What Changes are Being Introduced?

The UK government has acknowledged that there is a significant need to encourage more people to save in a private pension. The main reasons for this are due to people living longer and the fact that predicted retirement provisions are not considered sufficient to meet the potential demand. Although changes were introduced in April 2010 to make the State Pension fairer and available to more people, it is widely accepted that it will only be enough to provide a very basic foundation for retirement and most people will want to build up their own savings on top of this in an attempt to provide a suitable standard of living.

Therefore there are significant workplace pension reforms being introduced from 2012. Employers will be required to automatically enrol all eligible employees into a qualifying company pension scheme and make ongoing minimum contributions each month. Almost all UK employers will be affected by the new rules and it is important to know how these changes will affect you and your business.

Three parties are working together to implement these workplace pension reforms:

• the Department for Work and Pensions (DWP) is responsible for the policy and legislation
• the Pensions Regulator (TPR) is responsible for maximising employers' compliance with their new duties
• the National Employment Savings Trust (NEST) Corporation is the trustee body responsible for overseeing NEST

Automatic enrolment into a company pension scheme and a low-cost default arrangement were first raised by the Pensions Commission over 5 years ago. Following this there have been various consultations and reviews before we now have some clarity on what the new requirements for employers actually are.

A report published by the DWP in October 2010, called 'Making Automatic Enrolment Work', detailing the outcome of a final independent review and accepting all the recommendations contained in the report. The government concluded that the review team's recommendations represent a sensible and balanced package of proposals and will now proceed with their implementation of the pension reforms on the basis detailed in that report. We also now know the National employment savings trust (NEST)  will definitely be the alternative scheme available to all employers should they not have a company pension scheme already put in place.

Employers will be able to choose the company pension scheme they want to use provided the scheme meets certain quality criteria - this includes their current scheme. These may be based on contributions or benefits people receive, for example final salary schemes.

A new simplified company pension scheme, NEST (National Employment Savings Trust), formerly known as personal accounts, will be introduced as one such qualifying scheme. The intention is that NEST will operate like any other trust based, multi-employer defined contribution occupational pension scheme, but it will be focussed on a target audience of low to moderate earners.

If employers choose a defined contribution scheme they will need to contribute 3 per cent on a band of earnings for eligible jobholders - between £7,475 and £33,540 a year (this figure will be updated for 2012 and is pending legislation. We expect the minimum to be in line with the new Personal Allowance of £8,105). This will be supplemented by the jobholder's own contribution and around 1 per cent in the form of tax relief. Overall contributions will total at least 8 per cent for this type of scheme.

To help employers adjust gradually the plan is to phase in the employer contribution levels - starting at 1 per cent, then 2 per cent, and finally 3 per cent. The jobholder's contribution will be phased in the same period.

There are many issues employers now need to address and questions they need to answer. To begin with, all employers need to conduct an analysis to see how many employees will be affected and whether their existing pension scheme meets the quality requirements. Even if they do have a qualifying scheme, employers must decide whether to use this scheme or simply auto-enrol staff into NEST. Of course, some may decide to use NEST for certain categories of employee and their own scheme for others.

Auto-enrolment will almost certainly have a direct impact on employers' pension costs, they may also want to use this as an opportunity to review benefits for all staff, including the ongoing provision of a defined benefit scheme (if applicable).

Company Pension Review offer an initial consultation phone call with an Independent Financial Adviser to discuss your potential needs.

Please contact us to book in an appropriate time.