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Nest without feathers

How can a cash-strapped employer ensure they meet the new pension requirements?

I understand the Government is introducing a requirement that we pay into a pension scheme for our employees. We are only a small firm employing just six staff and not making a lot of money at the moment. What do we have to do? What choices do we have?

I suspect you are in the same boat as a lot of employers. Costs are rising and remuneration for many employees is flat so it is easy to perceive making provision for retirement benefits as a low priority.

However, the Government has recognised the importance of long term saving and has decided to introduce the national employment savings trust. There are still some finer points regarding Nest and automatic enrolment to be clarified but this is our understanding at present.

At the moment, you do have an obligation to do something, which is to designate a stakeholder pension scheme which your employees can choose to join or not.

There is no requirement that you as the employer contribute to this plan but you have to consult your staff, designate a scheme, provide information about it and deduct and pay to the scheme any personal contributions your employees decide to pay. All this, however, will change shortly.

From October 2012, UK employers will be required to automatically enrol employees into a qualifying workplace pension scheme and this auto-enrolment can apply to any existing company pension scheme if you have one and it meets certain criteria.

Between October 2012 and 2017, depending on the size of the company, all UK employers will be required to contribute a minimum of 3 per cent of each employee’s eligible earnings into a pension.

Employees will need to pay a personal contribution of 4 per cent with a further 1 per cent tax relief being added to make the minimum contribution 8 per cent.
This combined 8 per cent contribution is being phased in over the period from Octo-ber 2012 to 2017. The maxi-mum employer contribution will be 1 per cent during the initial four-year phasing period.

If, by October, you have established a pension scheme for your existing scheme to qualify it will need to meet the following criteria:

  • It will need to permit auto-enrolment
  • Employees will need to be enrolled with 90 days of joining the company
  • It will need to have a default investment fund
  • It will need to have a minimum contribution of 8 per cent of all band earnings (between £7,225 and £42,475) with at least 3 per cent paid by you the employer

Your staff will be able to opt out of your pension scheme if they choose not to participate. If they give you notice of their intention to opt out during the formal opt-out period, they will be put back in the position they would have been in if they had not become members in the first place, which may include a refund of any contributions taken following automatic enrolment.

You have told me you are not making a lot of money as a business at present so the introduction of Nest may be a financial challenge for you. However, the Government has to some extent recognised the difficulty for some employers by phasing in the contribution requirements over a number of years.

You might also note that the charges being applied to contributions for Nest on the surface do not look very competitive when compared with some existing pension schemes. Charges are expected to be 1.8 per cent of the contributions payable and an annual management charge of 0.3 per cent. The latter charge appears very low but the contribution charge appears quite high. You may want to consider alternative schemes.
<B> Nick Bamford is chief executive of Informed Choice</B>

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