Whilst many employers are aware that Pensions Reform is arriving at some stage over the next few years, many businesses are yet to consider what actions they should be taking now to help mitigate any additional costs that may arise.

The Government's concern that most people are still not saving for retirement has led to a number of new duties for employers surrounding pension scheme membership for their employees. These responsibilities linked with employer contribution rates could mean unprepared employers facing real challenges over the next few years.

It is estimated that some 7 million people are not saving enough to give them the retirement income they would like or indeed expect. The Pensions Act 2008 introduced new duties on employers which will require employers to automatically enroll all their workers into a workplace pension scheme that meets or exceeds certain legal requirements.

Which Employees are Eligible?

Employers will have to automatically enroll all eligible employees in a qualifying pension scheme, and make compulsory contributions. Employees eligible for enrolment will be all employees who are aged between 22 and State Pension Age, earn more than £7,475 per annum and are not already in a "qualifying pension".

In addition, any employee aged 16 or over with earnings of more than £5,720 can ask their employer to be enrolled.

What costs are there for employers?

This is an area which has caused much confusion. The aim of the Pensions Reform is eventually to have all employees investing 8% of their "Qualifying Earnings" towards retirement. Of this 8% employers will eventually need to fund 3%.

Can I simply ask my employees to opt out?

This will prove problematic as broadly speaking; an employer cannot induce or encourage employees to opt out of the new arrangements. Furthermore, from 2012, employers cannot require employees to make any choices, or ask them to provide information to join the scheme. The act also dictates there should be no deferred period before staff join a scheme, which could place a greater administrative burden on employers and requires them to be more proactive.

Auto-enrolment also rules out seeking employees' consent to make deductions from pay, which could throw up secondary issues regarding salary sacrifice arrangements on pension contributions. This could be particularly important as some employers will look to such arrangements to offset the increased costs associated with implementing the reforms. One way around this is to reword employees' contracts of employment to establish the principle of salary sacrifice for appropriate salary levels.

What about existing pension schemes?

It is anticipated that virtually all Defined Benefit schemes will meet the new minimum criteria, which is a 1/120th accrual rate as 1/60th or 1/80th rates are typically more common. For those few employers still operating these final salary schemes, time will be provided to phase in employees who were not previously members.

The majority of pension schemes available, however, are Defined Contribution (DC) schemes, such as trust-based, group personal pension (GPP) or stakeholder plans.

The exemption criteria for DC schemes will largely be based on contribution levels, namely 8% of qualifying earnings of employees. This will be phased in across three tiers, beginning with both employers and employees contributing 1% of qualifying earnings, then employers 2% and employees 3%, and finally employers 3% and employees 5%, inclusive of basic rate tax relief.

What about temporary and contract workers?

Eligible employees also include agency workers, fixed-term and part-time contract workers, and anyone who undertakes work in Great Britain, whether by written or oral contract. This means employers will need to pay contributions for workers, such as contractors.

What about Flexible Benefits?

Employers which include pension schemes within a flexible benefits plan will need to ensure that their scheme offers no inducement to opt out nor encourages employees to opt out of the pension scheme. For example, employers that offer staff the choice of flexing out of employer pension contributions to spend the money on other benefits may need to revise this strategy ahead of 2012.

So what can businesses do to mitigate these costs?

Taking action now rather than waiting until 2012 is key as is starting with a simplistic approach. For those employers fortunate enough to be in a position to offer pay increases at any time between now and 2012, structuring part or all of any future pay reward as a company pension contribution would make much sense. An employer who is able to fund 1% into a pension scheme now would also realise savings of 13.8% on contributions compared to making pay rises as no employer’s NIC is due on employer pension contributions.

Considering upgrading pension arrangements may also assist employers in advance of 2012 or perhaps the adoption of NEST accounts which will be available on a voluntary basis from 2011.

Whichever route is considered, professional advice should be sought to ensure that tax efficiencies are included in any proposed changes introduced by employers.