Pension reform 2012, good idea?

2012 will not only be a landmark year in the UK with the arrival of the summer Olympics. From October of that year, all employers will be faced with a raft of new employer duties connected to pension reform.

Included in those duties is, for the first time in the history of UK pensions, the requirement for employers to automatically enrol millions of eligible employees in to a qualifying workplace pension scheme (QWPS).

This is a major change to UK pensions. The Government has estimated that some 7 million people are either not saving enough or not saving at all for their retirement. To deliver their aims, the Government is placing the onus on employers to help in encouraging more people to save.

And don’t have the false sense of security that an election and change of Government will make automatic enrolment an irrelevance. The Pensions Act 2008 is on the statute book and it has wide cross-party support.

The key issues are:

* Employers must auto-enrol all jobholders in a pension scheme if they are aged between 22 and state pension age and earn more than £5,035
* A contribution of 8% ‘band earnings’ must be paid with the employer paying at least 3% - band earnings are between £5,035 and £33,540 (in 2006/2007 terms) – these contributions will be phased in from October 2012 with ‘large’ employers having to comply first – see below for more details
* Jobholders can opt-out of the scheme if they so wish
* Employers must re-enrol jobholders who choose to opt out at least every three years
* Employers can choose to use a good quality private scheme, a National Employment Savings Trust or a combination of the two

It will be possible to gain an exemption from a National Employment Savings Trust if you offer a QWPS that meets the following criteria:

* The scheme permits auto-enrolment
* Has a minimum contribution rate of 8% (including at least 3% from the company)
* Has a default investment fund

Auto-enrolment is a major issue. Under current legislation, employees cannot be auto-enrolled into a group personal pension or group stakeholder pension scheme. But this will be amended by 2012.

Research has shown that auto-enrolment is one of the most effective ways of triggering pension scheme membership and contribution. So it is highly likely that your business will incur significant additional costs in 2012. The increase will be much higher for those employers who do not currently offer a company pension scheme or who do not contribute to it for their employees.

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Great, as if the cost and red tape of employing people wan't enough for small businesses to bear. Haven't seen this, but assume there is a caveat for small businesses?

Think current one is if over 5 employee's, then you need to offer pension advice, is it this thats changing, or is it any number of employees?

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Yes, this will be another burden for smaller business and organisations like charities who have both suffered in recent times. Is 2012 set in stone? I would imagine it was conceived pre-recession.

bjn

I'll post up additions to further advise. From the way I see it, if you have just one employee then you will be afflicted,,affected not afflicted...then again.

Mike


Automatic Enrolment – now and after 2012

The Government’s pension reforms will introduce numerous new pension rules from 2012. Prime amongst them is the necessity for an employer to contribute to a pension for their employees for the first time and also the introduction of automatic enrolment.
What does automatic enrolment actually mean?

Auto-enrolment (as it will be more commonly known) means that employees will be a member of their employer’s pension scheme unless they actively decide to opt-out. So those that choose to do nothing will stay as members. Additionally, people who opt-out will have to be re-enrolled every three years. Auto-enrolment is likely to significantly increase membership of pension schemes.
Can I use automatic enrolment before 2012?

It depends on what type of pension scheme you have. If the scheme is an occupational pension scheme, then you are able to auto-enrol employees before 2012. However, if the scheme is what as known as a contract-based scheme – such as a group personal pension, group stakeholder pension or group self invested personal pension – then you can’t.

This is because of two European directives. The Distance Marketing Directive and the Unfair Commercial Practices Directive are there to protect customers from being misled into signing up for financial services contracts without being given the opportunity to fully consider the contract terms first.

After discussions with the EU, the Government believes automatic enrolment in contract-based schemes is consistent with EU law from 2012 onwards. The new interpretation recognises the difference between an employer sponsored scheme to which the employer contributes (workplace personal pensions) and individual personal pensions which have no employer involvement.
The automatic enrolment process from 2012

The Government's pension reform changes will start to be implemented from October 2012. New regulations confirm when employers will need to automatically enrol workers into a qualifying pension scheme - which depends on their size. The tables below show the exact date (known as the ‘staging date') by which employers must fulfil their responsibilities.

The employer must enrol all qualifying workers - broadly those between age 22 and state pension age who earn above £5,035. Employers can use a good quality private scheme, the new Government-sponsored NEST scheme, or a combination of the two, to fulfil their responsibilities.

Initially contributions need to be at least 2% of a certain band of earnings* with the employer paying at least 1%. From October 2016 this will increase to 5%, with at least 2% from the employer. Finally, from October 2017, 8% will need to be paid with at least 3% from the employer.
*The band of earnings, in 2006/07 earnings terms, are £5,035 to £33,540, and include basic pay, bonus, commission, overtime and statutory payments (such as sick pay and maternity pay). Assuming growth of 3.5% a year, the band limits will be approximately £6,200 and £41,200 in 2012.

Phasing in of Auto-Enrolment Contributions

The Government’s plans for employers to auto-enrol eligible employees into a Qualifying Workplace Pension Scheme (QWPS) are to be phased over a longer period, five years instead of four.

Small employers are not expected to have to auto-enrol before October 2015. This means that the 1% employer contribution will apply until October 2016. Only at that point will the level of required contribution increase. The revised timetable of contributions is expected to be:

* October 2012 to October 2016 – minimum of 2% of qualifying earnings with at least 1% from the employer
* October 2016 to October 2017 – minimum of 5% of qualifying earnings, with at least 2% from the employer
* from October 2017, minimum of 8% of qualifying earnings, with at least 3% from the employer

Further details are expected in January 2012.

Another view;

The pension system in the UK has been subject to constant change for decades; there is nothing unusual about that. But the changes being made by the two most recent Pensions Acts from 2007 and 2008 are surprising even in that context, for their scope and effect. In short, these changes, which are already on the statute books, will affect most businesses in the UK when they come into effect from 2012.

In my experience, very few employers know much about these fundamental changes that will affect them and their businesses, * and that includes FDs, * but that will clearly need to change as we approach the 2012 implementation date.

At the moment, there is no compulsion on employers to run workplace pension schemes for their employees other than the compulsion inherent in the state pension provision through the National Insurance system; the State Second Pension. From 2012 it will be a legal requirement that all employers with ‘eligible’ employees auto-enrol them into a Qualifying Workplace Pension Scheme, or QWPS. Employers will not be able to ignore this as it is part of the ‘duty’ laid on them by the Pensions Act 2008 and there will be heavy fines coming their way if they fail to meet the requirements.

Strangely enough, even though employers will be compelled by law to auto-enrol their eligible employees into funded workplace pension schemes, there will be no compulsion on employees to remain as members of a pension scheme if they do not wish to.

Employees will retain the right to opt out of schemes into which their employers are required to auto-enrol them; a process some employees may go through many times in their working lives as it will also be the duty of employers to re-enrol such opt-outs at three-yearly intervals.

Employees who choose to remain in the workplace pension schemes into which they are auto-enrolled will, after an initial phasing period, be required to contribute 5% of a band of earnings called qualifying earnings into the scheme, with the employer required to add a further 3% of qualifying earnings * again after a period of phasing (the qualifying earnings band is currently set between earnings of £5,035 per annum and £33,540 per annum.) The 5% employee contribution is the gross figure allowing for basic-rate tax relief on the pension contribution; it’s sometimes described as a 4% contribution by the employee and a 1% contribution from the taxman.

It is interesting to note that employees who do opt out, and thus forego the compulsory minimum employer contribution of 3% of their qualifying earnings, may not be recompensed for that loss by their employer. Such a payment to offer parity with those who remain auto-enrolled would be deemed to be an ‘inducement’ for employees to leave a pension scheme, which is something employers absolutely must not be seen to do under the new regime. That rule could have far-reaching effects on existing pension arrangements run on the so-called ‘flex benefit’ basis * a whole other conversation. Indeed, many of the detailed pieces of this new legislation will undoubtably lead to potential changes to existing workplace pension practices and look set to make the years in the run-up to 2012 very interesting years indeed.

The existing pension arrangement that will be replaced by these new employer-sponsored workplace pension schemes is the State Second Pension, or S2P. For decades, the state has provided earnings-related workplace pensions for employees in return for earnings-related National Insurance contributions levied on both employees and employers. It is worth noting, however, that workplace pension saving after 2012 will be voluntary as far as employees who can opt out of workplace schemes will be concerned.

The opposite is the case today. Since 1961 when the first State Second Pension, called the graduated pension, was introduced, workplace pension provision for all employees earning above a minimum level has been compulsory; it has not generally been possible to elect to not pay National Insurance contributions.

The graduated scheme, the State Earnings-Related Pension Scheme (Serps) and their modern equivalent S2P were pay-as-you-go schemes run by the state using the National Insurance system and utilising the efficiencies of the Department for Work and Pensions and its predecessors. There has been no national insurance fund as such, but running schemes on a pay-as-you-go basis is quite common elsewhere in Europe. Indeed, many of our public sector pension schemes in the UK are run on just that basis; nothing wrong with that.

What will be different in the future, though, is that the compulsory workplace pension system run by the state is about to be replaced by a voluntary workplace pension system run by employers that will depend on the power of inertia to ensure maximum coverage. My worry is that, by moving from a compulsory system to a voluntary system we will, in effect, end up with fewer employees saving for the future than do so today.

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I might be onto a winner here, since my business idea is centred around providing admin support for businesses who - for whatever reason - do not want actual PAYE permanent employees.

Although I will of course be stuffed if my business becomes such a success that I need to take on staff myself...

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Its interesting, with the amount of red tape floating around when taking on employee's, it's a wonder anyone still does.

So after you take on Matilda who is 18 and full of attitude, (because respect and discipline have disapeared from the school classroom), train her up at your expense, (having to teach her basic office etiquette and common sense), she clears off at 19 to have her first sprog, but you have to keep her job open.

She comes back, (part time), then gets up the duff again. Comes back again, then claims back all her missed holiday while away on maternity, you then have to give her pension contributions

ahh good old UK PLC

Maybe we could recruit people over 60/65? Do you still have to pay pension contributions then I wonder?

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