A seismic shift in pensions is underway, affecting all UK employers and employees. The government is revolutionising workplace pensions, forcing all employers, whether large companies with thousands of workers, or working mothers employing one nanny, to provide pensions for their staff. No ifs, no buts, employers will have to automatically enrol all eligible workers and pay into their pension scheme. Staff can choose to opt out, but only after they have been put in.
With less than half the UK workforce actually paying into a pension fund, the government hopes that once workers are enrolled, inertia will ensure they stay in and millions more will start saving for retirement with help from their employer.
Until now, only firms with over five staff had to offer a pension scheme, and they did not have to contribute at all. But the new pension obligations are really onerous. Employers should start planning 18 months in advance as the new rules are mind-bogglingly difficult. Setting up a scheme, explaining it to staff, enrolling them and paying into it will consume management time.
Indeed, pension contributions are only part of the extra burden facing businesses. The administration and compliance costs will probably come as a terrible shock. The complexities of the auto-enrolment rules are evidenced by the fact that the Pensions Regulator has issued 200 pages of guidance. Even if no workers stay in the scheme, the costs of setting it up will be significant and failure to comply could lead to large fines or criminal prosecution.
Employers must choose a pension scheme which meets approved minimum requirements, with suitable investment options and charges. This can be an employer’s existing scheme, a new pension arrangement, or the government-backed national scheme called NEST.
All employers have a legal auto-enrolment start date. The largest firms are first, with smaller employers starting between 2015 and 2017. All eligible workers (called “eligible jobholders”) must be enrolled into their pension scheme by this “staging date”.
Unfortunately, identifying “eligible jobholders” is not straightforward. Those aged 22 to 65 and earning over a minimum level must be enrolled, and younger, older or lower-earning workers must also be put into the pension scheme if they request it. Contractors and agency workers may also be eligible, if they meet certain criteria.
Employers must deduct pension contributions from all enrolled workers’ earnings and also pay in an employer contribution. Initially the total will be at least two per cent of their earnings between the lower and higher National Insurance thresholds, rising to eight per cent by 2018.
And auto-enrolment is not a one-off exercise. Every month the employer must reassess its workers in case some become newly eligible. Low earners may receive a bonus or extra pay that will lift them above the minimum eligibility threshold. Some may turn 22 and have to be enrolled for the first time. And every three years all workers must be automatically re-enrolled and opt out again if they still don’t want to belong.
It is important to stress that it is illegal to encourage workers to opt out. Offering a pay rise instead of the pension contribution, or suggesting they should not stay in the pension scheme, is against the law. Even flexible benefits systems could be construed as inducements to opt out, so care must be taken with all communications.
Pensions will be a major burden for employers over the next few years and many small and medium-sized firms will struggle with the new rules. Finding advice to help with auto-enrolment could take time to organise, so don’t leave it too late.
Any employer who has not started thinking about auto-enrolment yet, needs to get on with it.
Ros Altmann is a former government policy adviser on pensions.