Personal Accounts: Industry Comment

New pension plans to pose dilemmas for employers

This article was contributed by Rachel Vahey, Head of Pensions Development, AEGON Scottish Equitable. The views expressed are hers and not necessarily those of www.personalaccounts.info.  

Employers are set to play a much bigger role in their staff’s pension saving. The House of Commons is currently debating new legislation that will require employers to automatically enrol their employees into a pension scheme and then contribute at least 3% of their salary towards a pension pot.

This new requirement is set to start in April 2012. From then employers will have to automatically enrol their employees into a pension scheme. This affects all employers – whether they employ 10,000 people or just one. The Government is very keen no employer deliberately avoids this new law, and has threatened employers with a fine of up to £50,000 or a spell in prison for those who do.

Once in the pension scheme, employees have a choice. They can stay put and save for their retirement or they can opt out by signing a form. If they stay put, their employer has to pay a contribution of at least 3% of the employee’s total salary between £5,000 and £33,500. But this isn’t all a one-way street. The employee also has to contribute 4% of their salary, and the Government will throw in 1% as well as tax relief, bringing it up to total contribution of 8%.

Employers face a choice. They can either automatically enrol employees into a brand new pension scheme the Government is setting up called ‘personal accounts’ or into their own pension scheme, as long as it meets a government set quality standard.

Although 2012 sounds a long way off, employers should start thinking about what this means for them. Getting some help now will mean being prepared for when the new legislation starts to bite. That way they can make sure their own pension plan meet the new requirements, and also think about how to spread the financial burden over the next few years. And that employers get the full value for the benefit they have chosen to provide for their employees.