New rules will come into force in the next few months forcing employers to automatically enrol employees into a qualifying workplace pension scheme. The rules have been put in place to try and plug the retirement savings gap.
The Office for National Statistics announced last week that fewer than half of all employees, whether private or public sector, are paying into any company pension with the number of people paying into a personal pension falling to six million.
The largest employers in the country will be affected first with those employing over 120,000 having to auto enrol certain employees from October. The majority of employers, those employing less than 250, will have to auto enrol their employees from April 2014. An employer’s exact staging date can be found on The Pensions Regulator website.
Employers will have to separate their workforce into three different categories. Those aged between 22 and State Pension Age and earning over £7,474 per annum will be ‘eligible jobholders’ who will be auto enrolled into a pension scheme.
Those aged between 16 and 74 and earning over £5,035 pa are ‘non-eligible jobholders’ and can opt in to the scheme in which case employers will have to make the minimum contribution. The last category are those aged between 16 and 74 and earnings below £5,035 pa are ‘entitled workers’ and have a right to join the scheme. However there is no requirement for the employer to contribute.
Initially the total contribution will have to be two per cent of an employee’s salary with a minimum employer contribution of one per cent.
From October 2017 the total will be five per cent with a minimum of two per cent from the employer and then from October 2018 the total will be eight per cent with a minimum of three per cent from the employer.
Employees will have to be automatically enrolled after three months of employment or three months of their employer’s staging date. Employees will be able to opt out of the pension scheme. However they will be re enrolled back into the scheme every three years.
Employees who wish to opt out must request an opt out notice from the pension scheme and the employer must not encourage employees to opt out of the scheme.
There will be heavy fines for employers who do this.
There will also be heavy fines for employers who fail to auto enrol the appropriate employees into the pension scheme within the above time frames.
One way for employers to minimise the impact of these additional costs is to make employee contributions by salary exchange or sometimes know as salary sacrifice.