Workplace Pension Reform (WPR)
Information in this article should not be taken or relied upon as personal financial advice. Any individual requiring information or advice on their own specific circumstances or on their own account should contact a suitably qualified professional.
This information is based on draft legislation which may change.
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In 2012, workplace pensions reforms (WPR) will be introduced which will impose duties on employers to make mandatory pension provision for employees.
Employers will have to automatically include certain employees in a suitable pension scheme within a timescale.
The scheme must pass a quality test.
When will WPR happen?
The new rules will apply to large employers first from 1 October 2012.
Smaller employers will be phased in between March 2014 and February 2016.
What is a ‘Qualifying Pension Scheme’?
A qualifying scheme must meet certain requirements which allow it to be used for auto-enrolment (see below)
It must have:
- An auto-enrolment facility
- A default contribution basis
- A default investment option
Some existing schemes will meet the qualification criteria and others will have to be amended.
How much will employers have to pay?
The minimum employer contribution will ultimately be 3% of qualifying earnings. This will gradually increase from 1% in September 2016 to 3% in October 2017.
How much will employees have to pay?
Employees will ultimately pay 5% of earnings. Contributions will qualify for basic rate income tax relief at source so will effectively reduce to 4%.
What are qualifying earnings?
Gross earnings in the qualifying earnings band i.e. between £5,035 and £33,540.
What is automatic enrolment?
WPR requires employers to automatically enrol certain employees within a strict timescale without the employee having to:
- Apply to join the scheme
- Provide any information
- Make any choices about the level of contribution or the type of investment
Employees may opt out but they will have to go through an automatic re-enrolment process periodically.
An employer’s pension obligations will be different depending on the category the employee falls into i.e.
Eligible jobholders must be auto-enrolled into a qualifying pension scheme unless they are already a member of one. An eligible jobholder:
- Is aged between 22 and State pension age
- Works in the UK
- Has earnings in excess of £7,475 per annum
Non-eligible jobholders do not have to be auto-enrolled unless they voluntarily opt in. A non-eligible jobholder:
- Is aged between 16 and 21 or between State pension age and 74
- Works in the UK
- Has qualifying earnings
Employers can deduct contributions due from an eligible jobholder without their consent.
If an employer does not have a suitable scheme they can use the National Employment Savings Trust (NEST).
NEST is a centralised registered occupational pension and is open to any employer.
It is a simplified scheme for employees with low to moderate incomes.
NEST is an alternative to the employer’s own scheme and is subject to rules which make it less flexible than other schemes:
- Contributions will be capped at £3,600 per annum.
- The choice of investment funds will be limited.
- The pension fund must be used to buy an annuity at retirement age
- Charges will be capped. It is likely that there will be a 1.8% initial charge taken from each contribution and annual management charges will be limited to 0.3% of the fund value.
- Members cannot transfer their benefits out of NEST unless they have reached the normal minimum pension age of 55 or they are ill.
- Members cannot normally transfer funds into the scheme.
Who will check that employers are meeting their obligations?
The Pensions Regulator will oversee WPR compliance.
Employers must prepare in advance by:
- Ensuring that any existing pension scheme will qualify
- Choosing between a new pension scheme and NEST if they do not already have a qualifying scheme
- Identifying employee job categories
Once the WPR rules have been implemented, the employer must:
- Have a suitable record keeping system
- Periodically register information about the company, employees and the scheme
- Ensure that payroll systems can cope with salary deductions
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