Paul Leatherbarrow, Liverpool
Pensions Reform are arriving at some stage over the next of couple of years, so now is the time to consider what actions they should be taking to help mitigate any additional costs that may arise. Employers will have to automatically enrol all eligible employees in a qualifying pension scheme, and make compulsory contributions. It is estimated that about 7 million people are not saving enough to give themselves a sufficient retirement income. The Pensions Act 2008 introduced new duties on employers which will require employers to automatically enrol all their workers into a workplace pension scheme that meets or exceeds certain legal requirements. The Government has set up NEST (National Employment Savings Trust) – a new lower cost pension scheme to assist employers with these changes, any employer will be able to access. Many pension experts therefore anticipate NEST schemes replacing the mainly unused Stakeholder Pension Schemes. Who is Eligible? All employees who are aged between 22 and State Pension Age earn more than £7,475 per annum and are not already in a "qualifying pension". In addition, any employee aged 16 or over with earnings of more than £5,720 can ask their employer to be enrolled. What costs are the costs going to be for employers? The aim of the Pensions Reform is eventually to have all employees investing 8% of their "Qualifying Earnings" towards retirement. Of this 8% employers will eventually need to fund 3%. Can employees be asked to opt out? An employer cannot induce or encourage employees to opt out of the new arrangements. Furthermore, from 2012, employers cannot require employees to make any choices, or ask them to provide information to join the scheme. The act also dictates there should be no deferred period before staff joins a scheme, Auto-enrolment also rules out seeking employees' consent to make deductions from pay, which could throw up secondary issues regarding salary sacrifice arrangements on pension contributions. This could be particularly important as some employers will look to such arrangements to offset the increased costs associated with implementing the reforms. One way around this is to reword employees' contracts of employment to establish the principle of salary sacrifice for appropriate salary levels. What if you already have a pension schemes? It is anticipated that virtually all Defined Benefit schemes will meet the new minimum criteria, which is a 1/120th accrual rate as 1/60th or 1/80th rates are typically more common. For those few employers still operating these final salary schemes, time will be provided to phase in employees who were not previously members. The majority of pension schemes available, however, are Defined Contribution (DC) schemes, such as trust-based, group personal pension (GPP) or stakeholder plans. The exemption criteria for DC schemes will largely be based on contribution levels, namely 8% of qualifying earnings of employees. This will be phased in across three tiers, beginning with both employers and employees contributing 1% of qualifying earnings, then employers 2% and employees 3%, and finally employers 3% and employees 5%, inclusive of basic rate tax relief. What if you are a temporary or contract workers? Eligible employees also include agency workers, fixed-term and part-time contract workers, and anyone who undertakes work in Great Britain, whether by written or oral contract. This includes making contributions for workers such as contractors. What about Flexible Benefits? Employers which include pension schemes within a flexible benefits plan will need to ensure that their scheme offers no inducement to opt out nor encourages employees to opt out of the pension scheme. For example, employers that offer staff the choice of flexing out of employer pension contributions to spend the money on other benefits may need to revise this strategy ahead of 2012. So what can businesses do to mitigate these costs? For those employers fortunate enough to be in a position to offer pay increases at any time between now and 2012, structuring part or all of any future pay reward as a company pension contribution would make much sense. An employer who is able to fund 1% into a pension scheme now would also realise savings of 12.8% on contributions compared to making pay rises as no employer’s NIC is due on employer pension contributions. NEST accounts should be available on a voluntary basis from 2011. The information provided is based on our understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.
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