Pension Reform - Important Information For Employers

What is Happening?
The Government is putting the onus on employers to facilitate and encourage its employees and workers to save. For most employers, this will have a significant impact not only on finances but on HR, payroll and pension systems.

On a phased basis from 2012, employers will be required to enrol certain employees and workers automatically into either their own company plan, if it is suitable, or into NEST (National Employment Savings Trust), a new government pension scheme.

There will also be minimum levels of contributions both employer and employee will have to pay.

When is it happening?
The reforms will be rolled out over a number of years, beginning on 1st October 2012 - but employers will need to take steps in advance to make sure they are ready to comply.

A large proportion of employers (over 40%) have not started any preparatory work yet, and fewer than 1 in 5 Finance and HR directors know what auto-enrolment will cost their organisation, and what the operational impact will be.

What do you need to do now?
You should start considering now what you will need to do to make sure that you comply with the rules, to allow yourselves enough time to make sure that you have a compliant scheme in place, and effective auto-enrolment procedures.

What will be the potential additional costs?

• Increased pension scheme membership and employer pension contributions; and
• Administrative costs of registering and meeting new enrolment duties.
  

Employers also risk being fined by the Pensions Regulator for non-compliance with the rules.

How can we help?
Ashfords LLP is working with Citrus4Benefits Ltd, an award winning employee benefit consultancy authorised and regulated by the FSA.  Together, we can provide the full range of legal and practical assistance needed to set your business up to be compliant with the new legislation, whilst advising on strategies to minimise the costs to your organisation.  

More information about what is happening
Which employees and workers must be automatically enrolled?
Employees and workers who must be automatically enrolled are called "eligible jobholders".

Employees and workers who are not "eligible jobholders" can give notice to their employer that they want to opt in to the compliant pension scheme. A "non-eligible jobholder" will therefore receive the benefit of employer contributions in the same way as an eligible jobholder.

"Eligible jobholders" are able to opt-out of this scheme - but employers will be required to re-enrol eligible jobholders automatically every three years.

Employees and workers who are neither "eligible jobholders" nor "non-eligible jobholders" are called "entitled workers".  An "entitled worker" is not eligible to be enrolled automatically into the compliant pension scheme - but "entitled workers" can give notice to their employer that they want to opt into a "registered pension scheme".

A registered pension scheme does not have to meet the same criteria as a compliant pension scheme, and employers do not have to make contributions into a registered pension scheme for entitled workers.

Summary of Eligible Jobholders, Non-Eligible Jobholders & Entitled Workers

 Which pension scheme can be used?
A compliant pension scheme could be an employer's existing pension scheme, a new scheme or NEST.

If an employer uses its own scheme, whether existing or a new one, the scheme must be a registered occupational or personal pension scheme which meets the detailed criteria in the legislation. The main criteria it must meet are:

• The scheme cannot impose barriers, such as probationary periods or age limits for members; and
• The scheme cannot require staff to make an active choice to join or take other action (such as having to sign a form, or provide extra information to the scheme themselves), either prior to joining or to retain active membership of the scheme.

An employer with an existing scheme will be able to certify in advance that its scheme meets the minimum requirements necessary for the scheme to be a compliant pension scheme.

An employer with an existing defined benefit scheme who wants to use this scheme for auto-enrolment must ensure that the employer's scheme is broadly equivalent to, or better than, the pensions that would be provided under the "test scheme" detailed in the legislation.

Even if your current pension scheme meets the criteria in the legislation, you will need to provide employees and workers who are members of that scheme with certain statutory information, to meet your obligations under the legislation.

When must Eligible Workers be auto-enrolled?
The starting date for auto-enrolment will be 1st October 2012.

Employers will be separated into 43 bands according to size, with each band being assigned a particular monthly "staging date" from October 2012 onwards.  Large employers will become subject to auto-enrolment duties before smaller employers.

Existing eligible employees must be auto-enrolled from the day the employer is covered by the new regime, and any new eligible employees who start work after that date will need to be auto-enrolled the day they begin work.  However employers are able to issue a notice to the employee to defer auto-enrolment for up to 3 months.

What contributions must be made?
The contribution requirements will be phased in over five years.  The current position (which is subject to review) is as follows:

What if an employer fails to comply with its obligations?
If an employer breaches the rules, the Pensions Regulator will be able to issue an Enforcement Notice, and can impose penalties of up to £10,000 a day for larger employers.  Directors and business owners guilty of wilful non-compliance may also risk imprisonment.

Ongoing duties - safeguards
Employers will need to be aware of the ongoing safeguards that have been put in place to protect jobholders and job applicants.

As well as making sure that you are able to comply with the auto-enrolment duty, you must be careful not to:

• Act in a way that is seen as encouraging employees to "opt out" or cease active membership of a pension scheme, as to do so will be considered a breach of the employer's obligations.  It is not clear at this stage what will amount to encouragement, but it may include offering staff a flexible benefit package where membership of a pension scheme is only one of the optional benefits on offer;
• Subject a worker to any "detriment", or dismiss an employee or worker on grounds related to the new employer duties. If an employer does so, the worker or employee may enforce their rights in an Employment Tribunal. A "detriment" might include withholding a benefit if an employee or worker doesn't "opt out", or providing an additional benefit to those employees and workers who do "opt out"; or
• Screen job applicants on grounds relating to their attitude towards potential pension scheme membership – this is known as "prohibited recruitment conduct".

What do you need to do now?
You should start considering now what you will need to do to make sure that you comply with the rules, to allow yourselves enough time to make sure that you have a compliant scheme in place, and effective auto-enrolment procedures.

Ashfords LLP and Citrus4Benefits Ltd can assist with:

• Identifying your auto-enrolment date;
• A review of your pension provision to identify the potential financial impact of the new legislation;
•  Identifying "eligible jobholders" in your workforce; 
• Determining how you can meet your auto-enrolment duty;  
  
• Where you intend to use your existing scheme, determining if such a scheme is compliant;
• Implementing policies and forms relating to opting-in and opting-out;
• Preparation of a practical plan to align business and legislative requirements; and 
• Reviewing you recruitment policies and flexible benefit packages to ensure they do not induce employees to "opt out".
  

For further information, please contact any member of the Ashfords' Employment Team or the Citrus4 Benefits Team.

Stephen Moore

Charles Pallot

Rhiain Lewis

Michelle Fox