Pension Reform
17th Jun 2011
Automatic enrolment, the employer duties and NEST
Automatic enrolment, the employer duties and NEST
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 Pensions Act 2008 laid out the foundations for automatic enrolment, however, when the new coalition Government came into power, a review group was set up to examine automatic enrolment. This group presented its recommendations to the Department for Work and Pensions in October 2010. The proposals now incorporate any recommended changes. The employer duties From October 2012, employers will be required by law to: Automatically enrol all their eligible employees into a Qualifying Workplace Pension Scheme (QWPS) within three months of becoming eligible; Pay contributions for every employee who does not opt-out of the QWPS; Employees are allowed to opt-in and benefit from employer contributions within the three months if they choose. Qualifying Workplace Pension Schemes A staff pension scheme will qualify as a Qualifying Workplace Pension Scheme (QWPS) if it meets the following minimum contribution levels. These are being phased in as shown:Date Total minimum contribution % Minimum employer contribution % Minimum difference to be made up by employee % (gross) * October 2012 to September 2016 2% 1% 1% October 2016 to September 2017 5% 2% 3% October 2017 onwards 8% 3% 5%
*The minimum difference includes tax relief available on employee contributions. Qualifying Earnings The contributions will be based on a percentage of band earnings between £5,715 (lower qualifying earnings band limit for 2010/11) and £38,185 (up-rated in line with earnings). Qualifying earnings include basic pay, bonuses, overtime, commissions and certain statutory benefits such as sick pay. 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; they earn less than the level of the income tax threshold (£7,475 in 2011/2012 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. Self-certifying QWPS status Employers are be able to self-certify QWPS status using one or more of the following procedures: A check that each individual employee makes total contributions of at least 8% of qualifying earnings (i.e. basic pay plus bonuses, overtime, commissions, certain statutory benefits etc), with at least 3% payable by the employer. The contribution rate for each member, based on the first pound of employer defined pensionable pay, is at least 9% with a minimum 4% employer contribution rate. Where employer defined pensionable pay makes up at least 85% of total pay on aggregate, total contributions based on the first pound of employer defined pensionable pay are at least 8%, with at least 3% payable by the employer. Where 100% of total pay is defined as pensionable, total contributions based on the first pound of pensionable pay are at least 7% (possibly 3% minimum payable by the employer). Pensionable pay will be defined by the employer. It will be the pay that pension contributions are based on – this must be at least basic pay. The employer can decide whether to add other earnings 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 and ‘micro’ employers. There will be certain restrictions applying to NEST: there will be a general ban on transfers in or out (to be reviewed in 2017); there will be an upper contribution limit (currently £3,600 each year); limited retirement options; limited investment options. 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. Full details of every staging date can be found on the Pensions Regulator website at http://www.thepensionsregulator.gov.uk/pensions-reform/duty-dates-timeline.aspx.Author: Emma Glover (emma.glover@rowlandsaccountants.co.uk)