THANKS to betterment in living standards, technology and radical advances in healthcare, many of us are living longer. That is the good news. The bad news is that with great expectations of pensions, yet poorer returns, investors may well be very disappointed with life in old age.
According to the UK’s Office for National Statistics, males born in the UK in 1985 had a life expectancy of 86 years. By 2013 that life expectancy had risen to 91 years and is projected to be not far off 94 years by 2035.
The problems created by the interaction of longevity and the state rolling back what it can pay for means that the government is forcing the employer and employee pension relationship to change.
According to Heather Chandler, a partner in the pensions team at Shoosmiths LLP, the government has, for some time, been concerned that not enough people are saving enough for their retirement – preferring instead to rely on the state or just live for today.
She says that many larger employers offer membership of an occupational pension scheme for their employees and pay contributions into that 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.
Instead, where required, they have perhaps “designated” a stakeholder pension scheme (into which no employer contributions had to be made). Take-up of stakeholder pension schemes by employees has traditionally been very low.
“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,” she explains.
Graham Vidler, director of communications and engagement at NEST, a low-cost pensions auto-enroller run by the government, echoes her comments: “Workplace pension law has changed, which means employers need to give their workers access to a workplace pension scheme that meets certain legal standards.”
He 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.
“Generally speaking,” says Ms Chandler, “employers with between 50 and 249 employees will have staging dates (to join 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.”
Recent research by NEST showed that a number of employers “staging” in 2014 are not prepared. Mr Vidler says: “We found that only 23% of employers staging between February and July 2014 had both confirmed the provider they are using and have done everything else they needed to do in order to be ready to comply.”
There is one saving grace: firms can use a three-month postponement period to avoid automatically enrolling employees who leave the business shortly after joining (such as temporary workers). This should also help firms align their obligations with existing administrative and payroll processes.
The Pensions Regulator will notify every business of its staging dates. Following their staging date, they must register with the Regulator. Penalties follow from non-compliance.
Not everyone is covered
Those covered by the auto-enrolment legislation include permanent, fixed-term and temporary employees, as well as agency workers. Self-employed individuals will not be subject to the requirements. Employees already enrolled into a qualifying scheme through their workplace will remain in that scheme and the duty of auto-enrolment will not apply in respect of them.
Mr Vidler says that only those who trade as a sole trader and who do not employ anybody 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.”
Ms Chandler says workers fall into different categories depending on age and earnings, and the obligations on employers differ accordingly. “Employees between age 22 and state pension age, who earn over the income tax threshold (£9,440 in the 2013-14 tax year), are ‘eligible job holders’ 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.”
“However,” she 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 should they wish and the employer must also pay contributions for these employees if they do opt in.”
She adds that firms need to be aware of their obligation to provide certain information to all employees.
For employees earning under 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 (say through existing payroll systems) if the employee requests.
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 automatic enrolment pension scheme. For them the process demands that 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 established, the question turns to the pragmatic implementation of the new system and there are a number of options available. A firm can use an existing occupational or personal pension scheme if it meets certain statutory requirements; set up a new scheme; or enrol employees in the National Employment Savings Trust (NEST), a new central scheme set up by the government.
NEST, says Mr Vidler, was set up by the government specifically for automatic enrolment and operates on a not-for-pro t basis. NEST is the only pension scheme to have a service obligation which means it is open to every single employer. He adds that any scheme used for automatic enrolment must comply with legal minimum standards set out by the government.
As already mentioned, many small businesses will have previously been subject to the requirement to provide access for staff 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.
Ms Chandler says that 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. This guidance is available at http://bit.ly/1etn3fY.
Regardless of the type of scheme chosen, employers must make minimum contributions into the scheme in respect of each employee. These 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 in, at least 3% of which must come from the employer and 1% from tax relief.
Naturally there are costs for the administration of pensions and Ms Chandler says that 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 automatic enrolment could be substantial and will need to be budgeted for,” she warns.
Talk to others
It should go without saying that the changes will have an impact on business systems generally, most notably payroll and the administration involved in taking on new staff.
Practices will need to liaise with whoever is managing the process internally as well as payroll providers, pension providers, and financial and legal advisers if appropriate. They will also need to communicate with employees at the appropriate times.
Ms Chandler is keen to stress that there are certain safeguards imposed by the legislation 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. 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.” The warnings are clear.
All businesses, but especially small businesses, including the majority of veterinary practices, will need to make various changes in order to deal with the introduction of the auto-enrolment legislation.
Ms Chandler says that, from experience, 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 enrol staff, she says. Mr Vidler says that time is of the essence: “The largest employers took around a year to get ready for automatic enrolment; 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.”
He is recommending nine to 12 months for businesses to make sure they meet their new legal duties.
Practices would be well advised to plan ahead to ensure that their systems can cope with the changes, and to allow time to work with pension providers who may impose their own conditions or time-scales or may indeed decline further business at some point before 2018.
The Pensions Regulator (www.thepensionsregulator.gov.uk) suggests businesses allow 12-18 months to prepare for auto-enrolment.
Non-compliance is not an option
For businesses that get it wrong, the Pensions Regulator will generally work with them to ensure compliance.
“However,” as Ms Chandler is keen to point out, “ignorance of the duties is no defence and can result in a statutory notice directing businesses to comply.”
She adds that 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.
“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. Ms Chandler believes that while the penalties for non-compliance may seem substantial, the Regulator will only use them for persistent offenders or if there has been deliberate and wilful ignorance of the duties.
“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/advisers, and early planning, are key to ensuring compliance,” she says.