The Government estimates that about seven million people are not currently saving enough for their retirement, and as a result has put the onus on employers to help encourage their employees to save. Between 2012 and 2016 all employers have to automatically enrol all eligible employees into a qualifying pension scheme and make contributions to their plan.
The legislation has been introduced in a staged process, dependant on the size of the employer and type of scheme. The ‘Staging Date’ for each employer is based on the number of employees as at 1 April 2012 with the largest companies (supermarkets, coffee chains, etc) having had to comply with the new legislation from October 2012.
It may be possible for an employer to use your existing pension scheme to meet the new requirements, however, it will have to meet certain qualifying criteria:
- The scheme must permit automatic enrolment
- The Employee must be automatically enrolled within 3 months of joining the company (but they can opt-in before this waiting period is over)
- A default investment fund must be offered
- Delivers a minimum contribution rate (at the end of the contribution phasing in period – October 2018) of 3% of Qualifying Earnings for employers, and 5% from employees (which includes tax relief)
These changes raise a number of specific issues which could have a financial impact on a business (depending on how aligned the existing scheme is to meeting the new requirements):
- The minimum contribution rate may be higher than is currently being paid and may be calculated on a different basis
- It is likely that Auto-Enrolment will substantially increase the membership of many pension schemes and thus the cost to the employer
- There is an optional waiting period of up to 3 months before an employee needs to be automatically enrolled into a qualifying pension. Employees can, however, opt in during this period
- Who is going to manage the implementation of Auto-Enrolment and ensure that it ticks all of the compliance boxes at the Staging Date as well as the ongoing governance of the scheme from the Pension Regulators point of view?
The pension market is already being flooded with enquiries from companies that need to prepare for their staging date and many pension providers are already sighting capacity issues and have started to ‘cherry pick’ the companies they want to deal with and the terms that they offer. A complete contrast to this time last year when they were all competing very aggressively with each other to win a new scheme.
Although the legislation may not affect you in the next 6, or even 12 months, now is the time to start making preparations for changes, as it is very likely that many employers will be affected by at least one of the impacts listed above. It’s an old adage but it definitely works…Fail to prepare, prepare to Fail!
Finally, the Pension Regulator will be responsible for ensuring that employers comply with the legislation. Although they will focus on education rather than imposing penalties, they do have the powers to take action against employers who fail to carry out their duties. Fixed and escalating penalties can and will be enforced for non compliance. This is not Stakeholder legislation all over again…this legislation has teeth!
Tom Austin is an IFA looking after corporate clients at Finch Financial Services, part of the Finch Group, and provides cashflow modelling, investment and tax planning, and retirement planning. Finch and K&H refer their clients to each other – but only where appropriate, and where helpful to the client.