Employers - Act Now to Prepare for NEST Pension Changes From October 2012
The new state sponsored employment-based pension arrangement is called NEST.
This is scheduled to start rolling out to workplaces from October 2012.
Therefore, businesses should start to plan now for this event, since it will definitely affect you at some point over the next few years.
The Government estimates that around seven million people are not saving enough to meet their retirement aspirations.
Therefore the Government is making changes to the pension system which, as an employer, will affect you too.
What do the changes mean for employers? From 2012, employers will be required to automatically enrol all eligible employees into either the National Employers Savings Scheme (NEST) or an alternative 'qualifying' workplace pension and to make minimum contributions into it.
The process will be staged, dependent on employee head count, from 1st October 2012 to 1st September 2016, with large employers being the first to have to take action.
Who will need to be automatically enrolled? All jobholders working in Great Britain aged at least 22 years old who have not yet reached State Pension age and are earning more than £7,475*a year (the income tax threshold at 2011) will need to be automatically enrolled into either an employer's workplace pension or NEST.
*2012 figure to be confirmed.
What is the minimum contribution employers must pay? Under NEST, employers will need to contribute 3% on a band of earnings for eligible jobholders - between the Personal Allowance in 2012 and £33,540 a year ** ** Based on 2006 levels, 2012 figure to be confirmed.
This will be supplemented by the jobholder's own contribution (which will end up at 3%) and around 1% in the form of tax relief.
Overall contributions will total at least 8% for this type of scheme.
NEST will carry an annual management charge of 0.
3% per annum, which is extremely low for this type of scheme, mainly due to the expected size of the scheme.
Who can opt in? Jobholders aged between 16 and 22, and between State Pension age and 75 who are earning more than the above figure, will be able to opt in to their employer's workplace pension and will qualify for the compulsory minimum employer contributions.
Those earning below the above figure may opt in to their employer's workplace pension.
Their employer will not be required to make a contribution, but may do so if they wish.
Which scheme can employers use? Employers will be able to choose the pension scheme(s) they want to use provided the scheme(s) meet certain quality criteria (including any current scheme).
These may be based on contributions or benefits people receive.
To keep the certification process as simple as possible, any of the following should prove to be 'acceptable'.
Money Purchase Schemes (existing): - A minimum nine per cent contribution of pensionable pay (including a four per cent employer contribution) or; - A minimum eight per cent contribution of pensionable pay (with a three per cent employer contribution) provided pensionable pay constitutes at least 85 per cent of the total pay bill or; - A minimum seven per cent contribution of pensionable pay (three per cent employer contribution), provided that the total pay bill is pensionable Final Salary Schemes (existing): In order to qualify an existing final salary scheme will need to have a contracting out certificate in force as this is taken in evidence that the scheme already meets the 'reference scheme test' standard.
This test requires for schemes to commence a pension at age 65, payable for life and must be: a) 1/120th of average qualifying earnings in the last 3 tax years, preceding the end of pensionable service multiplied by b) The number of years of pensionable service up to a maximum of 10.
When do the changes start? The changes are planned to start from 2012.
The plan is to stage in automatic enrolment over a period of time, starting with large employers, medium and then small.
To help employers adjust gradually, the plan is to phase in the employer contribution levels - starting at 1% and then moving to 2% and finally 3%.
The jobholders' contributions will also be phased in the same period.
How will I know what to do in the future? DWP, The Pensions Regulator (TPR) and the Personal Accounts Delivery Authority (PADA) are working to ensure that information will be available to help prepare employers and individuals for the changes.
TPR will be writing individually to all employers at around 12 months and again at 3 months in advance of their automatic enrolment start date, to inform you when you need to take action and what you need to do to comply.
What should I be doing now? As an employer, you should ensure you understand the basic information on the changes as outlined in this article.
A review of existing arrangements should also be undertaken sooner rather than later.
For some firms these changes could be in less than 1 pay review's time! A review is also important as The Pensions Regulator, who will oversee the implementation process, does carry the power to levy fines of up to £50,000 on employers who do not take action.
This is scheduled to start rolling out to workplaces from October 2012.
Therefore, businesses should start to plan now for this event, since it will definitely affect you at some point over the next few years.
The Government estimates that around seven million people are not saving enough to meet their retirement aspirations.
Therefore the Government is making changes to the pension system which, as an employer, will affect you too.
What do the changes mean for employers? From 2012, employers will be required to automatically enrol all eligible employees into either the National Employers Savings Scheme (NEST) or an alternative 'qualifying' workplace pension and to make minimum contributions into it.
The process will be staged, dependent on employee head count, from 1st October 2012 to 1st September 2016, with large employers being the first to have to take action.
Who will need to be automatically enrolled? All jobholders working in Great Britain aged at least 22 years old who have not yet reached State Pension age and are earning more than £7,475*a year (the income tax threshold at 2011) will need to be automatically enrolled into either an employer's workplace pension or NEST.
*2012 figure to be confirmed.
What is the minimum contribution employers must pay? Under NEST, employers will need to contribute 3% on a band of earnings for eligible jobholders - between the Personal Allowance in 2012 and £33,540 a year ** ** Based on 2006 levels, 2012 figure to be confirmed.
This will be supplemented by the jobholder's own contribution (which will end up at 3%) and around 1% in the form of tax relief.
Overall contributions will total at least 8% for this type of scheme.
NEST will carry an annual management charge of 0.
3% per annum, which is extremely low for this type of scheme, mainly due to the expected size of the scheme.
Who can opt in? Jobholders aged between 16 and 22, and between State Pension age and 75 who are earning more than the above figure, will be able to opt in to their employer's workplace pension and will qualify for the compulsory minimum employer contributions.
Those earning below the above figure may opt in to their employer's workplace pension.
Their employer will not be required to make a contribution, but may do so if they wish.
Which scheme can employers use? Employers will be able to choose the pension scheme(s) they want to use provided the scheme(s) meet certain quality criteria (including any current scheme).
These may be based on contributions or benefits people receive.
To keep the certification process as simple as possible, any of the following should prove to be 'acceptable'.
Money Purchase Schemes (existing): - A minimum nine per cent contribution of pensionable pay (including a four per cent employer contribution) or; - A minimum eight per cent contribution of pensionable pay (with a three per cent employer contribution) provided pensionable pay constitutes at least 85 per cent of the total pay bill or; - A minimum seven per cent contribution of pensionable pay (three per cent employer contribution), provided that the total pay bill is pensionable Final Salary Schemes (existing): In order to qualify an existing final salary scheme will need to have a contracting out certificate in force as this is taken in evidence that the scheme already meets the 'reference scheme test' standard.
This test requires for schemes to commence a pension at age 65, payable for life and must be: a) 1/120th of average qualifying earnings in the last 3 tax years, preceding the end of pensionable service multiplied by b) The number of years of pensionable service up to a maximum of 10.
When do the changes start? The changes are planned to start from 2012.
The plan is to stage in automatic enrolment over a period of time, starting with large employers, medium and then small.
To help employers adjust gradually, the plan is to phase in the employer contribution levels - starting at 1% and then moving to 2% and finally 3%.
The jobholders' contributions will also be phased in the same period.
How will I know what to do in the future? DWP, The Pensions Regulator (TPR) and the Personal Accounts Delivery Authority (PADA) are working to ensure that information will be available to help prepare employers and individuals for the changes.
TPR will be writing individually to all employers at around 12 months and again at 3 months in advance of their automatic enrolment start date, to inform you when you need to take action and what you need to do to comply.
What should I be doing now? As an employer, you should ensure you understand the basic information on the changes as outlined in this article.
A review of existing arrangements should also be undertaken sooner rather than later.
For some firms these changes could be in less than 1 pay review's time! A review is also important as The Pensions Regulator, who will oversee the implementation process, does carry the power to levy fines of up to £50,000 on employers who do not take action.
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