New Pension Rules
John McDonald on the new pension rules
FOR the first time in history, UK employers are being required to provide pension contributions for employees.
This is a significant change in policy, as employers have always been given the choice to provide benefits for employees as they see fit, generally providing benefits that the employees value, or that otherwise aid recruitment or retention of staff.
For many firms in the construction industry, cash benefits, such as improved pay and performance bonuses, are the most attractive to employees, and pensions are not generally offered.
This new law has stopped just short of forcing employees to be in a pension scheme when they actively don’t want to be, but aims to capture all the employees who are lethargic on the subject.
Under the rules, all employees (within certain age and pay parameters) are automatically enrolled into a pension scheme, and can then choose to come out again, although their employer cannot encourage them to do so and the process to do so is designed to discourage opting out by all but the most determined.
In addition, those who opt out must be re-enrolled (and can then choose to opt out) every three years, which presumably will lead, in the long run, to most employees staying within the scheme simply to avoid the extra effort of repeatedly leaving it.
This ‘auto-enrolment’ obligation for employers is being rolled out overtime, having started in October 2012 with the biggest employers. However; from this year, the law starts to apply to much smaller companies.
For instance, by February list year, companies or groups employing 250 or more employees were obliged to auto-enrol them, and by June this included those that employ 62 people or more.
The calculation related to the number of employees on April 1, 2012, so it can throw up slightly strange numbers for expanding or contracting businesses, but in general the rules are now going to apply to smaller and medium-sized businesses.
Although the headline issue for many firms has been the extra cost, in practice the biggest concern has been the administration of the auto-enrolment of employees.
The rule, for auto-enrolment are complex, requiring employers to examine difficult issues about who they employ, on what basis, and requiring an advance knowledge of the levels of pay on any payslip (a particular challenge where there are workers with varying income, depending on output or bonuses). To date, employers have coped with this with significant effort, but generally to good effect.
Inevitably it has been easier for the larger employers, which often have pension arrangements in place and generally have a significant in-house HR and payroll team.
In 2014 SMEs, such as mid-scale and smaller businesses in the construction industry, are trying to roll out a pension arrangement for the first time, with the added complexities of having to identify the employees who are eligible, dealing with employees who opt out and putting employees into the pension arrangement without their consent.
The lack of an existing infrastructure is not the only reason that this is going to be an entirely different challenge for these smaller employers. Auto-enrolment, as the government intended, is giving rise to a much greater demand for simple, money purchase pension arrangements, and providers are not particularly enthused about small contributions from individuals who are not interested in cross selling.
The holdings of so-called ‘small pots’ of pension benefits for individuals who have only contributed minimally into the scheme for a short while before moving jobs is expensive and unprofitable for the pension provider.
As a result, it is expected that most providers will be willing to offer to provide pensions only for a small number of new auto-enrolment businesses going forward, and many smaller businesses will struggle to find a provider for their new auto-enrolment scheme.
Employers can use the National Employment Savings Trust (NEST), which has been set up specifically to provide in these circumstances, but this is subject to statutory restrictions, and so is unlikely to be attractive to employees (and won’t be available for the best paid).
The construction industry is one of many that are going to see auto-enrolment as a significant challenge over 2014 and beyond. Resources will have to be diverted to deal with a complex benefit provision that is new to employer and employees alike.
The challenge for most employers will be complying with the legislation, while ensuring that employees are enthused and appreciate the value of the benefit.
John McDonald is from Tara Management Services
An article on the new People’s Pension launched by B&CE appeared in CFJ last month (page 118) in response to the new system of ‘auto-enrolment’. The People’s Pension is geared to the construction industry and is aimed at flooring and other contractors. Check out the website:
This article has been reproduced from the Contract Flooring Journal. You can find them at www.contractflooringjournal.co.uk.