Thanks to betterment in living standards, technology and radical advances in healthcare, we are all living longer. That is the good news. The bad news is that with great expectations of pensions, yet poorer returns, investors may well be very disappointed with life in old age.
According to the UK’s Office for National Statistics, males born in the UK in 1985 had a life expectancy of 86 years. By 2013, that life expectancy had risen to 91 years and is projected to not be far off 94 years by 2035.
The problems created by the interaction of longevity and the state rolling back what it can pay for means that the government is forcing the employer and employee pension relationship to change.
According to Heather Chandler, a partner in the pensions team at Shoosmiths LLP, the government has, for some time, been concerned that people are not saving enough for their retirement. ‘The government has therefore moved from the concept of employees choosing to join a pension scheme to one of automatic enrolment.
‘Since October 2012, larger businesses have been required to automatically enrol eligible employees into a pension scheme and pay a minimum level of pension contributions for each employee. By February 2018, every employer, no matter how small, will be subject to the same obligations,’ says Chandler.
Graham Vidler, director of communications and engagement at the National Employment Savings Trust (NEST), a low-cost pensions auto-enroller run by the government, echoes Chandler’s comments. ‘Workplace pension law has changed, which means employers need to give their workers access to a workplace pension scheme that meets certain legal standards,’ says Vidler.
He reckons that over the next five years, more than 1.2 million employers and up to 11 million workers will be automatically enrolled into a pension scheme.
‘Generally speaking,’ says Chandler, ‘employers with between 50 and 249 employees will have staging dates (to join auto-enrolment) between April 2014 and April 2015. Employers with fewer than 50 employees will be subject to the requirements between April 2015 and April 2017. New businesses have staging dates at the end of the timetable.’
There is one saving grace – practices can use a three-month postponement period to avoid automatically enrolling employees who leave the business shortly after joining (such as temporary workers). This should also help practices align their obligations with existing administrative and payroll processes.
The Pensions Regulator will notify every business of its staging dates. Following their staging date, businesses must register with the regulator. Penalties follow from non-compliance.
Not everyone is covered
Those covered by the auto-enrolment legislation include permanent, fixed-term and temporary employees, as well as agency workers. Self-employed individuals will not be subject to the requirements. Employees already enrolled into a qualifying scheme through their workplace will remain in that scheme and the duty of auto-enrolment will not apply in respect of them.
Vidler says that only practices that trade as a sole trader and who do not employ anybody else, are unaffected by the changes. ‘However,’ he adds, ‘sole traders may decide to take advantage of a scheme like NEST so that they can put something away for the future while getting tax relief.’
Chandler says workers fall into different categories depending on age and earnings, and the obligations on employers differ accordingly. ‘Employees aged between 22 and the state pension age, who earn over the income tax threshold (£9,440 in the 2013/2014 tax year), are “eligible jobholders” who must be automatically enrolled into a scheme at the staging date (or on later joining the business). The employer is required to pay contributions into the pension scheme in respect of these employees.’
‘However,’ Chandler points out, ‘those earning below the income tax threshold but above the lower earnings limit, and those earning above the lower earnings limit but who do not meet the age criteria, will be able to opt into the scheme should they wish, and the employer must also pay contributions for these employees if they do opt in.’
She adds that practices need to be aware of their obligation to provide certain information to all employees.
For employees earning under the lower earnings limit, there is no requirement on the employer to contribute, but it must arrange access to a pension scheme and facilitate employee contributions (say through existing payroll systems) if the employee requests.
Clearly, there will be some employees that, for whatever reason, do not want to be part of a practice automatic enrolment pension scheme. For them, the process demands that they must first be automatically enrolled into the scheme before being allowed to opt out. They must then be automatically re-enrolled every three years.
Finding a scheme to join
With the background established, the question turns to the pragmatic implementation of the new system and there are a number of options available.
A practice can use: an existing personal or occupational pension scheme if it meets certain statutory requirements; set up a new scheme; or enrol employees in NEST.
Vidler explains that the government set up NEST specifically for automatic enrolment and operates on a not-for-profit basis.
Previously, many small businesses will have been subject to the requirement to provide access for staff to a stakeholder pension scheme. This requirement has now been removed, although employers may continue to use existing stakeholder schemes for auto-enrolment purposes if they meet certain quality requirements.
Chandler says: ‘If businesses want to use an existing scheme, they should check the regulator’s guidance or seek legal advice on whether it meets the quality requirements.’ The guidance is available online at http://bit.ly/1etn3fY
What to do next?
• Practices must identify their staging date (the Pensions Regulator will write 12 months beforehand)
• Review the workforce to identify categories of employees and the duties owed to each
• Make additional checks on any contractors or agency staff – do they fall within the requirements?
• Decide what sort of scheme the practice will operate. If an existing scheme is to be used, make sure it meets the necessary demands, making changes if required
• Take advice as appropriate and make use of free resources such as the Pensions Regulator’s website www.thepensionsregulator.gov.uk
• If a new scheme is required, review pension provider options. Be aware that providers will be inundated with small businesses as they hit their staging dates, so build in plenty of time to work within their timescales
• Discuss with payroll providers how the changes can be made within existing systems
• Budget for the increased cost of paying employee contributions
• Prepare employee communications (visit the Pensions Regulator’s website for template documents)
• Keep records to prove compliance with auto-enrolment duties
• Note that the auto-enrolment requirements continue beyond the initial staging date – new members of staff will need to be auto-enrolled on joining employment, and existing staff may fall within the requirements on a change in age or earnings
• Use software wherever possible to automate the monitoring process.
Regardless of the type of scheme chosen, employers must make minimum contributions into the scheme in respect of each employee. These minimum contributions are being phased in gradually but, by 2018, a total of 8% of an employee’s qualifying earnings over a 12-month period must be paid in – at least 3% of which must come from the employer and 1% from tax relief. Naturally, there are costs for the administration of pensions and charges that will involve a percentage of each contribution and annual management fees for employers who use NEST – other pension providers will also impose charges. ‘For smaller employers, the comparative costs of automatic enrolment could be substantial and will need to be budgeted for,’ Chandler warns.
Chandler is keen to stress that there are certain safeguards imposed by the legislation to protect employees. She adds: ‘Businesses must not encourage employees to opt out of a scheme and must not treat workers unfairly, or dismiss them for a reason relating to membership of an auto-enrolment scheme.
‘In addition, businesses must not screen job applicants on the basis of how likely they are to opt in or out of the pension scheme.’ The warnings are clear.
All businesses, but especially small businesses, will need to make various changes in order to deal with the introduction of the auto-enrolment legislation. From experience, Chandler says: ‘Administrative tasks will need to be allocated, with valuable staff time devoted to the issue, third party providers approached, systems changed and extra costs budgeted for.’ She says that taking action sooner rather than later will ensure a business is well prepared for a smooth transition when the time comes to enrol staff.
Vidler says that time is of the essence, adding: ‘The largest employers took around a year to get ready for automatic enrolment. Clearly, they had more workers to enrol but they were also more likely to have an in-house specialist team who were able to help. With dedicated HR, payroll, communications, IT and pension specialists, they had a head-start that some smaller employers may not have.’ He is recommending nine to 12 months to make sure businesses meet their new legal duties.
Practices would be well advised to plan ahead to ensure that their systems can cope with the changes, and to allow time to work with pension providers that may impose their own conditions or timescales, or may decline further business at some point before 2018. The Pensions Regulator suggests businesses allow 12-18 months to prepare for auto-enrolment.
Ignorance is not bliss
For businesses that get it wrong, the Pensions Regulator will generally work with them to ensure compliance.
‘However, ignorance of the duties is no defence and can result in a statutory notice directing businesses to comply,’ Chandler points out.
She adds that there is a fixed penalty of £400 for non-compliance with the statutory notice and there are other financial penalties, including escalating penalty notices of £50 to £10,000 a day, depending on employee numbers.
She says: ‘The regulator has stated that it will pursue penalties through the courts if necessary and will prosecute employers for deliberate and wilful failure to comply.’
Adam Bernstein is the director of Adam Bernstein Limited.