Government confirms employers must provide pensions

All British businesses, whatever their size, will be expected to offer employees the chance to join a workplace pension scheme, the government has confirmed.

The announcement supports many of the measures set out in the Pensions Act 2008.

The new scheme will start, as expected, in 2012, and all employers will need to play a part by September 2016.

As a result, between four and eight million employees will contribute to a retirement savings fund for the very first time.

The decision to move ahead with a mandatory pension scheme came after the government accepted the findings of a review conducted into plans laid out in the Pensions Act 2008, which will mean the automatic enrolment of all workers, not already members of a qualifying pensions scheme, into a savings fund.

Employers with fewer than 50 members of staff can, if they wish, use a state-sponsored scheme – the National Employment Savings Trust (Nest) – rather than establish a workplace pension scheme of their own.

Steve Webb, the Pensions Minister, said: “The National Employment Savings Trust (Nest) will be the new low-cost pension scheme that will be the vehicle for saving for millions.

“For the first time, employers will have to make pension contributions for eligible workers from 2012, ending decades of decline of membership in workplace pension schemes.”

Under the new rules, all employers will be expected to provide a pension scheme for employees aged 22 or more and currently earning more than £7,475 a year, which is the threshold for the personal income tax allowance.

Where the employer does not provide such a scheme, employees must be enrolled automatically into Nest.

The new pension programme will begin next year, with automatic enrolment starting in October 2012.

Initially, the largest employers will have to sign up first; the smallest firms won’t join until September 2016.

Employer and employee contributions will also be introduced on a phased basis.

Until October 2016, the minimum overall level of contributions will be 2 per cent, with 1 per cent being made by employers. From October 2016 to September 2017, the total contributions will be 5 per cent, with 2 per cent being made by employers. From October 2017, the total minimum contribution level will be 8 per cent, with employers paying in a minimum of 3 per cent of annual earnings.

If an employee does not wish to continue within the scheme, then they must opt out.

In a change to the previous plans, however, employers are to be granted a three-month period in which to enrol employees in a workplace scheme already set up by the firm or to enrol staff in the Nest scheme.

If a member of staff wishes to join before the end of the three-month period, employers will be obliged to make the appropriate contributions.

The original scheme would have seen all employees enrolled from the first day of employment, regardless of whether they were a temporary or permanent employee, or whether they had passed any probationary period.

The change means an employee will not have to be auto-enrolled for 12 weeks. Some workers – those on short term contracts or those who leave the business after a short tenure – will now not automatically join the scheme, saving employers both direct costs from the pension contribution and indirect costs from the administration involved in enrolment.

Another change will simplify the process by which employers certify that their own money-purchase pension scheme meets HMRC’s requirements.

The British Chambers of Commerce (BCC) welcomed the amendment to the rules.

Dr Adam Marshall, director of policy at the BCC, said: “Businesses will be relieved to hear that the government has decided to simplify and streamline the 2012 pension reforms – which represent an enormous change to private pension provision.

“Thanks to the 12-week exemption, companies with a high turnover of staff or a large number of seasonal workers will not have to spend a lot of time and money enrolling employees into pensions that they do not intend to continue. Employment agencies, which will be very important in the fight against unemployment and underemployment in the years ahead, will benefit hugely from this change.

“Now the government must embark on a communications drive to inform the 1.1 million employers in the UK of their new obligations. Unless businesses and their employees understand the changes ahead, we could see significant confusion as auto-enrolment comes in from 2012.”

But not all business groups were happy.

The Federation of Small Businesses (FSB) expressed concerns that firms with fewer than 10 employees have not been made exempt from the scheme.

A spokesman said: “The FSB has constantly warned that the cost and time spent on administrative work will damage micro firms.”

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