Saving for the Future? You will be!


From October this year major UK pension reforms will significantly impact employers’ HR, payroll, pensions and finance functions through more than just extra pension costs. Addressing the requirements of Auto-Enrolment could prove costly and resource intensive, but organisations should make changes to their systems and processes now to prepare for the inevitable.

What is Auto-Enrolment?
The UK Government requires employers to automatically enrol workers (not just employees) into a ‘suitable’ pension scheme. This is because there is a large number of employees that is not saving for retirement. In fact, the UK has the largest ‘pensions gap’ (the difference between the income needed to live comfortably in retirement and the actual income that individuals can currently expect) in Europe (study by Aviva and Deloitte). In order to close the gap the 31 million UK adults due to retire between 2011 and 2051 will need to save an average of £10,300 per annum. However, only half of employees currently save into a pension scheme at all.

Who is affected?
Auto-enrolment will apply to all employers but will be phased in from October 2012 to 2016. It will apply to workers aged between 22 and the state pension age. Employees under 22 and over state pension age can opt-in to the scheme.

What does it entail?
Employers can auto-enrol into an existing pension scheme, set up a new scheme, use NEST or comply through a combination approach. However, the scheme chosen must meet the Act’s minimum requirements (Pensions Act 2008).

The ‘compliance’ regime, enforced by the Pensions Regulator, starts for ALL employers in July 2012. After that time it largely depends on an employer’s ‘staging date’, which is related to the number of employees on the payroll at 1 April.

The percentage contributions will increase from 1% for both employer and employee to a total of 8% by October 2017 (employer 3%, employee 5% including 1% tax relief). The annual contribution maximum limit is currently set at around £5,000.

The contributions will be on ‘qualifying earnings’ rather than just basic pay. Qualifying earnings include basic pay, overtime, bonuses, commission etc. The contributions are based on the personal accounts earnings band (PAEB) which will be reviewed each year. The PAEB is currently around £5,000 to £33,500 pa.

Employees will be able to opt-out of the scheme, but this must be reviewed at least every 3 years when the auto-enrolment process must be repeated.

There will be a waiting period of up to 12 weeks for new employees. This will help to reduce the administrative burden on employers of seasonal staff or where these is a high turnover.

In a nutshell: