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Pensions changes on the agenda

19 May 2011

Reforms to pensions due to take effect in 2012 need to be prepared for now, says Mike Daniels. There will be increased administration and financial impacts that should be included in future plans

Pension reform is widely seen as long overdue, and business pension schemes in particular are now squarely in the spotlight with the Coalition Government beginning a review shortly after taking office.
There are now new requirements for UK employers to automatically enrol employees over the age of 22 and under State pension age, into a qualifying workplace pension scheme, and the employer will be required to make contributions into the scheme. This will be of major importance to the FM sector, with changes likely to increase payroll costs.
Employers will be able to use their own pension schemes to fulfil these requirements as long as they meet minimum quality criteria, which many businesses will already provide. Alternatively they can choose to use the new Government backed National Employment Savings Trust (NEST), a low-cost independent qualifying workplace pension scheme.
The auto enrolment requirements are planned to start from October 2012. From that date employers with more than 120,000 employees will be required to commence automatic enrolment. All UK-based FM providers will need to automatically enrol their eligible employees into a pension scheme, as opposed to the employee having to actively join the scheme which is the current normal practice. Auto enrolled employees will have the option to optout of the scheme but the employer must automatically re-enrol them every three years. A six month period of flexibility applies to the three year period.
Employers can choose to apply a three month waiting period before auto enrolling eligible employees, but employees may opt in during this period and the employer must contribute immediately.
The Pensions Regulator (TPR) will have responsibility for overseeing and ensuring compliance of the new legislation, and it has the power to impose fines on employers of initially up to £50,000 for non-compliance.
Employers will need to contribute a minimum of 3 percent of qualifying earnings, with employees contributing an amount that will bring the total to at least 8 percent of qualifying earnings - these include contractual income and statutory pay (sick pay and maternity) between £5,715 and £33,540 a year. The difference between the employer’s contribution and 8 percent will be made up by the employee contribution and tax relief. For example, if the employer pays 3 percent, the employee pays 4 percent plus there would be 1 percent tax relief to take the total contribution to 8 percent.
To help employers deal with the potential extra costs, it is proposed that the employer’s minimum contribution basis would be phased in as follows:
● 1 percent from between October 2012 to September 2016 inclusive, dependent on the size of the scheme,
● 2 percent from October 2016 and,
● 3 percent from October 2017 and thereafter.
The employee’s contribution will be phased in over the period, i.e. 1 percent during the first phasing stage, 3 percent from October 2016 and 5 percent from October 2017 (inclusive of 20 percent basic tax relief).
There is now no doubt that auto enrolment will happen and it is clear that this additional burden on employers will be significant. It is vital that employers start making plans as to how they will comply with these changes. The introduction of auto enrolment will almost certainly increase employer pension costs for those employers who either currently operate a scheme with less than 100 percent employee take-up rates, or who make low levels of, or no employer contributions towards their employees’ pension provision.
The FM industry will need to prepare for the changes that will take effect in 2012. The increased administration and financial impacts in particular should be included in future plans.
● Mike Daniels is Head of Business Services at Barclays Corporate

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