Finance - time to start thinking about your pension scheme for staff

Employers will have to enrol eligible employees into a pension scheme and pay into it for them, under a major reform of pension law which starts to come into effect next year.

With people living longer than ever before, the estimates are that the number of retired people in the UK will rise by more than a third by 2050. The Pensions Act 2008 aims to encourage people to save for their retirement, rather than relying on the state pension, by placing a duty on employers to provide workplace pensions.

Philip Richardson from Stephensons' Solicitors, which provides the legal helpline for the National Day Nurseries Association, says, 'The Act introduced a new duty for employers to automatically enrol all their eligible workers into a workplace pension scheme and make a minimum contribution as an employer. This means that from 2012 there will be a staged process - starting with the largest companies - to ensure that pension schemes are provided and that employers make a contribution to this for staff.

'This phasing in will mean that if, for example, you have fewer than 50 employees, the start date will not be until between August 2014 and February 2016, depending on your PAYE reference.'

While you can bring your start date forward, you cannot delay it.

Workers who qualify for automatic inclusion in a workplace pension scheme are known as 'eligible jobholders'. They are workers who are:

• Aged between 22 and state pension age

• Earn above a certain amount, currently set at £7,475, which is linked to the income tax personal allowance.

• Work in the UK.

The scheme can also include:

• Workers aged between 16 and 22, and between state pension age and 75, who are earning more than £7,475, who will be able to opt in to their employer's workplace pension.

• Those earning below £7,475 a year may also opt in to their employer's workplace pension.

Mr Richardson says that employers will eventually have to contribute 3 per cent on earnings of up to £33,540, while employees will make a contribution of 4 per cent. In addition there will be a further 1 per cent in the form of tax relief - meaning that contributions will total 8 per cent of an employee's salary.

'However, the contributions will be phased in over a number of years, starting at 1 per cent and moving to 3 per cent to support employers to adapt to the requirement.'

WHAT ARE THE OPTIONS?

The advice is to start planning for that cost impact now. Purnima Tanuku, chief executive of the NDNA, says, 'It is important that you start looking for a suitable pension scheme for your staff if this isn't something you currently offer and that you factor the cost of this into your business planning.

'By doing this, you will feel less impact on your business when this element of the Pensions Act comes into force in 2012. You should also discuss the benefits of joining a pension scheme with your staff to ensure that they feel supported and valued.'

Mr Richardson adds, 'It is important you start looking at possible options for a pension scheme now, as it is your responsibility as an employer to ensure that a scheme is in place. If you fail to do this, you can receive significant fines.

'Although this element of the Pensions Act comes into force in 2012, you should receive a letter from the Pensions Regulator at least 12 and then three months in advance of your start date to inform you about what you need to do.

'Planning now is critical. You will need to make sure that this cost is part of your business planning, and ensure you look for a suitable pension provider.

'It may seem like a big task to implement this, but by setting a plan of action in place you will not only experience less impact upon your business but also ensure that your staff feel supported and valued.'

Caring daycare

Peter Churchley, proprietor of Caring Daycare, has already taken the plunge. He set up a stakeholder pension scheme for his staff when the idea was first mooted. He discussed it fully with the staff and the provider - Friends Provident - and decided from the outset that the company should contribute, even though it was not a legal requirement. It cost the company about £2,750 this year.

'It is a cost that we thought we should bear to support and encourage our team to provide for the future,' says Mr Churchley.

The company contributes 1 per cent of employees' gross earnings, minus deductions, but even with that incentive, less than 8 per cent have enrolled into the scheme - just 18 people out of a team of 260, and one person is in a different scheme.

'We felt as Investors in People and responsible employers, we wanted to be able to give our staff the opportunity to plan and save for the future,' says Mr Churchley. 'When a new member of staff starts with us, we provide them with details of the scheme and give them an application form and invite them to participate.'

Caring Daycare will ensure its scheme is compatible with the new requirements. The company does not formally ask staff why they have not joined, but when the issue has been raised, people express the view that they are too young to be thinking about pensions.

Even where staff do not participate, the pension has cast the company in a good light. 'The fact that we position ourselves as willing to contribute ourselves to encourage them to do so, I feel, is part of the halo effect,' says Mr Churchley. 'As an employer we demonstrate that we are genuinely interested and support them as individuals.'

Under the new law, although employees are able to decide to opt out, their employers must not encourage them to do so. Nor can an employer try to screen out job applicants on grounds relating to potential pensions participation.

But it remains to be seen how great the takeup will be in the early years sector, where staff tend to be younger and on low salary rates.

As Mr Churchley says, 'In the current economic climate with rising costs and taxes, I think the Government's ability to increase pension take-up will be undermined.'

In the 1-28 November issue of Nursery World, our finance feature will focus on business tax

NATIONAL EMPLOYMENT SAVINGS TRUST

Companies that do not have a pension scheme can sign up to the Employment Savings Trust known as NEST, which has been set up by the Government as a non-departmental public body. It is regulated by the Pensions Regulator.

It has been established to be an easy-to-use, low-cost, online pension scheme that any employer will be able use to meet their new legal duties. Employers can also delegate someone else to manage their participation for them in NEST if they wish.

NEST members have one retirement pot that can travel with them throughout their working life. This means there will be no continuing administration for an employer when a NEST member leaves.

Also, more than one employer can contribute to a member's NEST retirement pot at the same time. This means that they can contribute for workers who have other jobs, such as part-time workers.

EMPLOYERS' LEGAL DUTIES

Employers must:

•  provide a qualifying scheme for workers

• automatically enrol all eligible jobholders into the scheme

•  pay employer contributions for eligible jobholders to the scheme; tell all eligible jobholders that they have been automatically enrolled and they have the right to opt out if they want to do so

• register with the Pensions Regulator and provide it with details of your qualifying scheme and the number of people that you have automatically enrolled

•  inform their workers, in writing, about the changes and show them how they are affected by them.

Employers must not:

•  encourage workers to opt out of the qualifying pension scheme

• have recruitment practices that will benefit job applicants who indicate they are prepared to opt out

• treat a worker unfairly or put them at a disadvantage because of automatic enrolment.

Further Information

• Pensions Regulator - www.tpr.gov.uk

• NEST - www.nestpensions.org.uk

•  Department for Work and Pensions - www.dwp.gov.uk

• Business Link - www.businesslink.gov.uk

• Pensions Advisory Service - www.pensionsadvisoryservice.org.uk