Wake Up Call: What the new pension laws will mean for employers
The Problem
Many employees in the catering and hotel sector do not have any form of pension arrangement provided by their employer. Is this about to change with the introduction of auto-enrolment and, if so, what are the consequences for employers?
The Law
Until recently, there was no general legal requirement for employers to contribute towards pension arrangements for their employees. That all changed on 1 October 2012.
Every employer that employs a "worker" now has to meet the legal requirements that apply to the three sub-categories under that definition. The rules are being phased in over four years.
"Workers" are individuals who: work or ordinarily work in Great Britain under a contract of employment; are aged over 16 and under 75; who are in receipt of "qualifying earnings".
The first sub-category, which imposes the most onerous obligation on the employer, relates to "eligible jobholders". These are workers who are aged over 22 and under state pension age who are earning the equivalent of £8,105 per annum or over.
From the employer's auto-enrolment staging date, the employer must automatically enrol all eligible jobholders into an auto-enrolment scheme.
Where the pension is defined contribution in nature, the contribution starts at 1% for the employer and 2% for the employee, rising to 3% (employer) and 5% (employee) by 2017.
Such contributions are calculated against banded earnings between £5,564 and £42,475 - those numbers rising with the rise in National Insurance earnings bands.
Non-eligible jobholders also have rights to pension contributions under the legislation if they so elect. A non-eligible jobholder is a worker aged between 16 and 20, or aged between state pension age and 75, earning over £8,105; or someone aged between 16 and 74 with earnings above £5,564 but less than £8,105.
While the employer need not automatically enrol non-eligible jobholders, it must notify them of their right to be treated as if they were eligible employees. If the non-eligible jobholder so elects, he is entitled to the same level of contributions into the same types of pension schemes as an eligible jobholder.
The methods used to calculate the notional annual salaries referred to above are based on actual pay in the relevant pay reference period - weekly, monthly, and so on, rather than annual salary. Therefore, casual employees will be caught even if they work only for part of a year if, during their period of employment, their qualifying earnings during a relevant pay reference period are in excess of the relevant fraction of the notional annual salary, for example, a monthly salary greater than one-twelfth of £5,564 or £8,105.
Expert Advice
The key issues for all employers over the coming months are:
â- How many of their employees are workers?
â- Which of the three sub-categories of worker do the employees fall into?
â- Is the employer going to take advantage of the three-month postponement period from the staging date?
â- Will the employer only enrol new eligible jobholders after its staging date from the date three months after the employee first meets that criteria, as allowed by legislation, or from an earlier date?
â- What pension scheme will the employer select as its auto-enrolment scheme?
â- What level of contributions will the employer offer, the minimum required or something higher?
â- How does auto-enrolment fit into the employer's wider benefits and rewards package?
â- Who will monitor each employee's changing status between the three sub-categories as their age or pay changes.
Beware
Auto-enrolment obligations come with teeth. Wilful non-compliance can lead to significant penalties from the pensions regulator. The more employers plan ahead and take advice from benefit consultants and lawyers, the easier it will be to meet the challenges that auto-enrolment will no doubt throw up.
Contact
Michael M Jones is a partner at Charles Russell LLP
Michael.M.Jones@charlesrussell.co.uk
