Thanks to better 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 but poorer returns, investors may be very disappointed with life in retirement.
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According to the UK’s Office for National Statistics, males born in 1985 had a life expectancy of 86 years. By 2013, that figure had risen to 91 years and is projected to be not far off 94 years by 2035.
The problems caused by the population's increasing longevity and the state rolling back what it can afford to pay for have resulted in the government forcing the employer-employee pension relationship to change.
Heather Chandler, a partner in the pensions team at law firm Shoosmiths, says the government has been concerned for some time that not enough people are saving enough for their retirement – preferring to rely on the state or just living for today.
Many larger employers offer their employees membership of an occupational pension scheme and pay contributions into the scheme on behalf of those who join. However, there has previously been no legal requirement to do so and the costs associated with having an occupational pension scheme have deterred many smaller employers from setting one up.
Instead, where required, they have perhaps “designated” a stakeholder pension scheme, into which no employer contributions had to be made. Employee take-up of stakeholder pension schemes has traditionally been very low.
Chandler says: “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.”
Graham Vidler, director of communications and engagement at Nest (National Employment Savings Trust), a low-cost pensions auto-enroller run by the government, adds: “Workplace pension law has changed, which means employers need to give workers access to a workplace pension scheme that meets certain legal standards.”
Vidler 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.
Chandler says: “Generally speaking, employers with between 50 and 249 employees will have staging dates [to implement 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.”
Only 23% of employers staging between February and July 2014 have both confirmed the provider they are using and have done everything else they need to do to be ready to comply
Graham Vidler, Nest
Recent research from Nest highlighted the fact that a number of employers due to stage in 2014 are not prepared for it. Vidler says: “We found that only 23% of employers staging between February and July 2014 have both confirmed the provider they are using and have done everything else they need to do to be ready to comply.”
There is one saving grace – employers can use a three-month postponement period to avoid automatically enrolling staff who leave the business shortly after joining, such as temporary workers. This should also help firms to align their obligations with existing administrative and payroll processes.
The Pensions Regulator will notify each business of its staging date. Following their staging date, employers must register with the Regulator. Penalties will be imposed for non-compliance.
Not everyone is covered
Workers covered by the auto-enrolment legislation include permanent, fixed-term and temporary employees, as well as agency workers. Self-employed people will not be subject to the requirements. Employees that are already enrolled into a qualifying workplace scheme will remain in that scheme and the duty of auto-enrolment will not apply to them.
Vidler says only people who are sole traders and do not employ anyone 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 their age and earnings, and the obligations on employers vary accordingly. “Employees aged between 22 and the state pension age who earn above 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.”
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
Heather Chandler, Shoosmiths
But 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 if they wish and the employer must also pay contributions for these employees if they opt in.” Firms also need to be aware of their obligation to provide certain information to all employees, she adds.
For employees that are below 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, for example through an existing payroll system, if the employee requests it.
What if employees do not want to be enrolled?
Clearly, there will be some employees who, for whatever reason, do not want to be part of an auto-enrolment pension scheme. For them, the process says 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 to auto-enrolment established, the question turns to the pragmatic implementation of the new system – and there are a number of options available. An employer can: use an existing occupational or personal pension scheme if it meets certain statutory requirements; set up a new scheme; or enrol employees into Nest.
Nest was set up by the government specifically for auto-enrolment and operates on a not-for-profit basis, says Vidler. Nest is the only pension scheme with a service obligation, which means it is open to every employer. Any scheme used for auto-enrolment must comply with legal minimum standards set out by the government, Vidler adds.
As mentioned above, any small businesses will have previously been subject to the requirement to give staff access 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 here.
For smaller employers, the comparative costs of auto-enrolment could be substantial and will need to be budgeted for
Heather Chandler, Shoosmiths
Regardless of the type of pension scheme chosen, employers must make minimum contributions in respect of each employee. The 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 into the pension scheme, at least 3% of which must come from the employer and 1% from tax relief.
Naturally, pensions administration has costs, and Chandler says the charges 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 auto-enrolment could be substantial and will need to be budgeted for,” she warns.
Talk to others
Obviously, the changes will have an impact on business systems generally, most notably payroll and the administration involved in taking on new staff. Firms will need to liaise with whoever is managing the process internally as well payroll providers, pension providers, and financial and legal advisers, if appropriate. They will also need to communicate with employees at the appropriate times.
Chandler points out that the legislation imposes certain safeguards to protect employees. “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," she says. "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.”
All businesses, but especially small firms, will need to make various changes to handle the introduction of auto-enrolment, says Chandler. “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.”
Taking action sooner rather than later will ensure a business is well-prepared for a smooth transition when the time comes to auto-enrol staff, she says.
The largest employers took about a year to get ready for automatic enrolment
Graham Vidler, Nest
Vidler agrees that time is of the essence. “The largest employers took about a year to get ready for automatic enrolment," he says. "Obviously, 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.”
Employers are advised to plan ahead to ensure their systems can cope with the changes, and to allow time to work with pension providers, who may impose their own conditions or timescales or may indeed decline further business at some point before 2018. The Pensions Regulator suggests that businesses allow 12-18 months to prepare for auto-enrolment.
Non-compliance not an option
For businesses that get it wrong, the Regulator will generally work with them to ensure compliance.
But Chandler warns: “Ignorance of the duties is no defence and can result in a statutory notice directing businesses to comply.” 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.”
There seems to be reason and common sense built into the system. Chandler believes that although the penalties for non-compliance seem substantial, the Regulator will only use them for persistent offenders or if there has been deliberate and wilful ignorance of the duties.
She concludes: “So long as you make efforts to comply, you should not find yourself on the receiving end. For smaller employers, working with a good pension provider or adviser, and early planning, is key to ensuring compliance.”