Let’s face it, pension planning is not the most exciting of topics – but 2012 saw the introduction of auto enrolment, the biggest change in workplace pensions ever, making it a talking point for even the smallest of businesses. But what’s it all about?
Since 1948 the average UK household savings ratio has been around 6% of income, which is considerably lower than the rates in much of Europe – and indeed a whole 10% less than our Antipodean counterparts. At current rates, the UK’s economic outlook is unsustainable, given the negative implications of rising public sector debt, an ageing population and increasing healthcare, long term care and state pension costs, coupled with contracting tax revenues.
Many UK workers have no retirement savings whatsoever, especially in the private sector, and some economists predict that the looming pensions crisis could make the credit crunch seem like a tea party. It is therefore one of the UK Government’s aims to increase our savings ratio to 12% by 2020.
Auto enrolment effectively started last October with our biggest employers, the big four supermarkets, and already over one million employees have been auto enrolled into a pension scheme. The auto-enrolment initiative will continue to be rolled out until 2018, by which time all employers – even the very smallest – must have a company pension scheme in place and be contributing on behalf of their employees.
Each company must provide and contribute to a ‘qualifying’ workplace pension for their staff aged between 22 and State Pension Age earning over certain amounts. Employers must also deduct contributions at set levels from employees’ pay and offer membership to the pension scheme to other staff on demand. Employees may opt-out of the plan of their own choice but it is an offence for an employer to encourage this.
Contributions start at low levels but by 2018 these will have risen so that, as a minimum, employees will contribute 4% of their qualifying earnings, with their employer adding an extra 3% and the Government adding 1% through tax relief. This is a great foundation for retirement savings but most people should try to put more away if possible, especially if they earn above average salaries. As an example, a 20 year old on average earnings saving for 46 years at the 8% level may only receive a pension of some £500 per month in today’s terms and those who are closer to retirement could get considerably less.
The rules and practical responsibilities of auto enrolment are complex and it would be wise for employers to seek professional help to ensure they don’t get it wrong – the risk of doing so includes hefty fines for those who fail to meet their new legal duties. The penalty regime is being managed by a third party contractor who is being remunerated on results – so don’t expect any leniency!
2018 may seem like a long way ahead but businesses should start planning now as the size of implementing an auto enrolment project should not be underestimated and it makes real sense to take professional advice early to ensure a smooth migration. Sound advice will need to come from a number of sources – pension specialists are needed to help with planning and design of the scheme to suit your organisation; accountants input on budgeting for new costs, potential ways of
mitigating them, and also on the mostappropriate payroll systems to cope with the changes; and finally, legal opinion may be needed around changes to contracts of employment and determining which employees are within scope of the new laws.
With hundreds of thousands of employers affected by the new laws access to the advice needed to comply is unlikely to be available to all, and its widely expected that the capacity simply will not be there to advise all companies – so act promptly and seek information now.
Further information is available in the latest issue of iNsight magazine or via the office on 02920 713 800.