There are still many business owners asking me what the pensions Automatic Enrolment legislation means for them. So for those who need a whistle stop tour of the main headlines I have produced a FAQ below.
Back in 2006 the Department of Work and Pensions’ research estimated that around 7 million people were not saving enough for their retirement needs.
To increase private provision for low/medium earners the Pension Act 2008 introduced workplace pension reforms effective from October 2012. These pension reforms mean that, eventually, all employers will have to offer a qualifying workplace pension scheme to their workers and that all eligible workers must be automatically enrolled into the chosen scheme.
To understand what is required of employers here are the most frequently asked questions.
What is Auto Enrolment?
It’s the process where an eligible employee is automatically enrolled into their company’s qualifying pension scheme without any action on their part. Under new Government legislation, this is a legal requirement for all UK employers.
Why is Auto Enrolment happening?
A large number of the working population in the UK are not saving enough for retirement or taking advantage of private pension schemes that may be on offer. We are living longer and have an increasing proportion of people of retirement age compared to those of working age. Auto enrolment is a part of a Government initiative to increase private retirement savings.
When is it happening
Auto enrolment began in October 2012. However, to help businesses prepare for the administration changes and costs of auto enrolment, it has been introduced in stages. The larger employers started to auto enrol their employees in 2012 while medium to smaller employers are being phased in over the next 4 years. By February 2018, all employers will have enrolled their employees into a qualifying scheme.
Is everyone being enrolled into a workplace pension?
Employers will have to auto enrol any eligible employee. An eligible employee is anyone aged between 22 and state pension age whose earnings are over the income tax personal allowance (£9,440 a year from 2013/14). There are different rules for staff outside these age and earnings ranges and employers will be required to ‘assess’ the whole workforce and know how and when to act in every circumstance.
How much will have to be paid into the qualifying scheme?
The total minimum contribution will eventually be 8% with the employer having to contribute at least 3%. The difference between what the employer must pay and the overall minimum contribution is made up by the employee plus some tax relief from the Government.
Where will the contributions be invested?
The scheme will need to have a default investment fund available as agreed with the pension provider. This will be used to auto enrol new employees and for those who don’t want to make an alternative investment choice if the scheme offers one.
What if the employer already offer a scheme?
The employer may already offer employees a scheme, but it will need to meet certain criteria to be suitable for auto enrolment. All types of schemes must have the means to auto enrol eligible employees. If the employer doesn’t currently offer any scheme or their current scheme does not meet the criteria then they can either change the current scheme to fit the criteria or set up a new scheme.
The DWP published a progress report in December 2013 on the success or otherwise of auto enrolment. It announced that so far over 2 million individuals had been auto enrolled with less than 10% deciding to opt-out – workers can decide whether to remain in the pension scheme or not. The data also suggests that many small to medium sized businesses are still not certain of their roles and responsibilities and are at risk of non-compliance. Since it can take up to 18 months to design and implement an effective auto enrolment pension solution business owners need to take action early.