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Guide to Workplace PensionsRules for employers under auto-enrolment
More advisers are looking to get involved in corporate pensions advice as a result of the demand and opportunity created by auto-enrolment reforms, which are now being rolled out to the small and medium firms which are likely to need support.
By 2018 all employers must provide a qualifying defined contribution workplace pension scheme for all eligible employees. Larger employers have been ‘staged in’ already, while medium, smaller and micro employers and being staged in between now and the final deadline.
Paul Budgen, channel manager for product and marketing at Nest, says employers need to automatically enrol all eligible workers who aren’t already in a qualifying scheme. An eligible worker is anyone aged between 22 and the state pension age, who is working in the UK and earning more than £10,000.
Other types of workers can ask to be enrolled and employers may need to make contributions for them too, under the auto-enrolment requirements.
Mr Budgen says assessing their workforce is one of the first steps employers need to take once they have found out what their staging date is. They will also need to consider what scheme they are going to use and check that their systems and processes are ready, he adds.
As the employer will need to send regular contribution information and payments on behalf of their workers, Mr Budgen says checking that their payroll systems or payroll provider is ready to do this is very important.
If an employer already offers a workplace pension scheme, Mr Budgen says they shouldn’t assume that their existing provider will be able to help all of the workforce.
Other duties that the employer has to meet as a result of auto-enrolment rules are to communicate with all employees to tell them what is happening and what options are available to them, says Jamie Jenkins, head of workplace policy at Standard Life.
He says it is important for employers to realise that this is not just about a staging date as they will then need to assess, join and make payments to employees’ plans on an ongoing basis.
As well as enrolling eligible members, Mr Jenkins says a suitable, good quality default investment fund needs to be put in place on the scheme.
The Department for Work and Pension’s guidance on default investments states that, as far as is reasonable, the option chosen should take account of the likely characteristics and needs of employees who will be automatically enrolled into it.
For this reason, Mr Jenkins says it is important that a default investment option that is most suitable for the majority of employees is chosen.
The government has set new criteria on workplace pension schemes that are used for auto-enrolment that will apply from April 2015 and April 2016.
These include setting a maximum charge cap of 0.75 per cent on the default investment fund and banning commission and active member discounts from QWPS schemes.
When selecting a scheme on behalf of a corporate client, Mr Jenkins says it is important for advisers to make sure that it is compliant with the rules regarding workplace pensions.
However, he says not all pension schemes are the same and the minimum standards will not always support the best outcomes for scheme members. Mr Jenkins says it is therefore important for advisers to recommend a scheme that delivers more than just the minimum.
Contributions
Minimum contribution requirements currently start at 2 per cent of qualifying earnings, of which employers must contribute at least 1 per cent. They will then increase gradually over the next few years to a total minimum contribution of 8 per cent, of which employers will have to put in 3 per cent.
For the 2014 to 2015 tax year the qualifying earnings is the band between £5,772 and £41,865 a year, with a lower threshold of £10,000 set to trigger an employee being automatically enrolled. Minimum contributions are calculated on a worker’s gross annual earnings within this band.
Minimum contributions are set by government and Mr Budgen says this requirement is a great starting point to get people into the savings habit.
He says: “They (contributions) have started off at a low level and will be increased gradually to help both employers and workers adjust. Nest research has shown that for most people the threshold for a comfortable retirement is around £15,000 a year.
“Ultimately, it is for individuals to determine ‘how much is enough’. Minimum contributions are just that – a minimum.”
