Know Where You Stand With Auto Enrolment

It is the Government’s plan that most employees should join a pension scheme by automatic enrolment through their employer.

The starting date for auto enrolment will be October 1, 2012 and will be phased in over four years. To recap, from October 1, 2012 to September 1, 2016 employers will be required to automati­cally enrol eligible “workers” into a pen­sion scheme. Employers will be able to use their own existing occupational pen­sion scheme or group personal pension plan if it meets statutory requirements as a “qualifying scheme”. Otherwise, they will have to enrol workers in NEST (National Employment Savings Trust) a trust based occupational pension scheme to be set up by the government and regulated by the Pensions Regula­tor.

Employers will be separated into bands based on size with each band being a particular monthly “staging date” up to full implementation from 1 September 2016. Clearly larger employers must think about this more urgently than smaller employers, but all should begin the planning process without further delay.

Employers should be considering the cost of the compulsory 3% employer contribution, or if currently offering a higher contribution, the cost and sus­tainability of enrolling all eligible staff on that basis. Consideration should be given to whether contributions will be based on the full salary amount or ‘band earnings’.

The key is to budget now for the new requirements so that bigger pension contributions will not mean a sudden spike in costs. If it was known that the cost of raw materials was going to in­crease by a fixed amount in the future businesses would factor in the cost within their rolling business plan; the same consideration should be given to the extra cost to the employee benefit package spend.

In a Defined Benefit scheme, monitor­ing the employer covenant is one of the most important areas of governance. The covenant of the employer refers to its legal obligation to fund the scheme both now and in the future. With a Defined Benefit Scheme the employer has to stand behind the known pension prom­ise. From their relevant ‘staging date’ from October 2012, employers will have to stand behind a known Defined Ben­efit minimum contribution cost. This is compounded by the fact that employers are battling a continuous need for im­proving operational performance and competitiveness by efficient use of work­ing capital with the two critical items; cost reduction and achieving cash posi­tion improvements on board agendas. Therefore it stands to reason that em­ployers should be assessing their busi­ness models in light of the future Defined Benefit commitments as employers sud­denly find their costs for funding for greater numbers soar dramatically. In essence, employers should be consider­ing a form of employer covenant review for the Defined Benefit pension scheme model.

At the very least employers should be assessing how many are classed as a ‘workers’. To do this, there will need to be an understanding of contractual rela­tionships. A worker is defined as any individual who; works under a contract of employment (an employee), or has a contract to perform work or services personally (i.e. they cannot send a sub­stitute or sub-contract the work) and is not undertaking the work as part of their own business. Anyone who has entered into a contract of this type with an indi­vidual is an employer and will be re­quired to comply with the new employer duties.

In many cases, it will be easy to iden­tify whether someone is considered a worker. Equally, it will usually be easy to identify who is the employer. However, in cases where there is uncertainty, an employer will need to examine the con­tract under which the individual is work­ing seeking specific legal advice when assessing their workforce.

Employers should not rely solely on a person’s tax status when assessing whether they are a worker. An individu­al considered by HM Revenue & Cus­toms (HMRC) as self-employed for tax purposes may still be classed as a ‘work­er’ under the new legislation, if they are working under a personal services con­tract.

It is imperative that employers’ asses the cost implications from their ‘staging date’ and beyond making sure that their business has a sustainable future and remodelling where necessary.