The biggest change to the UK pensions system in a generation will be rolled out next year – affecting every single business in Wales.
Auto-enrolment sounds simple enough, and in effect means that every working person aged 22 and over and paying tax will HAVE to be signed up by his or her employer into a workplace pension scheme.
It’s a revolution that will bring the country’s pension system screaming and kicking into the 21st century – and, most importantly, provide the majority of the 13 million people in the UK who would have currently retired with just the state pension to survive on, with a viable and valuable second source of income.
A similar system was introduced to the working population of Australia 30 years ago and has since been copied by governments in New Zealand, Canada and Israel with great success. Its launch in the UK next October is not expected to prove popular with employees or employers, but it’s widely accepted among politicians of all persuasions that without it the state pension system will literally go bust.
It will not be popular among employees because they will eventually have to contribute a minimum of four per cent of earnings each month into a scheme. It will be unpopular with employers because they will face the double whammy of contributing a minimum of three per cent of the value of the employee’s qualifying earnings (including any bonuses, overtime payments etc) PLUS the headache of having to administer the pension scheme for every single member of his workforce.
But – and at this stage, it’s a big ‘but’ – the employee will be given the right to opt out of auto-enrolment (bizarrely, making it not so automatic as it first appears). However, the feeling within the financial services industry is that this opt-out clause will quickly be withdrawn, making it compulsory for everyone to have an occupational pension.
Auto-enrolment goes ‘live’ from October 1 next year when all big businesses of 800-plus employees will have to provide a workplace pension scheme to all staff – by law. The following year will see companies with workforces of between 250 and 799 signing up to the new scheme, with businesses of up to 249 staff joining in sometime in 2014.
And, according to Gwent-based leading financial planning and pensions specialists Seer Green, the penalties for any employer failing to take part will be severe, with daily fines of up to £10,000 a day (depending on the size of business) and up to two years’ imprisonment for the owner of any business who continues to flout the new pension law.
“The vast majority of businesses in Wales are not geared up for this at all, and many of them have not even thought about it – let alone considered the implications, both financially and administratively to ensure they remain compliant with the law,” said Seer Green Director and pensions expert Siobhan Mail.“Those implications are potentially really quite life-changing for businesses of all sizes and we would urge every business owner to sit up and take notice of what is about to affect them – and seek advice early. We are already talking to all our clients about this issue and stressing that planning for change is crucial. Smaller businesses certainly have the opportunity to prepare early, particularly financially, and soften the blow.”
Siobhan added: “A small business with 25 employees, for example, has until August 2014 to get itself ready for pension auto-enrolment, which gives it the chance to budget for the extra financial burden that providing a pension for every eligible member of staff will create.
“Make no mistake about this, auto-enrolment WILL be a major headache for business, and the biggest pain for employers could well prove to be the issue of compliance. As the law stands, there will be a requirement on every employer to pay into a pension for every eligible employee – but no requirement on that member of staff to stay in the scheme. If the employee opts out, the employer has to continue putting in money for three months – and then claim his money back.
“But it gets worse. Exactly three years from the original opt-in date, that same employer has to re-register the member of staff who decided not to take part in the scheme and go through the whole process again.
“Then there’s the issue of keeping records for each and every one of your employees – which ones are opted in (and how much has been paid into their pension pot), which ones are out, and even which members of staff have since left the company and what happened to their pension benefits. And those records have to be kept for at least six years – and be available to be presented to the Pension Regulator on demand.
“We have been working with and preparing our clients for this for the last 12 months and have a unique software system in place that will make life a lot easier for employers when it comes to them having to administer a workplace pension scheme.
“Let’s face it, planning ahead for something like this will not yet be on the radar for many businesses, but auto-enrolment is one issue where they cannot afford to be reactive only at the last minute – otherwise they will pay heavily for the lack of preparation.”