The Government has estimated that around seven million people are not saving enough for their retirement and in order to tackle this problem and prevent future generations from retiring in poverty, the decision was taken to introduce automatic enrolment and the Personal Accounts scheme in 2012.
This new requirement to automatically enrol and offer national pensions scheme with mandatory employer contributions, tax relief is the most radical change in UK pensions for decades and will affect both the public and private sector. A Pensions Bill is currently going through Parliament which is fleshing out the detail and the new regime that will surround it.
From 2012, all eligible employees will be automatically enrolled into either a Personal Account or an existing employer-sponsored scheme. Employees will contribute a minimum of four per cent, matched by a minimum three per cent employer contribution and about one per cent tax relief. Contributions to Personal Accounts will be made on a band of earnings between £5,035 and below £33,540 per year, and this band will be increased in line with earnings and existing workplace pension schemes who wish to use as will have to meet this minimum requirement. It will apply to all individuals between the ages of 22 and State Pension age earning above £5,035 a year. The Personal Accounts scheme will be targeted on the needs of workers with moderate to low incomes, who do not already have access to a good workplace pension scheme.
Many employers already offer good pension provision. The Government want to ensure that existing pension provision is maintained. So alongside Personal Accounts there will be a simple exemption test for those employers who want to auto-enrol individuals in to an alternative pension scheme provided the scheme meets some requirements, such as minimum contribution levels for defined contribution scheme or minimum accrual rates for defined benefit schemes and of course automatic-enrolment.
For the HR community, the implications of introducing automatic enrolment and maintaining Personal Accounts will be far ranging. From 2012 every existing employee who is not a member of their scheme and who meets the age and income criteria will have to be auto-enrolled into either the existing qualifying pension that the employer offers or a Personal Account. The Government estimate that already there are 4.7 million people with access to a workplace pension but have chosen not to join, so the volume of existing employees that will have to be auto-enrolled will be substantial. All new employees will also have to be auto-enrolled if they meet this criteria. It will mean introducing a new internal system to manage this whole process.
Another issue is that whilst the auto-enrolment system may be straightforward once the systems are in place, there is the added complexity of managing those employees and their details who, at a later stage, eventually opt-out. Qualifying Earnings (QE) are being determined by all gross earnings on a band between £5,035 gross earnings and below £33,540. Two major issues for HR departments arise from this.
Firstly, at the time of writing, the Government were proposing that QE would include all pay not just Basic Pay or Basic Pay plus. All pay would include bonuses, commissions and overtime etc which for the vast majority of employers is not counted as pensionable pay. In fact, 83% of FTSE 100 companies use total basic earnings as their basis of pensionable pay.
Employers and pension scheme providers believe that because of the definition of QE, employers may need to alter their pension scheme’s rules so they match the definition for QE and quickly requirements in the Pensions Bill. It is estimated that due to these changes, there would be one-off costs to employers of £25,000 – £100,000 per scheme (payroll, legal, actuarial, communication and negotiation costs). The Government estimate that the on-going administrative costs to employers will be £101 million per year.
The last significant area that the HR community has to be aware of and develop systems for are communications. Not only are Personal Accounts and in many cases auto-enrolment new to the HR community, they are also new to employees. In the years leading up to their launch, the Government will be undertake a major national communications exercise to make sure that auto-enrolment reaches into the nation’s consciousness.
However, employers will have to undertake the same type of exercise for their employees, not just new employees but also for their existing workforce, particularly those who are not members of the existing scheme. The latter, will suddenly see 4% being automatically taken from their wage packet and they will want to be clear why this is happening.
In conclusion, the introduction of auto-enrolment and the Personal Accounts scheme in 2012 will have a longer lasting impact on the UK than the London Olympics of the same year. As the finer details of the scheme will be known when the current Pensions Bill receives Royal Assent later this year, the HR community will have to move quickly and decisively in integrating this into their company and organisation.