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Pensions and Pension Reform

Pensions and Pension Reform 2012 through 2016

The Government have already announced the abolition of Contracting Out of the State 2nd Pension from 6 April 2012 for Money Purchase schemes (COMP). Equally the recent Autumn Statement announcements have confirmed that the Class 1 National Insurance Rebate for Salary Related Pension Schemes (COSR) is reduced. From 6 April 2012 the employee contribution rebate is reduced by 0.2 percentage point (1.4% from 1.6%) and the employer rebate by 0.3 percentage point (3.4% from 3.7%) increasing the cost of pension provision for both employees and employers.

The pension bill 2011 received Royal assent on 3 November 2011 and brought the following changes to the state retirement age:

• from 6 April 2016 the women’s state pension age will rise faster than originally planned equalising with the male retirement age by December 2018
• between December 2018 and October 2020, both men and women’s State Pension age will be increased from 65 to 66.

The act also implements workplace pension reform measures.

As people are living longer now than they ever have before, the Government estimates indicate that over 7 million UK citizens are not saving sufficient amounts to support them through retirement.

Consequently legislation is being introduced to enforce employers to automatically enrol employees into an employer provided occupational pension scheme. The process of implementation starts with the very largest employers (those with over 120,000 employees) from October 2012, through to employers with 3,000 or more employees in July 2013. Dates for smaller employers are yet to be reviewed and confirmed by The Pension Regulator (TPR).

So what are the new obligations?

• That employers assess their workforce and communicate with them about pension reform
• That at the appropriate staging point and then as an ongoing process, place employees into an occupational pension scheme
• That in certain circumstance the employer contributes to an employees pension fund (initially at least 1% but rising eventually to at least 3% – these are minimums).

It is essential that employers make some initial assessment of the impacts on their business and put in place some initial financial plans (to cover the costs of implementation and employer contribution obligations) and to map out when significant events are to occur.

Employers will need to put in place an occupational pension scheme or ensure that their pre-existing arrangement satisfy new requirements. A new organisation, the National Employment Savings Trust Corporation (NEST) has been formed with a mandate of accepting any UK employer as a partner in the operation of pension reform. NEST must accept any employer who chooses them for the provision of the occupational pension, although employers are free to select any alternate pension provision.

What is Ceridian doing about Pension Reform?

Ceridian is directly involved with TPR, the DWP and NEST, and assessment of the changes is being closely monitored and tracked.

Ceridian pension calculations fully handle the pension scheme calculation requirements for Pension Reform, being extremely flexible to meet the vast majority of employer scheme rule combinations.

The new automatic enrolment triggers for pension reform are based on earnings above a threshold (probably £8,105 – to be confirmed) and employees aged between 22 and 75. Contributions, as a minimum, are assessed on earnings between a Lower Earnings Limit (LEL) and an Upper Earnings Limit (UEL) although employers are free to extend their rules to all earnings.

Ceridian Payroll solutions are being updated in advance of the first staging point in October 2012 with the following enhancements:

• The ability for employers to define earnings elements which are subject to Pension Reform assessments
• The ability for employer to define any postponement to be applied (employers may postpone their duties by up to 3 months, this also applied to new employees)
• The ability for the employer to define which employees are to be tested automatically (test or do not test) and define into which occupational pension scheme an employee would be enrolled if the test is satisfied
• The ability for the employer to handle an opt-out request which involves the refunding of the employee and employer contributions
• Opt-in capability is already present.

Ceridian can also offer employers the following services:

• An impact report for employers and trustees of the implications of pension reform on their business, or the impact of the abolition of COMP schemes and the reduction of rebates for COSR schemes
• Assistance with the assessment of earnings and allowance for pension reform purposes (the basis of earnings is different)
• Production of employee lists in relation to initial assessment for employer communications to meet the initial staging date obligations
• The creation and scheme design for auto-enrolment and Opt-In with employer contributions, and Opt-In scheme without employer contributions
• Assessment of current pension arrangements and the potential impact of pension reform
• The creation of a suitable Salary Sacrifice arrangement to take advantage of both Tax and Class 1 NICs reliefs
• Creation of interfaces to the employer chosen pension scheme.

In addition to the payroll service obligation of auto-enrolment into a qualifying scheme and the commencement of contributions, employers are faced with a significant administrative burden in both terms of communication to employees, handling of opt-in and opt-out instructions, record keeping to ensure employer compliance is undertaken and the interface with the chosen pension provider.

Pension Providers may take some of the administrative burden away, they may offer services to communicate with pension scheme joiners, opt-in and opt-out requests and other communication elements, however, the employer is still left with significant administrative and record keeping burden.

Ceridian can help! Our service offering is being expanded in readiness and we’ll be in touch with customers early in the New Year with further information on ways in which we can help you with your Pension Reform obligations.