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Preparing for Auto-enrolment

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Brief Overview

From 2012 all employers with at least one worker in the UK will need to automatically enrol certain members of their workforce into a pension scheme. As an employer you will need to make a contribution to it and ensure that you meet all of the new requirements to comply with the law (even if you already offer pension arrangements for your workers you will still have some new obligations to meet).

When will this affect me?

The new employer duties will be introduced in stages over 4 years starting in 2012. Each employer will be allocated a date from when the changes will first apply to them, known as the “staging date”. The first staging date will be in October 2012 and will continue through to 2016.

Your staging date will be based on the number of people that you have in your PAYE scheme and employers with the largest number of workers will have the earliest staging dates.

The Pensions Regulator will contact you 6-12 months before your staging date but it would be prudent to start looking at the effects this will have on your business sooner rather than later.

To find out what your staging date is likely to be you can visit The Pensions Regulator website at: www.tpr.gov.uk/staging

What employers will need to do to comply with the law

Employers will need to:

  • Automatically enrol certain workers into a pension scheme
  • Provide a qualifying scheme and inform all workers what type of scheme has been chosen
  • Pay employer contributions for eligible jobholders into the scheme
  • Tell all eligible jobholders that they have automatically been enrolled and that they have the right to opt out if they want to do so
  • Provide workers with certain information about the changes and how they will affect them
  • Inform workers that do not fall into the “eligible” category that they can opt in to the pensions scheme
  • Register with The Pensions Regulator and give detail of your qualifying scheme and the number of people that you have automatically enrolled.

Employers must not:

  • Encourage workers to opt out of the qualifying pension scheme
  • Have recruitment practices that will benefit job applicants who indicate they are prepared to opt out
  • Treat a worker unfairly or put them at a disadvantage because of automatic enrolment.

Which employees will I need to automatically enrol?

Workers who need to be automatically enrolled are called "eligible jobholders".

An eligible jobholder is:

  • Aged between 22 and state pension age
  • Working, or ordinarily working in the UK
  • Earning above a certain amount (currently proposed to be £7,475).

To identify if a person is earning above or below the lower earnings limit (£7,475) you will need to include earnings in salary, overtime, commission, bonuses, sick pay, maternity, paternity and adoption pay. This calculation will then give you the workers "qualifying earnings".

It may be possible for employers to defer this assessment – by allowing a "waiting period" of up to 3 months. More guidance on waiting periods will be published by The Pensions Regulator shortly.

What pension characteristics will my scheme be required to have to meet the new legislation?

Employers with an automatic enrolment duty will need to choose a pension scheme they can use for automatic enrolment. You may use an existing scheme or set up a new one with a pension provider. In addition, there is the National Employment Savings Trust (NEST). NEST is a pension scheme with the following characteristics:

  • It has a public service obligation, meaning it must accept all employers who apply
  • It has been established by Government to ensure that employers can access pension saving and comply with their automatic enrolment duties.

Each pension scheme will have its own rules, but all employers will need to provide their scheme with information about the person who is being automatically enrolled. In addition your scheme must:

  • Be able to auto-enrol jobholders within one month of their auto-enrolment date
  • Meet minimum requirements that differ depending upon whether the scheme is a money purchase or final salary arrangement
  • Not require the employee to make any choice about funds in order to be a member
  • Not put any barrier on membership other than a three month waiting or postponement period after the employee first becomes eligible
  • Have a legally binding obligation on the employer to make the necessary minimum contributions (many existing group personal pensions or stakeholder schemes do not have this in place).

If your current scheme does not meet this criteria then you may have to amend your existing scheme or select a new scheme that is compliant such as NEST.

Employers who already have a pension scheme can confirm that it is suitable for automatic enrolment by a process called "certification". The Pension Scheme Regulator will contact you 6-12 months before your staging date to confirm your arrangements.

What should I do now to prepare?

  • Review your current pension arrangements
  • Identify if you have the expertise in house to manage the process or if you require the services of a consultant
  • Identify any potential job holders, job roles or situations where auto-enrolment may not apply
  • Contact your current pension provider to identify if the scheme is going to be auto-enrolment compliant and meet the new legislative criteria
  • Identify budget implications and review the potential for using salary sacrifice to help fund the costs of auto-enrolment
  • Identify when your staging date is likely to be.

More details can be found on the Pension Regulator website www.tpr.gov.uk/staging

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