By Martin Lockyer, Managing Partner, Westminster Wealth Management
The Government estimates about seven million people are either not saving at all for retirement or not saving enough. Life expectancy is increasing and people are living longer in retirement, so the size of their pension pot will need to be greater to fund their lifestyle. In addition, the Government may not be able to afford to keep State Pensions at their current level in the longer term. Their solution is auto enrolment. So, what does this mean for employers?
New legal duties that came into force in October 2012 require employers to automatically enrol their eligible jobholders into a qualifying pension scheme. The reform is being staged over a six-year period, depending on the size of the employer.
All UK businesses will legally have to offer pensions to workers eligible for auto enrolment by 2018. Employers will also have to contribute towards their workers' retirement savings, although workers can choose to opt out of the scheme.
Employers must ensure all eligible workers automatically become members of a qualifying pension scheme with a high enough level of contributions.
The process is complex and time is limited so firms need experts in this field to help them. Several firms have sprung up to take advantage of the auto enrolment opportunity. The danger with using one of those firms is that they are not set up to provide the long term advice needs of staff. Ensure your firm looks to financial experts who can offer long term advice and value.
There are many elements to being fully prepared for auto enrolment, but let’s focus on six of the most important.
1. Know when you need to be ready (your staging date)
The date that the new law applies to your company is known as your 'staging date'. This date is determined by the size of your largest PAYE scheme on 1 April 2012.
• Any employer with a PAYE scheme registered before 1 April 2012 must enrol their staff by April 2017
• Any employer with a PAYE scheme registered from 1 April 2012 must enrol their staff by February 2018
• Smaller businesses with between 50 to 249 employees have between 1 April 2014 and 1 April 2015 to enrol all eligible workers into a workplace pension
2. Assessing your workforce
Workers who will need to be automatically enrolled in a pension scheme are called 'eligible jobholders’. An eligible jobholder is:
• Aged between 22 and State Pension age
• Working or ordinarily working in the UK
• Earning above £10,000
You will need to assess who in your workforce is an eligible jobholder. You must automatically enrol eligible jobholders into a qualifying pension scheme and make contributions on their behalf to that pension scheme. Workers who are not eligible jobholders will still have a right to opt into a pension scheme or a right to join one.
3. Review your pension arrangements
If you have an existing pension scheme for your workers, you may wish to consider enrolling all eligible jobholders into this scheme. To do this, your existing scheme will need to qualify as an automatic enrolment scheme.
If you do not have an existing pension scheme or you cannot use your existing pension scheme(s) for automatic enrolment, you will need to choose another pension scheme. In this case, all eligible jobholders will need to be automatically enrolled in your new pension scheme.
To be a qualifying scheme, minimum contributions or above must be made or it must provide a minimum rate at which benefits will build up.
4. Ongoing assessment
Employers should assess circumstances for employees on an ongoing basis, to determine where circumstances have changed and enrolment to a qualifying pension scheme is due. These circumstances could include:
• The deferral date for the worker if using worker or eligible postponement
• The first day of employment
• The worker's 22nd birthday
• The first day of a pay reference period
5. Opt outs and contribution refunds
The ultimate goal is for every employee to be a member of a qualifying pension scheme and actively saving for their future and retirement. For certain individuals this isn't always possible, and the time of auto enrolment may come at a difficult period or they may have alternative methods of saving available to them. For such individuals, there is the option to opt out of a pension scheme.
Postponement is an additional flexibility for employers that allow you to choose to postpone automatic enrolment for a period of your choice of up to three months. Some workers may still request to opt in during this period.