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AUGUST 2011

There are dramatic changes on the horizon relating to pensions. New rules are being introduced by the Government which aim to ensure that more people provide financially for their retirement. Whilst much of the legislation is still in draft form, the Government has made it clear that it is committed to getting new pension arrangements in place.

What is the new arrangement?

In summary, under the new system, every employer in the UK will be required to automatically enrol eligible employees into a qualifying pension scheme. Employers will also be obliged to contribute a certain amount into that scheme, as well as deduct the employee’s own contributions from his or her earnings.

Who is an “eligible employee”?

Eligible employees will be employees who:

• are aged between 22 and the state pension age (currently 65);
• work in the UK;
• and have earnings above the income tax personal allowance (which is £7,475 in 2011/12).

What type of pension scheme must be used?

Employers will have several different options when choosing a pension scheme to use in order to fulfil their employee enrolment obligations. If they already have a pension scheme in place, they may continue to use that scheme, provided it meets certain criteria. Alternatively, they may wish to set up a new pension scheme.

Employers will also have the option of using the Government-established National Employment Savings Trust pension scheme (“NEST”). NEST has been set up with the forthcoming changes specifically in mind.

When must the employer enrol eligible employees?

Ordinarily the employer must enrol all eligible employees into a qualifying pension scheme within one month from the day they become eligible. All eligible new joiners must be enrolled within one month from the day they start work. However, subject to certain notification requirements, employers may elect to implement a waiting period which defers the enrolment for up to three months.

What if the employee does not want to join?

Employees will be able to opt-out of the scheme if they wish to, but not until they have been automatically enrolled. There are also specific time limits that must be observed. Further, employers will not be allowed to induce employees to opt-out, and normally an employee opt-out notice will have to be obtained from the pension scheme into which the employee has been enrolled, rather than from the employer, before the employee can opt-out.

In addition, eligible employees will have to be automatically re-enrolled into the pension scheme every 3 years and therefore will need to renew their opt-out each time if they still do not wish to participate. 

How much will the contributions have to be?

The level of the employee’s and employer’s mandatory contributions will depend on several different factors, including the type of scheme being used. In 2012, the minimum total contribution will be 2% of an employee’s qualifying earnings (see below), of which the employer must pay at least 1% and the employee must pay the balance. By 2017, the minimum level will have increased to 8% of qualifying earnings, of which the employer must contribute at least 3%.

 “Qualifying earnings” are defined as the employee’s earnings within a certain range, which is likely to be approximately £7,475 to £38,000 (although exact figures are not known as the band will be reviewed annually and revalued in line with inflation).

When do the new arrangements become effective? 

The new duties will be implemented over a four year period, starting next year. The actual implementation date will depend of the size of the employer’s business. Generally speaking, employers with 50 or more employees will have to comply with their obligations during the period of October 2012 to July 2014 and for those with 1-49 employees, it will be between August 2014 and February 2016.

What if the employer does not comply? The Pensions Regulator will have wide-ranging powers to ensure compliance. Penalties of up to £10,000 per day could be issued to large employers. There could also be criminal sanctions.

If you would like any further information about the issues raised in this article, please contact Goodman Derrick LLP’s employment team on 0207 404 0606.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice. As noted above, the exact details of the new arrangements are still being finalised and so the above commentary is based on the available information as at August 2011.