, aged between 16 and 75 who works in Great Britain under a contract and is paid qualifying earnings (the proposed range for qualifying earnings is £5,035 to £33,540) by an employer.

Eligibility

To be eligible for auto enrolment a jobholder must:

  • be between the age of 22 and state pension age;
  • earn above the minimum earnings threshold (likely to be £7,475) a year; and
  • not be a member of a current suitable workplace pension scheme.

Employers will not have a duty to automatically enrol jobholders who fall outside of the above requirements (such as those aged between 16 and 22 or between state pension age and 75, or those earning below the proposed £7,475) however those jobholders will have a right to opt into the scheme.

Contributions

The amount of money being paid in by the worker, the employer and by the government in the form of tax relief, is calculated as a percentage of the worker's earnings. The government has set a minimum percentage that has to be contributed in total. In summary this starts at 2% between 2012 to 2016 rising to 8% from October 2012 onwards. Within this total the government has also set a minimum level of employer contribution which rises from 1% in 2012 to 3% from October 2017 onwards.

Opting out and re-joining

Jobholders will be given a chance to opt out of the scheme either at the start or at any time during their membership. However refunds of payments can only be made if the jobholder opts out after one month of becoming a member. Jobholders who choose to opt out will be allowed to re-join at a later date.

There will also be a duty on employers to automatically enrol workers back into the scheme approximately every three years providing they are still eligible. The thinking behind this is that it will give those who have left the scheme the opportunity to reconsider their pension saving.

Options available to an employer

There will be a number of options available to employers in choosing the pension scheme.

Employers will be able to use an existing pension scheme if it satisfies certain criteria. If this is not the case, the employer may amend an existing scheme or set up a new pension scheme in accordance with the criteria.

Alternatively an employer can choose to use the National Employment Savings Trust (NEST) which is a scheme set up by the Secretary of State.

Regardless of the scheme the employer chooses, they will be required to provide jobholders with information such as advising they have been enrolled and the amount of contributions the jobholder will have to pay.

NEST

If an employer chooses to use NEST it will be required to meet minimum contributions requirements that apply to occupational defined contribution schemes. The level of contributions will be phased in starting with a 1% contribution and rising to a minimum 3% contribution once the auto-enrolment process is established.

Employment protection measures

A number of measures will be put in place to prevent employers contracting out or limiting their duties. For example employers will not be allowed to ask job applicants at interview whether they plan to opt out, or to offer financial inducements to jobholders to opt out.

Next steps

The introduction of auto-enrolment will inevitably lead to more of us saving for our retirement with Standard Life estimating that the scheme will create an extra six million people saving.

Although employers will not become subject to the new auto-enrolment duties until 1 October 2012 at the earliest, it would be prudent to take advance steps to prepare for the reforms now.

Some ten million individuals are expected to be eligible for automatic enrolment which will place a considerable administrative burden on pension providers. Early preparation on the part of employers will be essential to ensure the smooth introduction of these new arrangements.

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