Auto-enrolment and NEST
The Government has introduced new duties on companies to ensure more people are saving for a pension. These new duties, to be staged in from 2012 depending on company size, require all employees to automatically enrol the majority of their employees into a company sponsored pension scheme. The pension scheme chosen by the company must either require minimum contributions, or provide minimum benefits, in order for it to be considered as a ‘Qualifying Scheme’ under the new companys’ duty.
Under the new rules, a Qualifying Scheme is any occupational or contract based pension scheme sponsored by the employer that meets statutory minimum criteria, including the following:
- Allows auto-enrolment of all employees between age 22 and the State Pension Age (SPA) with the relevant level of ‘Qualifying Earnings’ (broadly gross earnings between £7,475 and £38,185 a year from 2011). Contributions however start on earnings above £5,715 where the contribution threshold for auto-enrollment of £7,475 is met;
- Allows temporary and contract workers to be enrolled providing they meet the above criteria;
- Permits employees with Qualifying Earnings aged between 16 and 21, or between the SPA and 75 to choose to join and benefit from the employer contribution if they wish (and assuming the member also contributes where required).
- Automatically enrolls employees within three months of starting employment.
Minimum benefits / contributions
- For Defined Benefit schemes, a minimum accrual rate of:
- 1/80th of Qualifying Earnings if contracted out of the State Second Pension (S2P); or
- 1/120th of Qualifying Earnings if contracted into S2P.
- For Defined Contribution schemes, a total minimum contribution of 8% of Qualifying Earnings of which at least 3% must be paid by the employer. Where the employer only pays the 3% minimum, the balance will be met by 4% employer contributions and 1% tax relief (based on current basic tax rates). These minimum contribution requirements will also be phased in between 2012 and 2017.
- Defined Contribution schemes must have a default investment option so that an employee is not required to make an investment choice following automatic enrolment.
National Employment Savings Trust (NEST) will be one of the Qualifying Schemes which employers can use to meet their new employers’ duties. NEST is a new, national defined contribution pension scheme which has been designed to be easy for employers and employees to use.
NEST is aimed primarily at low to median earners who currently do not participate in workplace pension saving, and has some special features which make it unique from other occupational pensions’ schemes, including:
- Customer engagement primarily through e-channels;
- Each member will have a single account to receive all contributions, including from different employers;
- Admission of self-employed workers;
- An initial limit on contributions of £3,600 per annum (based on 2006/07 figures)
- Accessible to all employers who wish to use it to fulfill their new duties;
- Transfers in and out of the scheme are prohibited (in the short term except in some special circumstances);
- Anticipated membership of approximately 5 million individuals with up to 1 million participating employers.
2012 will arrive quickly and proactive planning now can help employers identify what they need to do in order to comply with the new duties, as well as what options are available to mitigate any increase in costs or disruption to existing pension arrangements. Where take up of existing arrangements by employees is relatively low-employers do not currently make any pension contributions, or where contributions fall below the minimum threshold required, the financial implications could be significant. This makes the need for careful planning vital.
Even where an employer’s current pension scheme meets the Qualifying Scheme standard, action may be necessary – for example, where employees are not currently auto-enrolled into such schemes and changes to systems and processes are required to facilitate this. Additionally, employers may need to review pensionable salary definitions and the administration systems operated by trustees or other pension providers.
Given the changing regulations, now is the right time to review current pension arrangements. Deloitte can help you review your current arrangements and identify your requirements under the new rules. Where appropriate, we can help you implement a new Qualifying Scheme as efficiently as possible, including strategies to ensure various costs, particularly VAT, are kept to a minimum. There are a range of flexible solutions, including not only NEST but also outsourcing of group pension schemes and Deloitte can help to identify and implement the right solution for your organisation.
The savings that can be achieved by implementing SMART Pensions can be substantial and is one way for companies to help mitigate the potential cost increase as a result of auto-enrolment.
Additionally, we are able to provide assurance services for pension schemes which include understanding of your risk and control environment in this area and testing of the relevant systems and processes. These services can be provided jointly with existing internal audit resources or as an outsourced solution. Learn more about the extent and benefits of our pension assurance services.