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Pensions: Preparing Your Business for the Change

11th Jun 2013
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At some point between now and the 1st April 2017, your business is legally required to set up a workplace pension scheme for your employees. The idea is to encourage staff to take some responsibility for planning their own financial future after leaving work.

Your business needs to make a few payroll and HR changes to accommodate the new pension schemes. This guide will explain the basic preparation you will need to complete in advance of your own workplace pension going live.

Choosing the right pension scheme

Most workplace schemes fall into two categories: ‘defined contribution pensions’ and ‘defined benefit pensions’.

Defined Contribution Pensions

Also known as a ‘money purchase’ scheme, these pensions pay out based on the contributions paid in, and the value of the fund at retirement. The defined contribution pension is much easier for most businesses to operate, as future payments to retirees are governed solely by the amount of money in the ‘pot’.

Defined Benefit Pensions

More commonly known as ‘final salary pensions’, these types of scheme pay staff a guaranteed salary after retirement. The pension payments are not directly linked to contributions, so pension fund managers (i.e. your business) have to make up any shortfalls.

Whichever type of scheme you choose, the fund manager should be able to clearly demonstrate:

  • Value for money.
  • A track record of pension fund management.
  • Asset protection schemes to minimise the effect of market fluctuations on fund members’ contributions.
  • The ability to adjust contributions.
  • Accurate record keeping and supply of information back to your business.

There are hundreds of different pension products available, so your business should source expert advice to ensure you choose the right one for your employees.  You will also need to decide what the minimum and maximum contributions levels for your scheme should be; a financial adviser will be able to help you calculate the contribution levels required to adequately prepare a fund for retirement.

You can find details of independent and impartial financial advisers at Unbiased.co.uk.

Speak to your employees

You are legally obliged to write to your staff, informing them of the new workplace pension and that they will be automatically enrolled into the scheme. However, to ensure staff fully understand what is involved, you should arrange a meeting or presentation to explain how the scheme works and how it affects them.

You should invite any team member who meets the following criteria:

  • Employees who are aged between 22 and the State Pension age,
  • And earn £9,440 per year or more,
  • And work at any of your locations in the UK.

The key points to communicate are that unless they opt out of the new workplace pension,

  • They will pay at least 0.8% of their qualifying earnings (salary between £5668 and £41,450) into the pension plan.
  • By 2018, their payments will increase to at least 4%.
  • Your company will also be contributing 1% into the pot.
  • By 2018 company contributions will rise to at least 3%.
  • The Government will also be making contributions, starting at 0.2%, and rising to 1% by 2018.

The graphic below helps show how this works in a defined contribution scheme:

Source: https://www.gov.uk/workplace-pensions/what-you-your-employer-and-the-government-pay

Staff need to be fully aware that their take home pay will be reduced slightly once the workplace pension scheme goes live.

Prepare your systems

Workplace pensions bring additional layers of bureaucracy to your HR and payroll functions. Managing membership status, processing contributions, and ensuring the scheme remains functional and legally compliant will undoubtedly become an administrative headache. It is therefore crucial that your business processes are amended in advance, ready to support the new scheme. Here are some tips that may prove useful.

Train your HR and payroll staff

The day-to-day application of new workplace pension contributions is little different to any other payroll deductions. However, there are still some additional tasks that staff will have to perform, on which they should be trained to understand in advance.

The HR team will need to be able to handle requests to leave the scheme, passing the relevant paperwork to fund managers so that contributions are not taken from the employee’s pay. They will also be responsible for calculating requested adjustments to contribution levels and ensuring that staff continue to be paid the correct sum each month.

Your HR/payroll team will also need to carry out testing to ensure that contribution calculations are being applied correctly in line with statutory guidelines before the scheme goes live.

Get your HR software sorted

Your current HR software system will also need to be prepared in advance of the pension scheme going live. You should verify whether the system has the necessary capabilities, and source a replacement if they are found to be lacking.

At the very least, your HR system will need to be able to record:

  • Copies of the letter informing staff of the new pension and evidence that each employee has a received a copy.
  • The scheme enrollment status of each employee.
  • The level of contribution being paid by each employee.
  • Details of any communications between your company and the pension fund manager regarding specific employees.
  • Details of leavers and successful transfer of their pensions to other providers.

You will also need to ensure that your system is able to process changes in minimum contribution levels automatically to accommodate the rate adjustments between now and 2018. If your current cannot meet these requirements, you will need to identify a new HR solution that can.

You may find that the workplace pension rollout provides the perfect opportunity to reassess current HR and payroll workflows to identify new efficiencies and cost savings. You should work with your team to audit current processes and pin down those that could be improved through automation in a new software solution.

Don’t be afraid to seek advice

The introduction of workplace pensions is quite daunting, particularly as it affects the future of employees and has financial implications for your business. It is therefore wise to seek advice from professional pension advisors to ensure that you are getting the best possible deal for you and your staff.

You may also find The Pensions Regulator website a useful resource for learning more about workplace pensions and your responsibilities as an employer.

Your business has between now and 2018 to put a workplace pension scheme in place, but there is no reason to delay planning and implementation. The sooner you complete initial investigations into how your business will operate a scheme, the easier the final rollout will be.

Image of piggy bank from Flickr

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