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From October 2012 the process commences whereby employees will start to be enrolled in a pension scheme automatically by their employer. This could affect up to 10 million employees and between 2012 and 2017, every employer, no matter how small, will have to implement a staff pension scheme or face tough penalties for non-compliance.
According to research by the Chartered Institute of Personnel and Development, less than one third of small firms know their ‘staging date’ - the date by when employers should have implemented a scheme and after which they could be prosecuted if they have failed to do so.
Employers expecting auto-enrolment to involve nothing more than some additional administration are in for a rude awakening, as the legislation is complex and has wide implications.
Here are some basics:
• Auto enrolment will cover all employees aged 22 or over, or, if younger, those earning more than £8,105 a year and not already enrolled in a qualifying scheme.
• From October 2018 a minimum contribution of 8% of ‘banded’ earnings will be required. This will comprise 5% from the employee (4% plus 1% from the government in tax relief) and 3% from the employer.
In addition to the financial commitment, employers also need to consider the administrative side of auto-enrolment and how to comply with the reporting requirements.
The significance of selecting a suitable administration tool should not be underestimated, as every new employee triggers a new enrolment and any employees who opt out have to be offered re-enrolment every three years.
Working through this complex legislation and figuring out how to comply will be a big challenge for employers, especially for smaller organizations that don’t have in-house support.
The good news is that major pension providers and employee benefits consultancies are gearing up to provide support and have created modeling which will help employers work out the impact of the legislation along with their ongoing obligations.
Additionally, the Government has set up the National Employment Savings Trust (NEST), which will be the ‘default’ scheme in the absence of a qualifying arrangement. Employers who already offer a pension scheme will also need to consider whether this should be rolled out in addition to their existing arrangements, as the obligation is to offer access to a pension to all new and existing employees. Employers therefore need to select their pension provider carefully, although NEST itself is a viable low cost arrangement, albeit with just five investment fund choices.
Offering a decent pension has often proven to make sound business sense, in terms of staff retention and motivation. Research reveals that pensions are still the most valued employee benefit, as confirmed most recently in surveys by Aegon/Edinburgh Business School and YouGov.
Auto Enrolment will bring compulsion to pension contributions which did not previously exist and I strongly recommend that employers start thinking carefully about their strategy well ahead of their staging date, which will fall between October 2012 and February 2014 depending upon the number of employees they have. Full details are provided via The Pensions Regulator via their website at: www.thepensionsregulator.gov.uk
Investment values can fall as well as rise and you may get back less than you invest. Past performance is not a reliable indicator of future results.
Financial Planning Consultant
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