Preparing for changes to pensions

Companies need to get ready for the new pensions rules. GrowthBusiness outlines the changes due to come in next year.

Companies need to get ready for the new pensions rules. GrowthBusiness outlines the changes due to come in next year.

Companies need to get ready for the new pensions rules. GrowthBusiness outlines the changes due to come in next year.

To increase the number of workers saving for their retirement, the government is introducing mandatory auto-enrolment of employees into pension schemes from 2012.

Implementation of the plans will be in tiers over a four-year period, starting with larger corporations in 2012 (by PAYE figures) and filtering down to all British companies by 2017.

As part of the plan, employers will be required to make minimum contributions to schemes for their employees.

The amount will be a percentage of the employee’s salary, which will rise in three stages from a minimum 1 per cent on 1 October 2012, for the larger companies
who will be involved in the first wave of introduction, to 3 per cent on 1 October 2017.

Under the auto-enrolment rules, employers will be obliged to automatically enrol and pay minimum contributions for any workers aged at least 22 but under 65 or state pension age and earning more than £7,475 per year.

Employers will have to choose a qualifying scheme to adopt and ensure that eligible workers are enrolled within three months of starting work. The employer can either make a minimum contribution towards a defined contribution scheme or NEST (the National Employment Savings Trust), or offer employees membership to a defined benefit or hybrid scheme.

Defined benefit (DB) – or final salary/ salary-related schemes – involve the calculating of benefits based on how much a member earns and how long they are an employed member of the pension scheme.

For defined contribution – also known as DC/money purchase schemes – benefits are based on how much the member and employer pay into the scheme, and also on the performance of the investment made with that money. Hybrids involve a mixture of DB and DC.

Employees can decide not to join a scheme, although employers must not encourage them to do so and can be fined if they do.

Eamonn O’Connor, London and South East managing director of financial advisory practice Bluefin, says most employees will opt to offer DC schemes, which have a number of modern-day tools that allow members to monitor and tailor products to suit their needs.

O’Connor says most DC providers currently offer online access, SMS text messaging and email updates showing the progress of schemes to keep members informed; however, the same tools aren’t the norm for DB schemes. For both products, he continues, a key issue is communicating the plan effectively so that members understand the scheme.

‘Many members don’t find they are sufficiently equipped to make the decisions that are asked of them,’ O’Connor explains.

‘Traditionally, they find they don’t know how their pensions are tracking and what they are in line for, but there are now lots of online tools to educate and facilitate the decision making process.

‘The same tools can also streamline the administration of the pension scheme, especially for small and medium sized companies,’ he adds.

‘This is because decisions can all be made, captured and fed off to the provider online. There is a lot less paperwork involved and, when the new auto-enrolment rules come in, SMEs will find the process easier to administer.’

More information on the implementation of the new rules is available on the National Employment Savings Trust (NEST) website at

Todd Cardy

Todd Cardy

Todd was Editor of between 2010 and 2011 as well as being responsible for publishing our digital and printed magazines focusing on private equity and venture capital.