AUTO ENROLMENT – What it means for employers and employees
by Ben Smaje, Kennedy Black Wealth Management
Employer based pension schemes are going through a massive change at the moment – perhaps the biggest pension reform in a generation.
From October 2012, new rules (referred to as “Auto Enrolment”) came into force that will require every employer in the country to provide a pension, into which it must automatically enroll its eligible staff and make contributions.
The rules are being phased in – the biggest employers started in October 2012 – however the most impact will be for small and medium sized businesses who are being phased in over the next 2-3 years. Most large employers will already offer a pension and will probably already be making contributions; a lot of smaller companies won’t be doing either.
This presents big challenges for small and medium-sized businesses, and we would be delighted to talk to anyone running a business about their new obligations in advance of the new changes taking effect. It may be helpful here, though, to try to summarise the new rules and how they might impact an employer.
Firstly, the new rules affect all businesses with at least one genuine member of staff (therefore only true one-man-bands will be exempt). Previously, companies with fewer than five employees had no pension obligations whatsoever.
Secondly, businesses will be required to automatically enrol their “eligible workers.” There are clear guidelines as to who will be eligible, so businesses need to ensure they have systems in place to flag them as eligible and enrol them (within 90 days of joining the company) or not.
Thirdly, reporting obligations are onerous. Employees can choose to opt out, but must be automatically re-enrolled every three years. The hope is that people will eventually give up opting out and resign themselves to joining. All steps to the process must be adequately recorded and records must be kept for six years.
Fourthly, employers will be required to contribute. These rates are also being phased in, rising to a total contribution of 8% of salary, of which at least 3% must come from the employer. This is likely to be a considerable cost for employers.
While there is some speculation as to how effective auto-enrolment will be (especially with regards to the opt out rate), we are a strong supporter of the new rules. The government is slowly waking up to the fact that an ageing population needs to take greater responsibility for its retirement.
However, in the short term, small businesses need to be well prepared and well in advance of their official “staging date” (which you should have already received by now).
Auto Enrolment is a huge change for employers. Equally, it is important that all employees understand what is happening too.
Essentially, unless you actively opt out (every three years), employees will be automatically enrolled into a pension scheme into which they will have to contribute up to 5% of gross salary (unless your employer is generous enough to go beyond the bare minimum).
Unless you already make pensions contributions, you can expect your take-home pay to reduce as a result. Because of this, research from the NAPF estimates that up to 33% of employees could opt out – most likely those struggling to make ends meet. Unfortunately, when it comes to retirement provisions, these people are perhaps the ones that need it the most.
There are thus two temptations that we urge you to resist.
The first is the temptation to opt out. Unless there are clear reasons to the contrary (the need to repay expensive debts, for instance), we believe most people should not opt out. Only you can take proper responsibility for your retirement, and there is no better time to start than now.
The second is the temptation to rely on Auto Enrolment and think that this 8% contribution is going to sow the seed for the retirement of your dreams. In our experience, it will not. We have found that individuals with 20-30 years until retirement need to be thinking about making regular pension contributions of 15-20%+ of salary (i.e. at least twice what is required under Auto Enrolment) to stand a realistic chance of maintaining the lifestyle they want.
Ben Smaje is managing director of Kennedy Black Wealth Management and a director of the Islington Chamber of Commerce