Costs of an ageing workforce.
17th October 2012
PENSION CHANGES FROM OCTOBER 2012.
As the population in the UK continues to grow quickly and against a background of advances in technology, medical treatment and our lifestyles generally, we are all living longer. The effect is a growing aging population reliant in its retirement largely on an already overstretched state welfare system teetering on the brink of failure.
This issue has been exacerbated in the past generation by the rapid decline in private “final salary pensions” and the failure of some other pension schemes. This has lead to the imposition of minimum requirements and financial controls over how they are run. However the government have yet more radical change set in the foreseeable future with a view to paving the way into retirement for the next generation.
In addition the maximum age for claiming unfair dismissal being removed some years ago we have also recently seen the abolition in the National Retirement Age in October 2010. It follows that it is now considerably harder to retire someone based on Age alone; in the event that an employer wishes to do so it must now show that any imposed Retirement Age is a proportionate means of obtaining a legitimate aim. Failure to do so will lead to a claim for age discrimination and even unfair dismissal.
Presently state pension age (not retirement) is 65 for men and between 60 and 65 for women (depending on their date of birth). However, by 2018 the retirement age will be 65 for everyone, rising to 66 by 2020 and eventually to 67 by April 2028.
The Present System
Whilst many employers still appear oblivious to their responsibilities, there are in fact employer obligations in respect of pensions and have been for in excess of 10 years.
Under the current system there is a minimum requirement for an employer with 5 employees or more (including shareholder/directors), at very the least in the absence of Occupational Pension Scheme, to provide access to a Stakeholder Pension Scheme.
At present there is no liability for the Employer to pay into that scheme. They act as a “money purchase scheme” and not as a final salary indexed one.
Other rules include:
- A stakeholder pension scheme cannot charge more than 1% a year of the value of the member’s fund for administration and investment expenses.
- Members must be able to transfer into or out of a stakeholder pension, or stop paying for a time, without facing any extra charge.
- All Stakeholder Pension Schemes must accept contributions of £20 or more a year, although some may accept lower payments.
- They must be run in the interest of their members. They can be run either under a trust or under contract-based arrangements by a scheme administrator.
It is therefore possible that an employer may find itself in a position whereby it is required to set up and provide access to a stakeholder pension scheme to its employees, however, no employees actually volunteer to join it.
Changes with effect from October 2012
The proposed changes will come into force with effect from 1 October 2012. i.e. in little over 6 months time from the date of the publication of this article.
The first noticeable change is that all “jobholders” over the age of 22 and under national pensionable age MUST be automatically enrolled into the occupational pension scheme. In reality this will mean that the additional opt in process will be scrapped.
A “jobholder” is defined as any person who meets the following three conditions:
- Works (or ordinarily works) in Great Britain under a contract, and including temporary workers and also executive directors employed under a service contract.
- Is aged at least 16 and under 75.
- Is paid “qualifying earnings” by an employer. Earnings include bonuses, overtime and statutory maternity, paternity or adoption pay. Under the DWP’s plans, the earnings “trigger” would be set at £8,105 and the band of earnings on which contributions must be calculated would extend from £5,564 to £39,853. We are presently awaiting full details as to how this will work.
The National Employment Savings Trust (NEST) is one form of pension scheme that is open to be utilised by Employers in order to comply with their obligations. NEST is a trust-based occupational defined contribution pension scheme run by the NEST Corporation, however, NEST is not compulsory and employers will be able to use their existing pension arrangements (or put in place new arrangements), provided they meet qualifying criteria.
Clearly increasing the access to “workers” is a significant step forward. This is also very much a natural progression from the recent agency workers legislation which provides that agency staff engaged in excess of 12 weeks must be provided with access to the same benefits as an employer’s directly employed staff.
Given the sheer size of the task at hand it is proposed that the automatic enrolment obligations will be brought in as a staged implementation based on the number of employees within an organisation. The target dates for such implementation will be specific to each employer however broad guidelines are set out below;
Number of employees Date compliance begins
250 or more 01 October 2012 to February 2014
50 to 249 01 April 2014 to 01 April 2015
Under 50 Employees 01 June 2015 to 01 April 2017
New Start Business 01 May 2017 to 01 February 2018
Between 1 April 2012 and 30 Sept 2017 01 October 2018
In order to check your specific compliance date you should review the charts published at www.tpr.gov.uk/staging
The Second change to pensions is that it will become compulsory for employers to also contribute to the jobholders’ pension.
It is presently planned that employers will pay 3% of the employee’s annual salary into the fund and employees will eventually be required to contribute 5% of their annual salary. However, the level of contributions is due to come into force on a sliding scale over a 5 year period. That scale for the majority of jobholders (as a tier 2 candidate) is set out below:
Year Employer Contribution Total Minimum Contribution
Oct ’12 to Sept ’17 1% 1%
Oct ’17 to Sept ’18 2% 3%
Oct ’18 onwards 3% 8%
Opting In and/or Out of the Scheme
Jobholders automatically enrolled will have a statutory right to opt out of whichever scheme they have joined. Details such as the period within which the jobholder can opt out, and the calculation of and procedure for refunding contributions is yet to be published. An employer will be under a duty not to take any steps (or make any omission) by which the jobholder stops being an active member, or the scheme stops counting as a qualifying scheme, unless the jobholder is an active member of another qualifying scheme.
Non-eligible jobholders who are not automatically enrolled can give their employer notice requiring the employer to arrange for them to be enrolled into a scheme. But they can only do this once in a 12-month period. The employer will not be required to make any contributions in these circumstances.
Pensions will be regulated by The Pensions Regulator who will be given powers to issue compliance notices to employers who contravene this obligation and penalty notices to those that flout compliance notices. Penalties will vary according to the employer’s size although it is anticipated that large employers who do not comply could be liable for escalating penalties of £10,000 a day. In addition it is yet to be seen whether criminal penalties will apply in the case of “wilful” failure to comply.
It is not yet clear whether individual candidates will have redress for compensation for any failures by an employer before an employment tribunal. However, various employment protection rights on workers (but not “jobholders”) will be enforceable in this way; for example if they suffer any detriment in their employment because of their employer’s breaches of the regime. In addition, a new provision will be introduced into the Employment Rights Act 1996 (as section 104D) which will render unfair any dismissal arising from an employer’s breaches of the automatic enrolment requirements or the prohibited recruitment conduct. Employers cannot contract out of, limit or exclude any of the new duties imposed on them (except under a compromise in relation to proceedings in an employment tribunal).
Employers will not be able to ask job applicants at interview whether they plan to opt out of auto-enrolment and they will not be able to offer financial inducements (such as higher salaries or one-off bonuses) to their employees to opt out of membership of workplace pension schemes. An employer will face a compliance notice from the Regulator if it takes action for the “sole or main purpose” of inducing an employee or worker to opt out of such qualifying schemes.
For employers the new systems mean an increased administrative burden to ensure that all workers earning over the threshold are automatically enrolled into the pension scheme, together with in most cases an increased financial burden in respect of those individuals for whom it will have to now make contributions on their behalf; the effect has a greater impact by the very fact that the payments will be made in respect of workers as well as employees.
In order to ensure compliance with the new regulations the Pension’s regulator will be provided with greater range of powers and financial sanctions which can be imposed in addition to any compensation payable to an employee for the losses that he or she may suffer.
More details on the new systems and their implementation can be found at:http://www.thepensionsregulator.gov.uk/pensions-reform/detailed-guidance.aspx