30 second quiz
How well do your understand payroll reform?
Q1 – what are the three different categories for automatic enrollment?
Q2 – what are the criteria for a non-eligible jobholder?
Q3 – what is the new regulation (The Pensions Act 2008) aiming to achieve?
Q4 – do you know your staging date?
Q5 – what are the key standards required for pension schemes?
Today sees the start of the long awaited and controversial payroll reform in the UK. As required by The Pensions Act 2008, employers must from now automatically enroll employees meeting set requirements into a qualifying pension scheme.
According to the DWP 11m people in the UK are not saving enough for their retirement. Pension saving has fallen across all age groups, but it is steepest among those aged 22-29, falling from 43% in 1997 to 24% today. Both men and women are saving less, although pension saving has fallen further for men – down from 59% to 44% and from 49% to 39% for women.
Up to 11m people are expected to be eligible for automatic enrollment (AE), with six to nine million newly saving or saving more in all forms of workplace pension schemes. Under AE, employers will eventually contribute 3% of earnings, individuals 4% of earnings, and there will also be 1% of tax relief to make up a total contribution of 8%. Employees are able to opt out of the change, but they will not receive this extra contribution from their employer or the tax relief if they do so. They will be re-enrolled every three years and be given the same option.
Automatic enrollment will be phased in over the coming years with process starting with large firms first, and is based on the following criteria; that new employees are aged between 22 and state pension age, working, or ordinarily working in the UK, earning above the proposed £7,475 per year.
Non-eligible jobholders are classified as an employee that works, or usually works, in the UK. They must be aged between 16 and 17 and earning between the lower and higher ‘trigger’ – £5,035 and £7,475 – or aged between 16 and 21 and annually earning over the higher trigger. Although workers don’t need to be automatically enrolled employers must provide them with relevant documents and help them opt in if they want to.
Entitled workers are classified as those aged between 16 and 74, working or ordinarily working in the UK and earning less than the lower trigger. These employees must be given all the relevant information regarding their right to join any qualifying pension scheme.
Staging Dates
Qualifications for start dates depends on the number of people in a firm’s PAYE scheme as of April 1 2012. Staging dates for companies with 250 or more employees are available on The Pensions Regulators’ website. The first to comply will be organisations with more than 120,000 staff with a start date of October 1. Firms with 50,000 to 119,000 will start on November 1 while companies with 30,000 to 49,999 will begin on January 1 2013.
Firms with 250 or fewer staff will follow larger companies with a deadline date of April 1 2014 for organisations with 160 to 246 staff. However, SMEs (firms with 50 or fewer workers) will have compliance delayed until 2015.
Choosing a Pension Scheme
Whether employers choose a new pension scheme or to stick with an existing one there are certain government standards that need to be met. The National Employment Savings Trust (NEST) is a government created pension scheme designed to cater for the needs of low to medium earners. It has a public obligation to accept any employer.
However, firms need to consider any other options available.
Compliance Concerns
Just a month before the October 1 deadline payroll professionals met with Pensions Minister Steve Webb to highlight concerns over compliance. Key difficulties highlighted included that employers are finding it hard to meet the deadlines for commencement of auto-enrolment communication duties and that these duties should be aligned with the pay-date in the final reference period in which an employee becomes eligible.
Pro-ration obligations are out of step with tax, NICs and pension contribution practice and should be abolished and have employees pay the full contribution at the point of payment. Opt-out and continuous employment obligations are inconsistent with employment law, as a result if employees opt-out or cease active membership their next assessment date should be at the employer’s next re-enrolment date.
Finally, missed payment and back pay obligations are complex and out of step with tax and NICs. The group argues that for auto-enrolment to run smoothly the pensions pay period and the pay points used must align with those used for the operation of tax and National Insurance Contributions (NICs).
How technology can help
It is possible that your payroll system won’t support the new earnings assessment. From the outset, the Pensions regulator stressed the importance payroll software would play in meeting regulatory compliance and identified core functions that would ensure new duties would be met. These included the assessment of earnings for automatic enrollment, the calculation of pension contributions on time, and the provision of necessary records to demonstrate employer compliance.
Software checklist
• Checking the eligibility of workers for automatic enrolment by assessing age and earnings
• Calculating the date that each worker becomes eligible to be automatically enrolled
• Calculating pension contributions and making deductions
• Processing refunds for those that opt out of the pension.
For more information visit either www.thepensionsregulator.gov.uk/tools or www.thepensionsregulator.gov.uk/pensions-reform
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