Understanding the latest pension reforms
For myriad factors, such as low earnings or lack of awareness, many people are neglecting to pay into a pension fund. As a result, the government has introduced a major reform, which has been active from October 1 2012. Over the next five years, employers will be required to automatically enrol workers into pension schemes if they are over the age of 22 and earn in excess of £8,105.
The reform will apply to all employers, but will begin with the largest companies. This new policy has been kick-started with a major television advertising campaign, featuring well-known employers, such as Dragons’ Den star Theo Paphitis.
The guidelines are that all workers will automatically enrol in a pension scheme if they do not already have a scheme with their employers, are over 22 but below State Pension age and work or usually work within the UK.
Presently, it is a worker’s responsibility to join a pension scheme, and as a result many fail to make an application to join their employers’ scheme and are therefore without a pension.
The reform brings in automatic enrolment so all workers benefit from a pension scheme without having to worry about starting or maintaining one. Under the new scheme an employer will match whatever an employee puts, meaning the retirement fund should be larger when the worker starts claiming their pension.
Employees have another perk too: even if they do not qualify to be automatically enrolled, such as being under 22 or earning less than £8,105, if they ask to join the employer must allow them to do so.
Similarly, if you would like to opt out of the scheme, you are free to do so at any point. There is also a certain point, and the employer will know the deadline, whereby if you opt out you are refunded any payments already made.
If you leave the scheme after the deadline the money remains in your pension pot and you can collect it upon retirement. Moreover, if you do leave and later decide you want to re-enrol, your employer must allow you to do so, and they also have a duty to enrol you automatically every three years after you opt out, so that you can reconsider your decision.
From a worker’s perspective, the plan is full of perks – you will have a guaranteed retirement fund and an opt out if you want to. But how does it affect employers?
The reform does mean extra work for employers, because they will need to identify any eligible workers on their payroll and ensure they are set up for automatic enrolment, plus automatically enrolling them every three years if they opt out of the scheme.
It will, however, be easier for employers who have an existing scheme in place already, as it can be used or adapted to fit the new guidelines, but those employers without one will need to start from scratch.
Employers also have the duty to write to all qualifying workers and explain what the reform means for them, but each category of worker has different information requirements.
Thus, the initial duties for employers are relatively high with a learning curve to master. Once everything is in place, though, it is simple to proceed and everything should happen automatically.
Employers and employees will need to be aware of the rights of workers, such as being able to opt out and opt in at any point. Thankfully, the policy is rather straightforward, and the government has gone to great lengths to explain it on its website.