The 2003–2005 Pension Commission reviewed the UK pension system and concluded that:
i. up to 12 million people were not saving enough to provide for their retirement,
ii. the State Pension could not meet the financial commitment of an increasing and ageing population, and
iii. taking no action would lead to an unaffordable burden on future generations of taxpayers.
As well as recommending a review of the State Pension system - to provide a fairer and more generous approach to State Retirement Income - the Pension Commission highlighted the following action points:
- a system of automatic enrolment into a pension scheme to encourage people to save for their retirement;
- a minimum contribution from employers to a pension scheme for their employees;
- the introduction of a simple, low cost pension scheme aimed at low to moderately paid employees who do not have the opportunity to become a member of an employer sponsored pension scheme.
New rules based on these findings will now require all employers to provide “workplace pensions” for their “eligible” employees. This is compulsory and the Pensions Regulator has power to impose significant fines on employers which do not comply. The new employer duties will be introduced in stages over four years, commencing on 1 October 2012. Each employer will be allocated a date when the rules will first apply to them and this will be known as their ‘staging date’ - employers with the largest numbers of workers will have the earliest staging dates. Employers will need to:
- Examine any existing employer sponsored pension scheme to determine if it is a “qualifying” arrangement, as certain requirements must be met and the scheme must be suitable for automatic enrolment.
- Assess their workforce and provide employees with certain information, which will be identified by this assessment. In particular, they should find out whether they are likely to have an automatic enrolment duty, as this will necessitate preparation.
One of the schemes whereby employers can fulfil their duties under the workplace reforms is the new National Employment Savings Trust (“NEST”). This is a simple and low cost pension scheme designed to give its members an easy way of building up a fund for retirement.
- Automatically enrol “eligible employees” into a pension scheme – these include those:
- Aged between 22 and state pension age
- Working, or ordinarily working, in the UK
- Earning above a certain amount .
- Make contributions on their workers’ behalf – these are based on “qualifying earnings”. Individuals who earn a minimum qualifying salary of £7,336 per annum will have their pension contributions based on “banded” earnings between £5,715 and £38,185. Qualifying earnings include a worker’s salary, wages, overtime, bonuses and commission, as well as statutory sick, maternity, paternity or adoption pay.
In 2012 the legal minimum will start at 2 per cent of a worker’s qualifying earnings; of this, the employer must pay at least 1 per cent.
The minimum contribution level will rise gradually to 8 per cent in 2017, of which the employer will need to pay at least 3 per cent.
The balance of the contribution is paid by the employee with Income Tax Relief being available.
- Register with The Pensions Regulator and give details of the qualifying scheme and the number of people automatically enrolled.
- Provide workers with certain information about the changes and how they will affect them.
- Tell all eligible jobholders that they have been automatically enrolled and they have the right to opt out if they want.
For more information and advice on setting up a NEST scheme contact Mike Cracknell or another member of our Financial Services Team on 01206 217614 or firstname.lastname@example.org