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Pensions and auto enrolment ? prepare for changes

Businesses are making preparations for new requirements that mean all employers in Great Britain must automatically enrol eligible jobholders in a pension scheme from a future date after October 2012.  Under a four-year staging process, employers must either use their own qualifying pension scheme or the National Employment Savings Trust (NEST).

New laws coming into force in October 2012 will require employers to automatically enrol eligible jobholders into a pension scheme.  Here we describe the key points that companies need to consider.

Implementing the reforms

The new duties will apply to all employers in Great Britain and will be formally implemented over four years starting on 1 October 2012, with larger employers being affected before smaller employers and new businesses.  The initial wave of employers will be able to voluntarily start auto-enrolment as early as July 2012.  Starting with employers with over 120,000 employees and working its way down to all employers no matter how few employees by 2016.

From the date the employer duties apply – referred to as the “staging date” – an employer must arrange for all eligible jobholders to be automatically enrolled in a qualifying pension scheme (though it can impose a three-month waiting period for new jobholders).  It can use its existing occupational or personal pension scheme if it meets certain quality requirements or enrol jobholders in NEST, the central government-established scheme.

Eligibility requirements and using NEST

To be eligible for auto-enrolment, a jobholder must be between age 22 and state pension age and must earn at least £7,475 a year (in 2011/12 terms): this starting point corresponds to the income tax personal allowance. “Jobholders” include permanent and temporary employees and agency workers.  Non-executive directors are not included.

If an employer auto-enrols its eligible jobholders in a qualifying scheme, it must pay contributions of 3% of band earnings each year, although this requirement will be phased in over five years.  The qualifying earnings band was originally due to cover earnings between £5,035 and £33,540 in 2006/07 prices, but the lower end of the band is likely to be changed so it corresponds roughly to the lower earnings limit (£5,304 in 2011/12).  Jobholders will be required to contribute 5% of band earnings, again to be phased in over five years.

There will be an annual limit on contributions (£4,200 in 2011/12 prices), but this is due to be abolished in 2017.

Opting out and opting in

Jobholders who have been automatically enrolled will have a statutory right to opt out of whichever scheme they have joined, within prescribed time limits.  Jobholders who have opted out will be automatically re-enrolled every three years during a six-month window.  Jobholders who are not automatically enrolled (for example, because they earn less than the earnings trigger or they opted out or are aged under 22) can opt in by giving their employer notice requiring the employer to arrange for them to join an automatic enrolment scheme but they can only do this once in a 12-month period.  Individuals earning less than the lower end of the qualifying earnings band can opt into a pension scheme too, but will not be entitled to receive any employer contributions.

Enforcing compliance

Employers will not be allowed to induce jobholders to opt out of scheme membership or make job offers conditional on opting out.

The Pensions Regulator will police employer compliance and has issued detailed guidance.  Some of its functions will be delegated to the private sector.  Employers that breach the new duties will face compliance notices and penalties that vary according to the employer’s size.  Large employers that do not comply could be liable for escalating penalties of £10,000 a day.  Criminal penalties could apply in the case of “wilful” failure to comply.