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TEAMHR Employment Law News Update March 2009

Mandatory Employer's Pension Contributions.. 21 months and counting

As the Bank of England interest rate falls to 0.5% and the real prospect of deflation, it seems timely to remind employers, particularly SME's, of the likely changes to pension arrangements from 2012 because of the implications for employment costs against a back drop of likely wages and salaries stagnation, or even wages and salaries reduction. So just before employers budget on wages and salaries not increasing...read on.

At the moment, employers are obliged to provide access to a Stakeholder Pension Scheme for their employees if they employ 5 or more people. That is the extent of the obligation, there is no requirement for employers to contribute to the scheme. The only exceptions to this are (1) where the contract of employment provides for an employer's contribution either to a Stakeholder Pension or other Occupational Scheme OR (2) where an obligation on the employer to make an employer's contribution arises from a TUPE transfer because of the nature of pension arrangements prior to the date of the transfer.

Subject to legislation employers are reminded that from 2012, just 21 months from now, the following changes are planned:

A new scheme of personal accounts, intended to provide a straightforward opportunity for employees to contribute to a high-quality, low-cost pension savings vehicle.
The scheme will have the following key features:
- Employees will contribute 4 per cent of a band of earnings of between around £5,000 (4% equates to £200.00) a year and £33,000 (4% = £1,320.00) a year; and
- Employers will make minimum matching contributions of 3 per cent on the same band of earning;
  - For earnings of £5,000, the 3% employer's contribution equates to £150.00 per year per employee or £12.50 per month per employee;
  - For earnings of £33,000, 3% employer's contribution equates to £990.00 per year or £82.50 per month);
  - EXAMPLE (1) If you employ 20 members of staff whose average earnings are £12,000 pa, 3% employer's contribution equates to £7,200 per year or £600.00 per month;
  - EXAMPLE (2) If you employ 20 members of staff whose average earnings are £18,000 pa, 3% employer's contribution equates to £10,800 per year or £900.00 per month;
  - EXAMPLE (3) If you employ 20 members of staff whose average earnings are £28,000 pa, 3% employer's contribution equates to £16,800 per year or £1,400 per month;
- There will be automatic enrolment for employees into either the new personal accounts scheme or their own employer's occupational scheme providing it meets a minimum standard;
- Employees will be able to opt out of this provision, in which case the employer would not contribute; however due to the mandatory employer's contribution it seems likely that few will opt out of the scheme.
- Neither employers nor employees pay tax or National Insurance contributions on employer contributions which will reduce the net cost to employers.
- It is proposed that there will be support for all employers during the introduction of compulsory employer contributions in that it is proposed that employer's contribution can be phased in over a three-year period at the rate of 1 per cent each year.