Auto-enrolment will be compulsory for all firms. Here’s what you need to know
The rules on pensions have changed. As of October 1, UK businesses must offer the Automatic Enrolment Pension Scheme (AEPS) for all employees, following a six-year process starting from the largest employers going down to the smallest.
Iain Duncan Smith, secretary of state for work and pensions, expects that the new scheme will eventually get up to 9 million more people saving into a workplace pension. For many it will be the first time they have had the opportunity to save.
The move is designed to revive the flagging pensions sector. Fewer than one in three people saves for a pension, with the percentage of people saving falling down across the board.
The Pensions Regulator envisages that the process will roll out until 2017 at the latest. By then it will include all companies.
Large businesses have received letters from the Regulator some 18 months ago. As a result, from next month anyone between 22 and 65 years old, currently earning between £ 8,105 to £40,000 and working for an employer, who is affected, will be automatically enrolled.
While the move, which has been based on the Pension Act from 2008, has been a result of a long consultation process and has received the necessary political support across the board, its roll-out timing and the immediate administrative and financial burden on businesses may well slow it down.
The Department of Work and Pensions has estimated that companies will need to pay £150 million a year cumulatively in administrative costs once all employers have been phased in. However, no-one will have to pay the full minimum contribution of 8% until October 2018, which is made up of 3 per cent from the employer, 4% from the individual and 1% in tax relief.
“Leaving it as late as possible runs the risk of making preparations more costly and complex”, said Charles Counsell, executive director for employer compliance at The Pensions Regulator, implying that making adjustments to processes and systems takes time.
“Our estimate is that there are 19 million employees in the UK’s private sector and about 40% of those do not save for retirement”
Meanwhile, the majority of companies would have received letters from the Regulator with their specific deadline and additional instructions, whereby many SMEs will have time to enrol until 2015. UK’s top employers such as Tesco, Asda, Morrisons and Sainsbury’s employing more than 120,000 people, got their notification letters at least an year ago, according to a Regulator spokesperson and are ready to go ahead.
“The businesses will benefit from the scheme, as it will help them retain their work force more easily, while it will be easier for older employees to retire regardless of how close they have got to retirement age, also allowing new blood to come in” said Malcolm Small, senior adviser on pensions at the Institute of Directors. However, that flexibility will come at a cost.
“Our estimate is that there are 19 million employees in the UK’s private sector and about 40% of those do not save for retirement,” said Small. “In the last year alone, according to the Office of National Statistics, 100,000 people in the sector more have declined to save for retirement, due to the current economic condition, which can be a real problem for future funding of pensions, he said. “In addition, in the public sector, 90% of people have enrolled, but their pensions are unfunded.”
So in terms of the cost to employers, having in mind that the employer contributes 3%, based on an average national salary of £26,000 a year, the scheme will cost companies roughly £2.1 billion before administrative costs.
However, Small assumes that as high as 40% of employees in the private sector will decline rolling in, due to the current economic conditions, which will bring the cost to employers to around £1 billion, having in mind that many have already got on place penison schemes.
The difference between the existing self-enrolment scheme and the AEPS is that now all employees have to enrol. If they do not want to, they need to explain “why not” in writing in the first month, according to DWP. There will be still ways for workers to opt out or roll in later on, but it will be more difficult to do so. However, if an employee does not wish to enrol, the employer will not need any more to contribute.
Additionally, with current prospects that earnings on middle income will drop by 15% over the next few years, raising inflation and a smaller number of new full-time time work places, the timing of the new scheme’s enrolment is clearly unfavourable.
“Not all businesses are ready, some SMEs are even not aware of the scheme yet”, said Small.
Although the Regulator’s role is policing and compliance, if the Regulator sees that a scheme is in action, it is unlikely that it will obligatory penalise firms, according to Small. However, the Regulator may in certain occasions pay a penalty fee of £400 if its guidance has not been observed.
AEPS complies with the requirements of EU’s pension regulation, although he is not aware of the same scheme being run elsewhere in Europe. “However, I know that most countries are watching closely what the UK will do, as they have the same problems”, he said. Australia is the closest example, which introduced a similar scheme in 1994, although it remained non-compulsory.”