Since the introduction of compulsory automatic enrolment for workers in 2012, HR departments have been getting to grips with a new set of rules on pensions.
Existing employers have a deadline of April 2017, and in November 2014 68% of organisations had implemented auto-enrolment (CIPD 2014). As the dust settles, the new pensions environment will bring new HR challenges for choosing pension types and designing benefits schemes.
Types of workplace pensions
Workplace (or occupational) pensions are arranged and contributed to by employers. Employees usually also contribute a percentage of their salary to their workplace pensions.
There are two main types of workplace pension:
- Defined benefit (DB) pensions guarantee a specific level of income on retirement. ‘Final salary’ pensions are a well known example of DB schemes.
- Defined contribution (DC) pensions guarantee the contribution but not the level of retirement income. Benefits received depend on external factors such as the amount contributed and the stock market.
In recent years employers have offered fewer DB and more DC schemes, which are less costly. The shift is seen as a result of various factors including the UK’s aging population, recent poor stock market returns and increased regulation of pensions.
Another key factor is the introduction of auto-enrolment.
What is automatic enrolment for pensions?
Under new rules, every employer with at least one employee is required by law to provide a workplace pension — if employees meet qualifying criteria.
Your employees are eligible if they are:
- Aged 22 to state pension age and earning over £10,000. These employees will be automatically enrolled and your organisation must make contributions their pension.
- Of any age and earning £5,824 or less. These workers are entitled to join a company pension scheme, but your organisation is not obliged to contribute.
Auto-enrolment duties are being phased in in stages. Existing employers must have auto-enrolled employees by April 2017. New employers have a deadline of February 2018.
The minimum pension contribution your organisation must make under auto-enrolment is also being increased in stages:
From staging date to 30 Sept 2017 Minimum employer contribution 1% of employee’s salary/wage
From 1 Oct 2017 to 30 Sept 2018 Minimum employer contribution 2% of employee’s salary/wage
From 1 Oct 2018 Minimum employer contribution 3% of employee’s salary/wage
Planning a workplace pension strategy
For many organisations and employees, workplace pensions are a key part of the employee benefits package. Besides salary, pensions are also usually the costliest element of employee compensation. For these reasons, pension provision might be a key strategic issue for your organisation.
Besides meeting legal requirements, your pension strategy might consider:
- How your pension scheme can support staff retention and talent recruitment
- The costs of potential schemes and how these might change over time
- The future financial well-being of employees
Making sure staff understand the value of their pension
If one of your pension strategy goals is to increase competitiveness of your benefits package, then it’s vital you communicate its value to applicants and staff.
Behavioural science studies show people tend to under-value rewards they have to wait for — and pensions are a prime example. Pensions are also complex and difficult to understand. A pension is therefore most effective as an attraction and retention tool when you communicate its advantages well.
Pensions and the law
Auto-enrolment rules aside, there’s no single law that explains your legal duties regarding pensions. Instead, a large body of legislation and case law govern your organisations’ pension schemes.
Rules on pension contributions and benefits are also determined by HMRC limits. Make sure your managers responsible for pensions are up to date with the latest HMRC guidance.