The 2012 pensions reform

The impending introduction of the National Pensions Savings Scheme (NPSS) will impose a requirement on all employers, large and small, to contribute financially to their workforce’s pension plans. The aim of the legislation, is to encourage people to save for their future retirement.

The new rules will be introduced over a four-year period from 1 October 2012. For those businesses with 50,000+ employees the staging date will fall in 2012; for employers with 500+ employees it will be 2013 whilst companies with less than 500 staff will not be required to implement the changes until 2014.

All employers will either have to automatically enrol all employees in an approved private sector pension scheme, known as a Personal Account, or to opt into the National Employment Savings Trust (NEST).¬† This is a new provision managed by a government appointed Corporation and aimed at low to medium earners who don’t have access to a private pension scheme through their employer.¬† NEST will provide a low cost option for companies that do not want to provide a more substantial pension scheme.

How much will it cost?

Employers will be required to pay at least 3% of qualifying earnings for those opting in the scheme.  Employers can choose to pay more but by 2017 the total contributions from employers and jobholders must be at least 8% of qualifying earnings.

The contributions are based on an employee‚Äôs qualifying earnings i.e. gross earnings between ¬£5,035 and ¬£33,540 (with proportionate amounts for a period of less than 12 months). These figures are based on 2006 earnings and are expected to be increased for 2012. ‘Earnings’ include: salary or wages; commission; bonuses; overtime payments; statutory sick pay; statutory maternity pay; ordinary or additional statutory paternity pay and statutory adoption pay; plus, other sums as are allowed under regulations.

The rules apply to full-time, part-time, fixed-term/temporary and agency workers where there’s a written or implied contract of employment in place.

Employees can opt out of the pension scheme, but under current proposals, the government will make it as difficult as possible to do so.  Anyone who does opt out will have to repeat the process in three years’ time.

First steps

Even though SMEs have until 2014 to implement the provisions, the 3% contribution requirement is worrying many employers andit would be sensible to examine any existing employee pension schemes to see if they will meet the minimum requirements as set out by the Act.  Specialist advice from a Financial Advisor may be required.

A good pension provision can be incorporated into a package of benefits that can be used to attract and retain key staff.  An employer could use different pension schemes for specific job grades, for example, a higher pension contribution being made available for more senior roles. Or pension contributions could be reassessed as part of an annual review or job appraisal and thereby used as a reward or motivational tool.