Government confirms employers must provide pensions
All British businesses, whatever their size, will be expected to offer employees the chance to join a workplace pension scheme, the government has confirmed.
The announcement supports many of the measures set out in the Pensions Act 2008.
The new scheme will start, as expected, in 2012, and all employers will need to play a part by September 2016.
As a result, between four and eight million employees will contribute to a retirement savings fund for the very first time.
The decision to move ahead with a mandatory pension scheme came after the government accepted the findings of a review conducted into plans laid out in the Pensions Act 2008, which will mean the automatic enrolment of all workers, not already members of a qualifying pensions scheme, into a savings fund.
Employers with fewer than 50 members of staff can, if they wish, use a state-sponsored scheme – the National Employment Savings Trust (Nest) – rather than establish a workplace pension scheme of their own.
Steve Webb, the Pensions Minister, said: “The National Employment Savings Trust (Nest) will be the new low-cost pension scheme that will be the vehicle for saving for millions.
“For the first time, employers will have to make pension contributions for eligible workers from 2012, ending decades of decline of membership in workplace pension schemes.”
Under the new rules, all employers will be expected to provide a pension scheme for employees aged 22 or more and currently earning more than £7,475 a year (up from the £5,035 proposed by Labour), which is the threshold for the personal income tax allowance as from April 2011.
Where the employer does not provide such a scheme, employees must be enrolled automatically into Nest.
The new pension programme will begin next year, with automatic enrolment starting in October 2012.
Initially, the largest employers will have to sign up first; the smallest firms won’t join until September 2016.
Employer and employee contributions will also be introduced on a phased basis.
Until October 2016, the minimum overall level of contributions will be 2 per cent, with 1 per cent being made by employers. From October 2016 to September 2017, the total contributions will be 5 per cent, with 2 per cent being made by employers. From October 2017, the total minimum contribution level will be 8 per cent, with employers paying in a minimum of 3 per cent of annual earnings, employees 4 per cent and 1 per cent coming in tax relief from the government.
If an employee does not wish to continue within the scheme, then they must opt out.
In a change to the previous plans, however, employers are to be granted a three-month period in which to enrol employees in a workplace scheme already set up by the firm or to enrol staff in the Nest scheme.
If a member of staff wishes to join before the end of the three-month period, employers will be obliged to make the appropriate contributions.
The original scheme would have seen all employees enrolled from the first day of employment, regardless of whether they were a temporary or permanent employee, or whether they had passed any probationary period.
The change means an employee will not have to be auto-enrolled for 12 weeks. Some workers – those on short term contracts or those who leave the business after a short tenure – will now not automatically join the scheme, saving employers both direct costs from the pension contribution and indirect costs from the administration involved in enrolment.
Another change will simplify the process by which employers certify that their own money-purchase pension scheme meets HMRC’s requirements.
It is thought that the Nest scheme will become, in time, one of the largest pension funds in the UK, accumulating a pot of between £50 billion and £100 billion within 30 years.
Contributions are to be invested in shares and bonds, but officials say that the investment will be low-risk, with the money mainly going into ‘passive’ instruments such as index-tracking funds.
Employer who do not make payments on behalf of their employees could be met with penalties from the Pensions Regulator.
At the moment, employers pay an average of 6.1 per cent of earnings into workers’ pensions. One fear is that the new system will encourage employers to reduce contributions closer to 3 per cent, the minimum demanded by the upcoming rules.
Another is that low-income earners will lose out on means-tested benefits such as pension credits.
The Pensions Secretary sought to allay concerns by insisting that the government will be trying to “make sure that saving is worthwhile” and that the “issues around making it worthwhile to save are tackled”.
Andrew Strange, policy director at the Association of Independent Financial Advisers, said: “We support the use of societal nudges to encourage the restoration of a savings culture in the UK, and we are therefore pleased to see the roll out of the requirement for all employers to automatically enrol staff into pension arrangements.
“Building a more widespread savings culture is absolutely essential to prepare people for their financial future. The UK has the second lowest savings rate of all OECD countries, with 13 million people in the UK saving inadequately. Nest will provide a crucial component in the development of more prudent and financially protected consumers.”
The British Chambers of Commerce (BCC) welcomed the amendment to the rules.
Dr Adam Marshall, director of policy at the BCC, said: “Businesses will be relieved to hear that the government has decided to simplify and streamline the 2012 pension reforms – which represent an enormous change to private pension provision.
“Thanks to the 12-week exemption, companies with a high turnover of staff or a large number of seasonal workers will not have to spend a lot of time and money enrolling employees into pensions that they do not intend to continue. Employment agencies, which will be very important in the fight against unemployment and underemployment in the years ahead, will benefit hugely from this change.
“Now the government must embark on a communications drive to inform the 1.1 million employers in the UK of their new obligations. Unless businesses and their employees understand the changes ahead, we could see significant confusion as auto-enrolment comes in from 2012.”
John Cridland, the CBI’s deputy director-general, said: “This is a welcome review, which will make the new auto-enrolment system simpler for employers, while meeting all of Lord Turner’s original aims and recommendations.
“The most important thing is that all eligible employees will be included. This will mean that the reform achieves its aim of boosting pension saving for all.
“The government has rightly chosen to simplify the rules for all employers, rather than carve some out and leave others to cope with a high regulatory burden.
“It is also right that auto-enrolment will kick in three months after someone has started a job. This will avoid people on short-term assignments, who want to maximise their income, being auto-enrolled. It will also avoid the cost to employers of auto-enrolling staff who want to opt-out.
“We also welcome the government’s decision to introduce a simple process for firms to certify their own pension schemes.”
But not all business groups were happy.
The Federation of Small Businesses (FSB) expressed concerns that firms with fewer than 10 employees have not been made exempt from the scheme.
Mike Cherry, the FSB’s policy chairman, said: “While the FSB welcomes initiatives to help people save for their future, the FSB is severely disappointed the government has not listened to the needs of the UK’s micro firms and has not made them exempt from automatic enrolment into pensions, which will cost employers in time and money.
“We know that small firms do not feel confident in choosing a pension scheme because of its complicated nature, so are pleased that the government has put in steps, such as the waiting period, to make the administrative burden slightly easier.”