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Nest – Pension Legislation 2012
From October 2012, the Government is introducing new laws. These laws will require every UK employer to have a workplace pension scheme in place for their employees and pay contributions for any employees who do not opt out of the pension scheme. This brief summary will give you an overview of how these changes will impact on your business and what you can do
Why do pensions need reform?
Our nation’s (and indeed the world’s) demographics provides the answer to this question. In the future, there will be less people of working age supporting more people in retirement through tax and national insurance contributions. As well as this, people are living longer lives. Almost half of the current working population are not saving, or are not saving enough for retirement1. If nothing is done, all this will put the state pension system and future taxpayers under tremendous pressure.
How much pressure? In 2006/2007, it is estimated that the cost of providing state benefits to pensioners (including pensions and other benefits such as council tax benefit) was £84.5bn. This is projected to increase by 2035/2036 to a staggering £189.1bn.
The three pillars of pension reform
There are three pillars of reform that have been introduced by the Pensions Acts 2007 and 2008.
First of all, the basic state pension is changing. It will be paid later so that it will be paid to less people, be paid for less time and therefore be more affordable.
Next, the second state pension (S2P) will be changed over the next few decades to make it fairer for the lower paid.
The third pillar of pension reform, designed to encourage private pension saving, comes in the shape of the new employer duties.
The employer duties
The Pensions Act 2008 will place new duties on employers to automatically enrol workers on the day they become eligible into a ‘Qualifying Workplace Pension Scheme’ (QWPS). Workers can then opt out of the QWPS if they want to, but if they don’t, the employer must pay at least 3% of a band of earnings into the QWPS. Workers can then be required to pay 5% of a band of earnings into the QWPS as well, bringing the total payments to 8% of band earnings.
As well as the requirements to automatically enrol workers into a QWPS and make payments into it, employers will have other duties imposed on them by the Act. For example, they must give information to workers about pension saving, make sure that they operate automatic enrolment properly, handle any opt outs and make any refunds within specific timescales set out in the Act and reenrol any workers who opt out on a 3 year rolling basis for as long as the worker continues in their employ. Employers who fail to comply with any of their duties under the Act can face penalties of up to £50,000. And ultimately, employers who wilfully fail to comply can be sent to prison for up to two years.
When will it happen?
The employer duties will be staged over no less than 43 dates from October 2012 to September 2016. Larger employers will be staged in first, smaller employers last. Employers with less than 50 employees will be staged according to the last two characters of their PAYE scheme reference number from July 2014 to February 2016.
The required payments will also be phased in:
Up to September 2016: 1% employer, 1% worker
October 2016-September 2017: 2% employer, 3% worker
From October 2017: 3% employer, 5% worker
Every UK employer should be considering how the new duties will impact on their business, for example:
- Is there a suitable pension scheme in place?
- How will the costs be absorbed in the business?
- Are HR and payroll processes geared up to deal with the administration burden?
- Will the costs associated with the duties impact on expansion/takeover/merger plans?
- Have the costs been taken into account in financial projections?
The answers to these questions will be different for every employer. Seeking tailored professional advice now will be key to being properly prepared.