Prepare now for pension changes

The government has announced one of the most radical changes to the pension system in a generation. All “eligible jobholders” of every business must be enrolled into a pension scheme.

The rolling changes beginning in October 2012, will be fully introduced by September 2016, at that time all businesses must either offer their own qualifying pension scheme or enrol staff into the government backed National Employment Savings Trust (NEST).

Eligible jobholders are employees who earn at least £7,475 a year in 2011/2012, are aged at least 22 and have not yet reached State Pension Age. The contributions will be based on their income above the national insurance primary threshold of £5,715.

For employees whose income lies between these two figures, there will be the option to opt into the pension scheme and receive an employer contribution.

The government claims the move will see between four and eight million workers begin to save into a pension scheme for the first time. It will apply to all businesses – whatever their size. Once fully operational, the scheme will see employers and employees together contributing 8 per cent of income into a pension.

For companies who do not currently make any pension provision for staff, and there are many, the changes will be significant and costly.

Businesses need to factor the contributions into their business and financial plans. Setting up pension schemes for staff can be a labour intensive job, especially for those companies who may not have an in-house HR department. The sooner businesses start planning the better.

Employers will have the choice to enrol employees into an existing qualifying scheme, set up a new scheme or use NEST. So the first thing to do is to check the staging date – the date when a business must commence enrolment of its staff.

Following this, a business should look at the current take-up among staff for any existing schemes and assess how costs will increase under auto enrolment.

Importantly, companies that do not make pension provision should look into the potential costs of auto enrolment and review who will need to be auto enrolled so that there are no surprises when the staging date does arrive. Directors will also need to decide as soon as possible what kind of scheme to use.

There is no avoiding auto enrolment, however if businesses plan early enough it should lessen the impact. Through embracing the changes positively, it can actually provide a powerful employee benefit to boost staff morale.

Businesses should seek professional advice if there is any doubt about the effect of the changes.

Paul Jackson
Taylor Patterson