The biggest reform of the pensions system in over 100 years means Northern Ireland’s big businesses are now required by law to pay into a pension scheme for their staff.
Since yesterday any company with more than 1,250 employees has been forced to ‘auto enrol’ its workers into a pension scheme.
According to the latest edition of Northern Ireland’s Top 100 Companies, that impacts around 36 companies here, including the likes of Moy Park, Tesco and Bombardier, although most of these companies already have their own pension plans.
Under the new scheme employers will have to pay a minimum percentage of a worker’s gross wage package into a pension pot, starting at just 1%, but rising to 3% from October 2018.
Employees are then automatically enroled in the initiative and will pay a percentage of their salaries into their own pension pot unless they choose to opt out. For the next year that will be 1%, rising to 5% from October 2018.
The Government’s aim is to get most people saving 8% of their salary, a level which pension experts say will provide “an adequate level of savings for retirement”.
“Auto-enrolment pension schemes are intended as a base from which individuals need to move beyond if they are to set aside sufficient savings to have an adequate income in retirement,” said Stuart Faloon from Belfast pension company Mercer.
He said that while the scheme is a good idea for most, there may be cases where opting out might be justified.
“Whilst putting long-term savings plans into place is essential for having an adequate income in retirement, it is not necessarily the case that such arrangements are suitable for everyone,” he said.
“For some, short-term savings for the deposit on a mortgage or to repay a student loan are higher priorities.”
Only those working for large firms will be impacted by the new law, with smaller companies having more time to get prepared.
Those with 250-1,249 staff won’t have to sign up until October 2013, those with 50-249 will go through a staged implementation process between April 2014 and April 2015, and those with less than 50 staff between April 2015 and April 2017.
The Government estimates that around 11m people in the UK are not saving enough to achieve the pension income they are likely to want or expect in retirement, and less than one in three adults are contributing to a pension. This comes as people are on average living longer — in the past 25 years life expectancy at age 65 has increased by five years for men and three years for women.
Evidence from the Department for Work and Pensions suggests that, once automatically enrolled, less than one-third will take the active decision to opt out.
In the US, case studies show automatic enrolment dramatically increased membership of similar schemes among new employees.
Auto-enrolment Q & A
Q Do all employees have to be enrolled?
A Employees aged between 22 and 65 earning more than £8,105 per year will be automatically enrolled. Employees between 16 and 22, or between 65 and 75, will have the right to ask to be enrolled and if they “opt in” employers must contribute.
Q What level of contribution must employers and employees pay?
A From 2018, the total minimum contribution (employer and employee combined) will be 8% of earnings between £5,564 and £42,475. These amounts are linked to national insurance and tax thresholds which will be reviewed annually.
Q What do I have to do as an employee?
A Nothing. However, it’s recommended that employees read all of the communications from their employer. Employees may also require independent financial advice if they have existing pension arrangements.
Q What do I have to do as an employer?
A Firstly, you need to identify the date that the new rules apply to your business. Failure to comply will be costly; Stage 1 will be a warning, stage 2 a fixed fine of £400 and thereafter a fine per day based on the number of employees.
Next, with guidance from an independent financial adviser, you need to review any existing pension arrangements to assess if they are compliant.
If you do not have a pension scheme in place, you will need to establish an effective scheme that provides value for money. Employers will need to appoint professional advisers to guide them through the legislation. Employers must then communicate the pension plans with employees and register with the Pensions Regulator.
Advice provided by ASM Financial Planning