2012 Pension reform and National Employment Savings Trust

The coalition government is introducing legislation for pension reform that will cover virtually all employers and employees. The legislation is already in place for larger companies but will be introduced gradually over the next few years to cover organisations no matter how small. The national pension plan will be known as ‘Personal Accounts’ which will effectively provide access to a low-cost pension for employees.

The government’s new pensions bill will eventually affect all businesses regardless of size. The changes will be introduced gradually from 2012-2016 and will cover all employers.

The first changes will only apply to large organisations with more than 30,000 staff but will eventually apply to all employers. Employees will be auto enrolled and can expect employers to make a minimum contribution of 3% salary to those earning over £5,035 p.a. into each employee’s fund. In 2013 the legislation will be expanded and apply to those companies with more than 350 employees, and between 2014 and 2016 will apply to all companies regardless of size.

The pension contributions must be at least 8% of an employee’s qualifying earnings and will be made up from 4% of employee’s qualifying earnings, 3% from employer’s contributions and 1% tax relief. Staff will be automatically opted in but will be able to opt out by asking the organisation running the pension scheme for an opt out form. If the form is returned promptly, the employee will not become a member of the workplace pension scheme.

The government is also introducing a National Employment Savings Trust (NEST) as an alternative to or as an addition to any privately operated pension scheme that companies may already be running. NEST works on a defined contribution basis and the employer will be required to make a minimum contribution towards the employee’s pension. NEST is open to employers of any size and will provide workplace pension advice for both employees and employers. Employers will be able to self certify that their existing pension schemes meet the minimum requirements set out in the act.

Whatever scheme(s) you decide to introduce it will be a good idea to find out now your obligations under the legislation and decide how you will introduce this employee benefit and how it will impact your finances.

The employer’s contribution of a minimum 3% of salary will impact company finances and will have to be budgeted into your future plans so that you are ready for this extra cost. You will also need to ensure that your finance and HR systems are ready to cope with the extra workload.

Here are 7 steps for employers to consider:

Budget now – Consider the cost impact of the compulsory 3% employer contribution
Decide which type of pension you want to offer staff – will it be an employer pension scheme or the NEST scheme or a combination of the two?
Consider the impact of retaining and recruiting employees – employers who offer schemes with contribution rates above the statutory minimum may apply for a pension quality mark to differentiate their scheme from others.
Does your existing scheme meet the Government’s requirements? – examine any existing pension schemes to determine if they will meet the minimum requirements of the Pensions Act.
How will you communicate the changes to your staff? – consider how you will go about communicating these changes to your staff
Do you have systems in place to deal with the administration? – It is important to ensure that your payroll and HR systems are able to cope with any extra administration.
When do you need to start considering what to do? – starting to prepare for the reform now is a good idea.

Full details of the Governments scheme can be found here or here

Details of NEST can be found here