The recent publication by the Department for Work and Pensions of the first set of draft regulations...
The recent publication by the Department for Work and Pensions of the first set of draft regulations covering automatic enrolment into pensions highlights just how big a change is facing employers from 2012. The new requirements arising from the Pensions Act 2008 will lead to extra administration and also to higher cost.
The standard automatic enrolment process will see new staff being brought into the pension arrangement within 14 days of starting work, or reaching age 22, after which there will be 30 days in which they can choose to opt out. In almost all cases there is likely to be at least one pay-day before the opt-out period ends, and the employer has to deduct a contribution from the employee if there has not yet been an opt-out. If the form is subsequently submitted, the employer will have to make a refund to the staff member, and reclaim any money that has been passed over to the pension scheme. The employer must also check that the opt-out form is completed correctly and pass it on to the scheme.
While the Government wants to make things as simple as possible for employers, this process is potentially messy, especially when automatic enrolment is first introduced and employers may be bringing in a large number of staff. There may also be significant extra costs, from three sources.
First, automatic enrolment is likely to lead to many more people joining the pension arrangement. There is some evidence that the number of members could increase by as much as 70%. While many newer members will be lower-paid, with higher-paid staff already in the scheme, the introduction of automatic enrolment could add a substantial amount to the cost.
Second, relevant earnings under the new regime include overtime, bonuses and commissions which are currently often excluded from calculations. While the first £5,000 a year of earnings is excluded under the definition, employers may find themselves having to increase contributions for some staff.
And finally, if employers choose to reduce the administrative burden of automatic enrolment by delaying automatic enrolment for up to 90 days, they then have to pay a contribution rate of at least 6% of relevant earnings - twice the usual minimum. The minimum employee contribution is not increased.
This all represents a major change to employer responsibilities. While there will be extensive Government communications nearer the time, advisers can help their employer clients consider the issues and take appropriate action before it is required, particularly if they are starting or reviewing pension arrangements.
Ian Naismith is head of pensions at Scottish Widows
