Work-Based Pensions

Work-based pensions are being reformed to encourage more people to save for their retirement and many employers are likely to be affected.

At present no-one in the UK is compelled to set up their own personal pension, however from 2012 millions of workers who are not paying into company pension schemes will automatically be enrolled into what the Government has termed ‘qualifying work-based pension schemes’.

Why Change the Current System?
The current pension crisis is regularly reported on and according to youGov there are more than seven million employees across the UK who are not saving enough for their retirement.

The new work-based pension scheme is designed for employees who either don’t have a qualifying pension scheme at work or are looking for a scheme that offers better value than their existing plan. The new work-based pension scheme will mean an individual will automatically get a pension contribution paid in both by themselves and by their employer.

Contract or seasonal workers have usually not been allowed to make contributions, as they are not classed as ‘permanent’ employees. Women who leave work to start a family and then return often missed out on a decent pension too. The new scheme should see these groups finally being given the pension rights they deserve.
People on low earnings will also benefit from the new structure, as charges associated with the new scheme will be kept relatively low.
The Government hopes that these changes will result in more people saving for their retirement.

What are the changes?
Employers must provide a pension scheme for certain members of their workforce from 2012 and they will need to make a contribution towards it. Even if a company already offers pension arrangements for their workers there may be some changes required, as the pension scheme provided must meet certain conditions based on the level of contributions paid or the benefits received.

At present employees can decide whether or not to join a company pension, whereas after 2012 all employees will automatically be enrolled into a work-based scheme. If they do not wish to contribute they will have to put in a written request to opt out of the scheme. 

When do the changes come into effect?
Each employer will be given a date, known as their staging date, from which the changes will have to be in place.

• The first staging dates will be in October 2012 and will continue through to 2016.
• These staging dates will be broadly based on the number of people in the PAYE scheme.
• Employers with the largest number of workers will have the earliest staging dates. The smallest employers will have later staging dates starting from 2014.
• Employers can set up pension arrangements for their workers at any time and don’t have to wait until automatic enrolment is introduced in 2012.

What will employers have to do?
Employers will have to automatically enrol their eligible employees into a qualifying pension scheme and make an employer contribution towards it. Employers will also have to register their scheme with the Pensions Regulator and provide them with details of the scheme and the number of people that they have automatically enrolled

Employers must not

• Encourage workers to opt out of the qualifying pension scheme.
• Have recruitment practices that will benefit job applicants who indicate they are prepared to opt out or
• Treat a worker unfairly or put them at a disadvantage because of automatic enrolment.

What contributions will Employers have to make?
Employers must contribute at least 3 per cent of a worker’s earnings, although they can choose to pay more if they wish. Employees will get tax relief on their contribution and the total combined contribution must be a minimum of 8 per cent of their earnings. There are different rules for defined benefit schemes i.e. final salary schemes. When working out contributions, employers do not need to consider any amount the employee earns above the upper earnings threshold. Contribution levels will be phased in from 2010 and the 8% mark will not be reached until 2017.

How will employers know if their scheme is a qualifying scheme?
Many occupational and group personal pension schemes will qualify if minimum contributions are made or it provides a minimum rate at which benefits will build up. Even if it doesn’t qualify at the moment, they may be able to change the scheme rules or amend the terms of the policy so that they will be able to use it by the time the staging date comes around.

Monahans Financial Services can provide employers with an audit report detailing where they are now, where you have to get to and the costs involved.

For more information on Work–Based pension schemes or assistance in setting up a suitable scheme, please contact us here.

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