The arrival of pension auto-enrolment obligations is imminent.
The largest employers are obliged to enrol workers and pay pension contributions from October this year with staging dates for smaller employers ranging from 2012 onwards. The regime is designed to get the workforce saving for their own retirement but it will be an additional cost for employers at a diffi cult time and may be a cost employees are unwilling to accept. Employers must first classify their workforce as jobholders or entitled workers. Enrolment obligations arise automatically in relation to eligible jobholders but there are also obligations in respect of other workers and the provision of information to the entire workforce will be an important step in ensuring compliance.
Unlike the stakeholder regime, employers and employees are obliged to make contributions to an appropriate scheme, namely the National Employment Savings Trust “NEST” (Government default scheme) or an existing “qualifying scheme”. A minimum of 8% of qualifying earnings will eventually be paid in to defi ned contribution schemes, after a phased increase, with employers paying a minimum of 3%. Where the employer pays the minimum 3%, the employee must pay in 4% with a further 1% paid in as tax relief.
Employees may elect to opt out of autoenrolment but employers should be careful not to encourage or incentivise this in breach of their obligations. In the current economic climate, 4% contributions to pension savings might be aspirational but not achievable. A DWP research paper from July 2010 highlights the issue. When asked about barriers to pension provision small employers reported that workers did not want a pension scheme if they had to contribute to it i.e. they did not want to give up part of their salary in order to save for the future.
Employers may use the reforms as an opportunity to review and reduce existing pension provision. Using NEST might save on administration and result in a reduction of contributions to the minimum 3%. Where an existing employer scheme is nominated it might be amended to reduce future benefi ts – although this would trigger worker consultation obligations. It remains to be seen what will happen in practice.
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