Radical changes are being brought in by the new Pensions Act 2008. These will begin to be implemented in 2012 and will require every employer to comply with new statutory duties. The reforms will have a very substantial impact upon every business. The duties of an employer will be extended with unavoidable additional costs being incurred. The purpose of this article is to summarise the changes and to offer assistance in guiding businesses to prepare for implementation of the reforms.

 

 

It was recently estimated by the Institute of Fiscal Studies that approximately 7 million people in the UK are not presently saving enough income to provide a pension that they will consider adequate in retirement. There is a natural reticence to save or a natural inclination to put off thinking about such things until it is later…sometimes too late. The government has decided that as employees will not volunteer to save for retirement they will be deemed to choose to do so unless they expressly decide not to. Of course, it will be employers who will pick up much of the cost of implementing the new system.

 

The new Pensions Act 2008 makes provisions to ensure that essentially all employees above the age of 22 earning above £7,475 a year will automatically be enrolled in membership of a pension scheme and, if they want out, they must expressly opt out after enrolment.

 

In other words, rather than the present default position where an employee can decide to set up his/her own private pension arrangements and consequently often avoids doing so, he/she will be deemed to automatically have done so unless he/she has expressly opted out.

 

This places new duties upon the employer to effect the automatic enrolment, to make minimum pensions contributions and to administer compliance with the requirements of the new Act. Fairly severe penalties will apply should the employer fail to meet its new obligations.

 

 

The main features of the scheme will be:

1.     automatic enrolment and

2.     mandatory contributions by the employer and employee.

 

1.         Automatic Enrolment – employers will have to make arrangements for automatic enrolment into a qualifying workplace scheme from 2012, for employees earning at least £7,475 a year (in 2011/12 terms) who are above the age of 22 and below the state pension age, including temporary and agency workers - all being called ‘jobholders’ for the purposes of the scheme. For clarity’s sake we will refer to them as employees. Employers can choose to impose a three-month waiting period before a new employee is enrolled.

 

The onus will be on the employer to decide whether to meet these requirements through an existing occupational scheme, a workplace personal pension scheme (provided the existing scheme meets certain quality tests) or through personal accounts in the new government-established National Employment Savings Trust (NEST).

 

Membership of NEST is also available to employees who wish to opt-in by notice, where they do not qualify for automatic enrolment – i.e. at enrolment are under age 22 or under the minimum wages threshold.

 

Employees can Opt Out but only if they choose to do so - Any employee will have the right to opt out of membership. Broadly, if an employee opts out within a month of being auto-enrolled, they and their employer get a refund of any contributions paid.

 

Employees who have opted out will be automatically re-enrolled every three years during a six-month window and the employer must make arrangements to automatically re-enrol them. The employer cannot give any advice. Employers will not be able to offer financial inducements to workers to opt out of auto-enrolment, nor will they be able to ask job applicants at interview whether they plan to do so. If a worker suffers any detriment because his or her employer breaches the regime, they will be able to claim in the employment tribunal. Employers will not be able to contract out of or exclude any of their new duties, except when compromising an employment tribunal claim. Employment contracts should be updated to reflect these concerns.

 

Clearly, the new scheme will involve additional costs both directly, by way of mandatory employer contributions, and indirectly by reason of the need to adequately administer pension arrangements and ensure employer compliance with auto enrolment and re-enrolment every three years.

 

Qualifying Workplace Schemes – in addition to NEST, this can either be a registered occupational pension scheme or personal pension scheme that provides for automatic enrolment and meets prescribed quality tests as below. The tests applicable to defined contribution schemes (including Money Purchase Schemes) differ from those applicable to defined benefit schemes as summarised in the following:-

• The broad overriding test will be to ensure that contributions must provide pensions that are broadly equivalent to, or better than, the pensions that would be paid under a test scheme standard. (Most existing defined benefit schemes should anyway satisfy this test).

• An employer contribution of at least 3% of ‘qualifying earnings’ phased in over five years, with the total amount paid by the employee and the employer being at least 8%.

• Qualifying earnings: gross earnings between £5,035 and £33,540. The lower end of the band is likely to be changed so it corresponds roughly to the lower earnings limit (£5,304 in 2011/12).

• In the case of a group personal pension, there must be a direct payment arrangement for contributions between the employee and the employer.

Employers with Defined Contribution schemes will be able to self-certify in advance that their scheme satisfies the test.

• Occupational schemes which are contracted-out, or

• Schemes paying pensions for life from age 65 where the benefits are at least 1/120th of qualifying earnings in the three tax years preceding the end of pensionable service, for each year of pensionable service (subject to a maximum of 40).

Mandatory employer contributions to money purchase or personal pension schemes will be phased in over six years. Broadly, employers will be required to pay contributions of 1% of a jobholder's qualifying earnings in the first four years, rising to 2% in the fifth year and the full 3% from the sixth year onwards, in October 2017.

Contributions and Transfers – there will be a contribution cap to NEST. Transfers in and out of NEST personal accounts will initially be prohibited to limit the impact of the reforms on the occupational market. These provisions will be reviewed in 2017. There is some concern that NEST will end up as the lowest common denominator to which most personal pension schemes will level as a result of the reforms.

 

Stakeholder Pension Schemes – the requirement for employers to provide access to a designated stakeholder scheme will be removed following the introduction of NEST and automatic enrolment.

 

 

There will be a phased implementation of the new scheme over 4 years, with the largest employers (for employers with a PAYE scheme size of 120,000 employees or more) to reach compliance at the first staging date of 1 October 2012, before smaller employers come into the reach of the system. The attached table from The Employers’ Duties (Implementation) Regulations 2010 (© Crown copyright, used under the terms of the Open Government Licence), indicates the implementation dates applicable to differing PAYE scheme sizes.

 

Subsequent staging dates, for smaller employers, occur on the 1st day of each of the following months (excluding December) up to 1 September 2016, when the staging period is complete. Staging for new businesses, where PAYE income is first paid after 1 April 2012, will take place towards the end of the period.

 

The number of persons within a ‘PAYE scheme’ is based on the latest information available to the Regulator at 1 April 2012.

 

It is possible for employers to bring forward their staging date to an earlier date provided that:

• the earlier date is not before 1 October 2012;

• the pension scheme to be used for early automatic enrolment is contacted; and

• the Regulator is notified.

 

 

D.        Compliance Body – the Pensions Regulator will have the role as compliance body and will monitor how employers meet their statutory duties.

Employers will have to register how they meet their new duties and the Regulator will have automated processes and penalties for those who fail to do so.

¨       Employers will have to provide information to the Pensions Regulator, within two months of their staging date, telling them how they have complied with their duties.

¨       Employers will also have to update that information in the event of an employer making arrangements for automatic re-enrolment or where three years have passed since information was last provided.

¨       Employers and pension schemes are also required to keep certain records and information that will enable the Regulator to check compliance. Records must be kept in such form and manner so that they are capable of being arranged according to the corresponding employer pension scheme references and can be provided to the Regulator in a legible form.

¨       Records must be preserved for a period of six years.

 

The Regulator will inform employers about their duty to register at the same time they are told about auto-enrolment.

 

The compliance provisions also cover the following points:

 

¨       If contributions are not paid by their due date then interest may be payable on those contributions.

¨       If unpaid contributions are not made within three months of their due date, then the employer can be made to pay all outstanding amounts (i.e. the employee share too).

¨       The Regulator’s powers include issuing penalties to employers for non-compliance of the employer duties, which will vary according to the employer’s size. Large employers that do not comply could be liable for escalating penalties of £10,000 a day. Criminal penalties could apply in the case of "wilful" failure to comply.

 

¨       Employers now have more certainty in terms of when and how they will be required to comply with the pension reforms. Every employer needs to review their existing pension arrangements with regard to eligibility, enrolment, re-enrolment, contributions/benefit structure and default options.

¨       A review of standard service contracts and indeed of all existing service/employment contracts should be undertaken to ensure no inconsistency with the new requirements and that appropriate provision relating to compliance with the new employer duties is set out in such terms.

¨       Although final decisions do not have to be made until nearer 2012 or even later, planning and budgeting can and should start much sooner not just for the minimum 3% direct cost but also for the indirect associated administrative costs.

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