Nest egg necessities
Social landlords have just a year to prepare for pension reforms. Chris Crichton, solicitor at TLT Solicitors, explains more
From 1 October 2012 all UK employers will be legally required to automatically enroll ‘eligible jobholders’ into a contributory workplace pension scheme, which could result in increased costs and administrative burden.
Between October 2012 and 2016 employers will have their own ‘staging dates’ when their obligations to enroll employees on a qualifying pension scheme will commence. This date will be based broadly on the number of people in an employer’s PAYE scheme, with the largest employers starting first. By this time employees must either be enrolled into the government’s newly created workplace pension scheme - National Employment Savings Trust, or NEST - or their existing pension schemes.
How will it work?
Both employers and eligible employees will have to make mandatory contributions and the contributions payable will be phased in over a period of five years. By 2017, employers must contribute at least 3 per cent, and employees 4 per cent, of that employee’s gross qualifying earnings. This does not include any earnings above the upper earnings threshold (currently £38,185). Qualifying earnings include salary, wages, commission, bonuses, overtime, statutory sick pay and statutory maternity, paternity and adoption pay.
Employers must automatically enroll employees who: earn more than the minimum earnings threshold (currently £7,475); are aged between 22 and state pension age; and work in the UK under a contract. Temporary workers and directors under a service contract are also eligible and agency workers will be considered eligible jobholders if the employer is responsible for paying them.
There is an exemption which permits employers to wait three months before auto-enrolling eligible employees, so employers in the social housing sector with seasonal workers or those on contracts of less than three months duration may not need to automatically enroll those workers.
How should employers prepare?
To prepare for these changes in the law employers need to:
- provide a qualifying scheme for their eligible job holders or check whether or not their current pension scheme meets requirements;
- register the scheme with the Pensions Regulator;
- ascertain their staging date
- consider the impact on payroll costs and ensure payroll is prepared to administer increased or new pension contributions;
- tell employees that they have been enrolled and give them the right to opt out.
The Pensions Regulator will police employer compliance and large employers which do not comply could be liable for escalating penalties of £10,000 a day, with criminal penalties for willful failure to comply.
Employers may be able to take steps to reduce the impact of auto-enrolment by offering certain workers fixed-term contracts of periods no longer than three months. However, given the potential for unwanted employee claims arising from auto-enrolment (such as unfair dismissal or discrimination claims) it is vitally important that employers understand the requirements and ensure that all employee communications and human resources practices are properly compliant.