From 2012, the UK is facing a major pensions reform. Image courtesy of: sxc.hu
The Pensions Act 2008
set out a radical reform of occupational pensions, requiring every employer to enrol automatically their employees into a qualifying pension scheme, if they are not already in one, and contribute to that pension. These reforms will be introduced over a period of four years, starting from 2012. From October 1, enrolment in a company pension scheme will become an opt-out process for eligible employees in the UK, which marks a step-change in the way that pension schemes are administered in the workplace. It is hoped that this change in legislation will overcome the current poor take-up of company pension schemes.
The pension scheme used will be entirely down to the individual employer, but each qualifying scheme will have to meet minimum criteria in regards to what contributions are paid towards it and what the resultant benefits will be.
The scheme will require employers to:
- Enrol eligible workers into a qualifying workplace pension arrangement
- Choose the qualifying scheme(s) they adopt to discharge the newly arising duty; and either:
a) Make a minimum 3 percent contribution towards a defined contribution scheme (based on qualifying pensionable earnings) or NEST
(the National Employment Savings Trust); or
b) Offer the employee membership of a defined benefit scheme or certain hybrid scheme, which either has a contracting out statement or meets the test scheme standard.
Any employee aged between 22 and state pension age and earning above the income tax personal allowance (£7,475 in 2011/12) is eligible for the new scheme. Contributions will be payable on earnings between £5,035 and £33,540.
Employers will also have an ongoing duty to maintain qualifying pension provision for workers who:
- Are already members of qualifying schemes; or
- Become members of such schemes.
Despite new duties being rolled out from October 1, 2012, duties for individual employers will be
Employer size AE duty date
250 or more members 1 Oct 2012 1 Feb 2014
50 to 249 members 1 April 2014 1 Apr 2015
30 to 49 members 1 Aug 2015 1 Oct 2015
Less than 30 members 1 Jan 2016 1 Apr 2017
Employers w/o PAYE schemes 1 Apr 2017 -
gradually introduced over the following years and will be based on the size of the employer, dependent on the company’s PAYE size.
When a new employee joins a company – or an existing one becomes eligible – there will be a three-month period, during which the employee can decide whether to opt out or not. During this period, workers can choose to opt in and start paying in immediately.
Automatic enrolment will begin in October 2012. All existing firms will have enrolled their staff by April 2017, followed by all new employers by February 2018.
Where a worker is automatically enrolled in a defined contribution
(DC) scheme or NEST, there will be a minimum contribution of 8 percent of qualifying earnings, of which the employer must pay a minimum of 3 percent. If the employer chooses to pay the minimum 3 percent, the worker will pay 4 percent, with a further 1 percent paid as tax relief by the government. (Qualifying earnings is earnings between £5,035 and £33,540).
However, these minimum contribution levels will be phased in between October 2012 and October 2018.
- October 2012 to September 2016 - total minimum of 2 percent of qualifying earnings with at least 1 percent from the employer.
- October 2017 to September 2017 - total minimum of 5 percent of qualifying earnings, with at least 2 percent from the employer.
- From October 2018, total minimum of 8 percent of qualifying earnings, with at least 3 percent from the employer
Employees do not have to remain in the pension scheme. They have one month to opt out from the day they officially become a member of the scheme. Any payments into the pension pot made during this time will be refunded.
Following this opt-out period, the employee can choose to leave the scheme whenever they wish. However, the payments already made will not be refunded and will remain in their pension.
Workers who have opted out or left the pension scheme may re-join at a later date if they wish.
Employers will also have a duty to automatically enrol workers back into the scheme approximately every three years, so long as the employee meets the criteria given above. This is to give those who have left the scheme the opportunity to reconsider.