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At the core of the Government's workplace pension reforms is a requirement for employers to automatically enrol all eligible employees in a qualifying pension scheme within a strict timescale and without the employee having to provide any information or make any choice as to whether to join or not.
Does every employee have to be automatically enrolled?
Employees between the age of 22 and the State retirement age, earning at least £7,475 (or the prevailing PAYE threshold) must be automatically enrolled into a qualifying pension scheme. Anyone earning less than £7,475 will not be forced to enrol.
However, those earning between £5,715 (currently lower National Insurance threshold) and £7,475 will be allowed to opt in and the employer will not be required to make a contribution, but may choose to do so. Employees aged between 16 and 22 years or between State Pension Age and 75 years, who are earning more than £7,475 will be able to opt in and will get employer contributions if they do.
The self employed and sole trader directors would not be automatically enrolled, however, they can join on a voluntary basis. Employers will be required to register how they intend to meet their enrolment duties, for each PAYE scheme they run, with The Pensions Regulator. This will be monitored in conjunction with the HMRC.
What if employees don’t want to join?
Eligible employees can independently opt-out of being auto-enrolled but, if they do, they will periodically go through an automatic re-enrolment process. Automatic enrolment is designed to overcome the inertia that currently prevents many people from saving and is intended to make it easy for individuals to save for retirement.
When will this happen?
It will be rolled out over a period of four years beginning October 2012. All employers will need to designate a qualifying pension scheme into which all of their eligible employees will be automatically enrolled. Existing money purchase and personal pension schemes need to ensure their plans meet the qualifying criteria within the first three years from 2012.
In the case of defined benefits (“final salary schemes”) and hybrid pension schemes the transitional period is the four year period to October 2016, by which date, all employers must have complied. The timing is determined by the number of employees in your PAYE system.
Do employers have to automatically enrol new eligible employees immediately?
Employers can choose to operate a waiting period of up to three months before auto-enrolling their employees to cover things like probationary periods. This will also help employers avoid having to automatically enrol short-term employees unnecessarily. But if they do, eligible employees must be told that they can opt-in during this period to benefit from an employer pension contribution sooner.
What steps should employers be thinking of now?
Employers need to build the cost of complying with auto enrolment into future budget projections. This will need to include contribution increases, employees not currently a member of your pension scheme or if you do not already have a workplace pension scheme in place, the cost of implementing a qualifying scheme and/or NEST.
In addition, all employers will need to inform their employees. Keeping employees informed will avoid problems closer to auto enrolment time. An employee who is unaware of the new legislation will certainly be asking why their pay packet is reduced, when pension deductions commence. Misunderstanding and frustration amongst the workforce can be eliminated by effective communication of forthcoming changes.
Mark Richardson is Head of Employee Benefits at Mazars.
If you would like to ask the author a question on this or a related topic email: email@example.com
From October 2012 there will be new legal obligations on employers designed to ensure more employees save for their retirement. Ultimately, every UK employer will be affected.
What are the new legal obligations?
The new obligations require employers to automatically enrol their eligible employees into a pension scheme that meets or exceeds certain legal requirements. Crucially this will mean a minimum amount of money you, as an employer, have to contribute.
These new requirements will be staggered over a four year period from October 2012 depending on the size of the employer. Ultimately by 2017, every employer is required to have complied with the new legal obligations.
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