News that the introduction of a secondary pension scheme by the States of Guernsey has been delayed until January 2023 provides a welcome breathing space for employers to prepare, especially helpful for those who currently do not offer a pension scheme to their employees.
Employers should of course take note that there are a number of obligations that will arise as a result of the implementation of mandatory pension contributions and it is helpful to summarise those here:
- Contributions will be phased in stages, with both employees and employers contributing 1% initially, rising incrementally to 3.5 % for employers and 6.5% for employees over a 7 year period.
- All employees will need to be auto-enrolled into either the States pension scheme administrator (Smart Pensions Ltd); a workplace pension scheme or a qualifying pension scheme.
- Employees will have the right to opt-out (and will be automatically re-enrolled every 3 years).
- The qualifying age for the States pension increased in January 2020 and will continue to increase at a rate of 2 months every 10 months until the pension age reaches 70 in 2049.
If you reflect on the current position you can appreciate why it's important that individuals start taking responsibility for their retirement. The full rate of the States pension benefit (currently £228.37 per week) is payable where an employee has made contributions for 45 years. But the benefit reduces - on a sliding scale – for anything less than 45 years of contributions, all the way down to no benefit being payable for contributions of less than 10 years.
The need for a new scheme has been on the States' agenda for some time and was originally intended to be implemented by January 2022. However, on 8 June 2021, the States announced that the secondary pension scheme had been delayed, "held up by Covid and Brexit". It has now been confirmed by the Committee for Employment and Social Security that employers will be given "adequate lead-in time to prepare" with an implementation date of January 2023 being targeted.
While the extension is welcome news, the unavoidable reality is that these obligations will result in increased costs for employers. With a greater lead in time, what should employers without pension schemes be doing now to prepare themselves and potentially mitigate those costs? Here are our recommendations:
- Review your contracts of employment and in particular your pension and salary provisions. Consider if they need to be updated (for new employees) or amended (for existing employees) to reflect the value of pension contributions; to allow for the deduction of the mandatory contributions and; to reflect the increasing pension age (Note – the proposed discrimination legislation which will prohibit discrimination on the basis of age will remove the ability of employers to have contractual retirement ages and so any amendments may want to be made having regard to those future obligations).
- Review your handbooks and ensure that sufficient provision is made for pensions, and that sufficient flexibility exists to change pension providers and the terms on which any employer funded pension scheme is operated.
- When determining pay rises, consideration could be given to the cost of future mandatory employer pension contributions and allowance made in any pay review process for that future obligation.
- When considering remuneration and reward packages, consider schemes which reward employees for contributing over and above the minimum statutory amount by matching their contributions up to a pre-determined limit.
At this stage, the devil will be in the detail and we await the finalisation of the scheme and accompanying legislation, which will be the appropriate time to comment further on the implications, so please watch this space. In the meantime if you would like to discuss the issues further, please contact a member of the Guernsey employment team.
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