Employers from plcs to parents employing nannies will be affected by new pension scheme rules. From October, starting with the largest employers, employers must set up pension schemes or be included in the state scheme. Employees are automatically included unless they opt-out.

From Nannies to NatWest: all employers are affected by NEST

Starting this October employers of all sizes will eventually have to provide a workplace pension scheme to their workforce. It will no longer be possible, as it was under ‘Stakeholder’, for employers not to have an approved scheme available for all their workers. Employers will have to:
        a) have a scheme in place; and 
        b) automatically enrol all ‘eligible jobholders’.
Employers who do not have a scheme at present, or one which does not meet certain criteria, will have to enrol their workers into a new qualifying pension scheme which includes the new National Employment Savings Trust (NEST).

Costs will be an issue

Compulsory enrolment, whether in NEST or an employer’s own scheme, will carry with it a requirement for the employer to make contributions over and above salary in addition to the employees’ contributions.  At first contributions will be limited to no more than 2% of earnings (joint, between employer and employee), but over the next five years the minimum contribution will increase to 3% from the employer and 4% from the employee (to which the Government will add a 1% tax credit).

The need to provide contributions in addition to salary could cause problems for employers who are already struggling. Additional costs won’t be confined to only the pension contributions: employers will incur cost directly and indirectly in:

• considering whether to set up their own scheme instead of NEST;
• choosing a provider;
• designing the rules and systems;
• deciding whom to include;
• preparing opt-in processes for voluntary scheme joiners;
• identify the workers who will be auto-enrolled;
• providing workers with information;
• registering with the Pensions Regulator; and
• updating payroll software.

Consider salary sacrifice

An approach that currently works to make pension provision more tax efficient will also be available when pension provision effectively becomes compulsory.  Under salary sacrifice employees’ employment contracts are amended to divide their salary package between cash received and employer’s contribution to a pension fund. Employers’ contributions to pension schemes are exempt from NICs, so saving money.

NEST will not be right for all employers or employees

The NEST scheme will be restricted in its application, in particular for employees earning above the current basic rate income tax band upper limit. Total annual contributions under NEST will be subject to a cap: the current proposal is to £4,400 per year, so higher-paid employees will be looking for a scheme that makes proper provision for their retirement needs and that will mean a non-NEST scheme.

What about the ‘workers’?

The new rules are not just restricted to employees in the strict sense of the word. Anyone who is classed as a ‘worker’ for National Minimum Wage purposes will be included in the new pension regime.
Genuinely self-employed workers who do not commit to personal service are not covered by the new rules in respect of their own earnings. However, if they have employees, they will be subject to the new employer obligations.

Auto-enrolment will be a recurring issue

Opting out will not be a once-and-for-all decision: instead workers who opt out will be automatically re-enrolled every three years, so they will have to make a positive choice to remain outside the pension schemes offered and opt out again if they do not want to join a pension scheme.
The Government’s clear intention is to make pension saving the default option and encourage provision of schemes that are attractive enough for workers not to opt out, but to stop short of making pension saving compulsory.

Help is available

No employer can afford to ignore these issues and the knock-on matters that will crop up as they are considered.  Baker Tilly can provide guidance about what auto-enrolment and NEST means to you and access to expert advice about setting up and managing a scheme that complies with the new rules with the minimum of additional cost and disruption.