Pension changes: A guide for small businesses

9 August 2011

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You may have heard whisperings about changes afoot to private sector pensions. As our average life expectancy improves, the Government is continuing with plans to help workers save for their future by creating a system of ‘auto-enrolment' for pensions. This means that all employers, no matter how small their business, will have to offer a pensions scheme to their employees.

Although pensions changes will start to come into effect from October 2012, implementation will be staggered depending on the number of employees, smaller businesses will not be affected until Spring 2014 or as late as 2016.

Though this may seem like a long way off, the changes are likely to be so burdensome for small businesses – especially those with no pension scheme in place – that we're encouraging you to think about taking action now.

Auto-enrolment: the basics

Under the new duties, employers will have to:

choose a qualifying pension scheme or schemes
automatically enrol eligible workers into a scheme
make a minimum contribution towards a qualifying contribution scheme or NEST (the National Employment Savings Trust)
register with the Pensions Regulator
provide workers with information about the changes and how it will affect them.

Not providing an auto-enrolment pension scheme will be a regulatory offence punishable by a fine.

Who is eligible?

An eligible worker is an employee aged between 22 and state pension age and earning above the income tax personal allowance (£7,475 in 2011/12). Contributions will be payable on earnings between £5,035 and £33,540.

Other workers will be eligible to join the scheme, but you will not be obliged to make a contribution for them.

If you do not have any eligible workers, you will still be obliged to tell the Regulator.

What's a suitable pension scheme?

Employers can use an existing pensions scheme or set up a new one with a private pensions provider, providing it doesn't impose any barriers to joining (i.e. probationary periods) or require staff to take any extra action to join.

Alternatively, you can use the National Employment Savings Trust (NEST), a public pension scheme that must accept all employers who apply.

How much will employers have to contribute?

The minimum contribution overall contribution is 8% of earnings, of which 3% must come from the employer. Another 1% will most likely come from Government tax relief and the remaining 4% would come from the employee.

Can workers opt out?

One month after auto-enrolment, a worker will be able to opt out of the scheme if they wish. At this point any deductions made from their salary would be refunded. The worker can opt out at any time after this, but they may not be entitled to a cash refund.

There will be strict rules and penalties around an employer's involvement in getting employees to opt out of the scheme. For example, you wouldn't be able to advise or incentivise them to opt out.

Employers will also be required to undertake a continuous process of automatic re-enrolment every three years for all employees who are covered by the automatic enrolment obligation. This obligation applies even to those employees who have previously decided to opt out.

What do employers need to do now?

The Pensions Regulator is advising all employers to:

check their staging date
assess which workers will need to be automatically enrolled
budget for these future changes.

This article is meant as an introduction to the basics of pension reform, but we will continue to bring you more information and advice as it becomes available. Keep an eye out for new content on the website and in the weekly eNewsletter.

If you have any questions, members of the Forum can speak to one of our helpline advisers on 0845 130 1722.