SMEs to top up the pension pot

Many owners and managers of small businesses will shudder at the thought of the Governments new pension scheme – the National Employment Savings Trust (NEST) – planned to come into force in 2012. The scheme will eventually require employers to automatically enrol all eligible employees onto the scheme and will force them to contribute the equivalent of at least 3% of the employee’s salary to their pension.

This is expected to have the effect of increasing pension uptake amongst employees from around 55% to an estimated 80%. However, leisure, retail and construction companies are expected to be hardest hit as currently 90% of employees in these sectors have no form of pension provision.

Employers will have to automatically enrol employees if they:

are aged at least 22,
have not reached state pension age,
earn more than £7,475 per year
are not already involved in a suitable scheme.
Employees outside of these parameters will be able to request that their employer include them in the firm’s pension scheme, but it will be at the firm’s discretion whether they make a contribution to the employee’s pension or not.  Whether an employee is automatically enrolled or voluntarily enrolled, they will eventually be required to personally contribute at least 5% of their annual salary to their pension. Despite the obligations on employers, all employees will be able to remove themselves from the scheme at any point if they so wish.

The provisions of the new scheme will require employers to enrol employees in NEST from day one of their employment. This marks a change from the current requirement of employers only to make pension provisions for employees after several months. This change will mean pension provisions may have to be made for short-term or seasonal staff, again having a drastic effect on the retail and leisure sectors in particular.

Despite attempts by the government to reduce the administrative burden the scheme will place on small firms the Federation of Small Businesses (FSB) has criticised the scheme arguing the Pensions Regulator will take an overly firm approach to enforcing the provisions.

Those employers failing to properly administer the NEST scheme or provide an alternative pension scheme that would exempt them from NEST will be liable to face significant fines, expected to be calculated per employee affected.

Posted 06/04/2011 by:
David Dixey
Senior Chartered Legal Executive in Litigation & Employment Teams

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