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Pension Reform & NEST- Key Facts for Employers

Pension reform

There will be more pensioners in the future and those pensioners will live longer. This will put a massive strain on the State pension system.

To alleviate this burden, the Pensions Acts 2007 and 2008 make changes to the Basic State Pension, the State Second Pension and introduce new employer duties for pensions.

The employer duties

From October 2012, employers will be required by law to:

automatically enrol all their eligible employees not already in a good quality pension scheme into a Qualifying Workplace Pension Scheme (QWPS) on the day the employee becomes eligible, and
pay contributions for every employee who does not opt-out of the QWPS.

Timetable

The employer duties will be staged in over 4 years from 2012. Larger employers will have their duties imposed first, smaller employers last. Any employer with less than 50 employees will have their staging date set depending on the last two digits of their PAYE reference number.

Size of employer	Staging date
120,000 – 800	Over 12 dates from 1st October 2012 to 1st October 2013
799 – 250	Over 3 dates from 1st November 2013 to 1st February 2014
Less than 50 (sample)	On 1st March 2014
249 – 50	Over 4 dates from 1st April 2014 to 1st July 2014
Less than 50	Over 18 dates from 1st August 2014 to 1st February 2016
New businesses that start up after October 2012	Over 5 dates from 1st March 2016 to 1st September 2016

The costs

The amount of contributions that must be paid in order for a scheme to be treated as a QWPS is being phased

in as follows:

Date	Total minimum contribution %	Minimum employer contribution %	Minimum difference to be made up by employee % (gross) *
October 2012 to September 2016	2%	1%	1%
October 2016 to September 2017	5%	2%	3%
October 2017 onwards	8%	3%	5%

The contributions will be based on a percentage of band earnings between £5,035 and £33,540 (qualifying earnings) at 2006/2007 levels. These amounts will be increased in line with earnings to 2012 and beyond.

* The minimum difference includes tax relief available on employee contributions.

Quality Qualifying Workplace Pension Scheme (QQWPS)

Employers can avoid much of the administration burden associated with automatic enrolment by setting up a QQWPS where:

the total minimum contribution is 11% of qualifying earnings, of which
at least 6% must come from the employer,
there is no option to phase in contributions, and
automatic enrolment dates can be postponed up to 90 days allowing a ‘sweep up’ of eligible employees all at once at the employer’s convenience.

Eligible employees

All employees will have to be auto-enrolled unless:

they are already in a qualifying workplace pension scheme,
they are under the age of 22,
they are over the State Pension Age, or
they earn less than £5,035 a year (in 2006/2007 terms).

Employees can only ‘opt-out’ once they have been auto-enrolled.

Non-eligible employees must be given the option of opting in to pension saving.

Auto-enrolment is the responsibility of the employer, not the Government or the pensions industry. The Pensions Regulator will oversee employer compliance and has the power to fine employers for non-compliance.

National Employment Savings Trust (NEST)

Employers who do not have, or who will not set up, their own QWPS will have the option of using NEST. This scheme is designed to be low cost and is specifically aimed at low to medium earners. There will be certain restrictions applying to NEST:

there will be a general ban on transfers in or out,
there will be an upper contribution limit (currently £3,600 each year),
limited retirement options and
limited investment options.

If you would like further information or guidance please contact alan hyder or steve paramor or by phone 0207 014 1450 .

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. This page will be updated as more details emerge.

Financial Planning Organisation. September 2010

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