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Auto-Enrolment and the National Employment Savings Trust
The Pensions Act 2008 introduces a duty on employers to auto-enrol eligible employees into a ‘Qualifying Workplace Pension Scheme’ (QWPS). The duty is expected to begin to apply from 2012, but may be staged over a short period starting with the largest employers.
Eligible employees will be those aged between 22 and State Pension Age who have qualifying earnings (and employees below 22 and over 65 will also be able to opt in). The QWPS will be either an employer sponsored pension arrangement that satisfies specified quality tests or the “National Employment Savings Trust (NEST)”.
Individuals can opt out of the QWPS but employers face financial penalties if they induce this. Employees choosing to opt out will face auto-enrolment every 3 years.
Auto-enrolment and NEST is likely to be relevant to your business if:
· You do not operate a pension arrangement(s) for all of your eligible employees;
· You have a significant number of employees who opt out of the pension arrangement that you operate; or
· The pension arrangement you operate does not satisfy the specified quality tests.
We give brief details below of our current understanding of the NEST scheme and the quality tests to be used to assess whether your existing pension arrangement qualifies for exemption. Our calculator estimates the minimum potential costs in relation to your non-pensioned eligible employees.
Details of the NEST scheme
· Minimum employer contributions of 3% and minimum total contributions of 8% (8% includes basic rate tax relief on employee contributions).
· If the employer pays the minimum, then the 8% total contribution will comprise: Employer 3%; Employee 4% and Tax Relief 1%.
· Minimum contributions to be phased in:
Minimum Employer Minimum Total
Oct 2012 to Sept 2016 1% 2%
Oct 2016 to Sept 2017 2% 5%
Oct 2017 onwards 3% 8%
· Qualifying earnings will be total earnings (i.e. not restricted to base salary) falling within an earnings band (£5,035 to £33,540 in 2006/07 terms). (Currently £5,435 to £40,040 if uprated with National Insurance thresholds.)
· Maximum contributions of £3,600 p.a. (in 2005 terms).
Exemption from the NEST scheme
· Defined Benefit (DB) schemes (also known as “final salary”) – these should qualify for exemption if contracted out, or contracted in and a pension accrual of at least 1/120th of qualifying earnings;
· Defined Contribution (DC) plans (also known as “money purchase” ) – these should qualify for exemption if providing contributions at least comparable with Personal Accounts, i.e. in terms of contribution rates and qualifying earnings (many arrangements do not currently recognise all fluctuating earnings) ; and
· DB/DC Hybrid plans – to be confirmed (tests likely to be as above for core DB or DC benefit).
Impact Assessment
We would be happy to give you a free indication of whether your current pension arrangement(s) will qualify for exemption from the NEST scheme. If they do not qualify for exemption, we can then offer our advisory services to explain the main options for benefit re-design to gain qualification. We can also analyse potential increases in costs and explore cost management strategies.
Even if you have a qualifying employer pension arrangement, you may have non-pensioned eligible employees, e.g. for reasons of opting out, ineligibility (under the arrangement’s rules) or closure to new joiners. These eligible employees will have to be auto-enrolled into a qualifying employer pension arrangement (the same or a different qualifying arrangement as for other employees) or into the NEST scheme. We can advise on the relative merits of these options.
For an approximate guide to the minimum potential costs involved for enrolling your non-pensioned eligible employees into the Personal Accounts Scheme, click here.
For further information
Please contact your usual Barnett Waddingham contact or email employeebenefits@barnett-waddingham.co.uk
Related DocumentsAuto-Enrolment and Personal Accounts Update Jan 10 (173.98 KB, .pdf)