Feathering the nest

The 2008 Pensions Act marks a different approach '“ this time, one which will ensure there is something in the pension pot. That inevitably means an element of compulsion. And it also means cost, at least for those employers who have previously made no pension provision for their workers.

The long-term issues with pension saving (or the lack of it) are well documented. Back in 2006, the government produced a White Paper called 'Personal Accounts '“ A New Way to Save', to look at ways to address that particular problem. That in turn spawned a Pensions Bill in late 2007, and we have now finally ended up with the Pensions Act 2008 (the '2008 Act'), which received Royal Assent in late November.

A simple concept?

At its heart, the government's aim is a key move away from the voluntary provision of workplace pensions, and towards compulsory workplace pension provision (although not immediately). The aim is for employees in one way or another to benefit from a good quality pension scheme.

A key component of delivering on that is the concept of Personal Accounts, but Personal Accounts will not be the only way for employers to meet their obligation '“ employers can instead use an adequate alternative pension arrangement. The Department for Work & Pensions sees Personal Accounts as part of its measures to enable and encourage more people to build a private pension income to supplement the pension they receive from the state. As is often the case, however, the apparently simple concept of requiring some form of adequate pension for employees has, in the end, become rather complex.

At this early stage, you might be wondering why we need yet another means of pensions saving. For those not already benefiting from some form of employer pension provision, there is the Stakeholder Scheme. As a concept, stakeholder schemes were not a bad idea. The only problem is that they have simply not achieved what was hoped. That is largely because, despite the requirement on most employers to make available a stakeholder scheme to their employees, and to provide a facility to deduct and pay over contributions the employee might decide to make, the major flaw was that employers did not have to contribute. As a result, most employers chose not to contribute (and neither did the employees). The result is that there are now many stakeholder schemes that have been designated by employers to comply with their obligation, but many of those schemes have little or nothing in them. In short, the voluntary approach to achieving more widespread workplace pension provision had failed, meaning a different approach is now needed.

New requirements

The new pension savings regime will start in 2012. As part of that, the 2008 Act provides for the setting up of a new pension scheme '“ in effect, what (from 2012) will be the Personal Accounts Scheme. This will, broadly, be a type of centralised, low-cost, defined contribution ('money purchase', if you prefer that term), trust-based scheme. It will be set up through the Secretary of State for Work & Pensions, with assistance from the Personal Accounts Delivery Authority (which was itself set up by the Pensions Act 2007). More detail about the Personal Accounts Delivery Authority, and its functions, is now set out in the 2008 Act. The detail (particularly the rules) of the Personal Accounts Scheme will follow, but two key points are that there will be an annual contribution limit of £3,600 (geared to 2005 earnings levels) and that there will initially be no transfers in or out of the Personal Accounts Scheme, although that will be kept under review.

Since the new requirements do not apply until 2012, there is plenty of time for employers to start planning how they will comply. The additional cost of the new regime to those employers not currently providing pensions for their workers will apply in particular to those employing a high proportion of temporary, agency or similar workers.

Effect on employers

The two key features of the new regime are the requirement for automatic enrolment into a (rather unimaginatively titled) 'automatic enrolment scheme', and employer and employee contributions.

In effect, 'jobholders' (rather than just 'employees') will need to be automatically enrolled, either into some form of employer-established (or designated) arrangement (all of which will have to meet a quality test), or into the Personal Accounts Scheme. It is quite possible that smaller employers in particular will use the Personal Accounts Scheme rather than make their own pension arrangements. Employers who already have their own pension arrangements in place, on the other hand, may want to consider using those (with any necessary changes to ensure they comply with the quality test that alternative arrangements must meet).

The requirement for automatic enrolment is consistent with the government's aim that, instead of employees deciding whether they want to be in a pensions saving vehicle, they be included unless they actively decide not to participate or withdraw. Jobholders who are aged at least 22 and under state pension age must be enrolled into an automatic enrolment scheme. With limited exceptions, automatic enrolment for the jobholder occurs from the first day of work.

A 'jobholder', for the purposes of the 2008 Act, is, broadly, a UK-based and contracted employee or worker, who is at least 16 years old and under 75, and who has qualifying earnings. Being widely framed, the result is that temporary and agency workers and some directors will be included in the automatic enrolment requirement.

'Qualifying earnings', for the purposes of the 2008 Act, are the jobholder's earnings from his employer between £5,035 and £33,540, which will include salary, wages, commission, bonuses and overtime, as well as statutory maternity, paternity and adoption pay.

If the Personal Accounts Scheme is not used, any alternative scheme must meet certain quality tests. The quality tests differ depending on which type of scheme (i.e. whether it is defined contribution or defined benefit) is involved. In summary, the tests are:

• if the employer has an occupational defined contribution scheme, the total contributions must be at least 8 per cent of the jobholder's qualifying earnings '“ the employer must pay at least 3 per cent of that;
• where the scheme is a personal pension scheme, the employer must again pay at least 3 per cent of the jobholder's qualifying earnings, with the jobholder making up the difference. Specifically for this type of scheme, there needs to be a direct payment arrangement in place, by which the employer makes the necessary contribution deductions from the jobholder's earnings and pays them to the scheme;
• if there is a defined benefit scheme involved, a test scheme standard is applied. In summary, that scheme must provide a pension for life, using an accrual rate of 1/120th of average qualifying earnings (in the three tax years before pensionable service ends) for each year of pensionable service (up to 40 years).

Special provisions may apply if the scheme is contracted out. Details on how the tests will apply for defined benefits schemes will follow in regulations.

A warning

Employers should remember that merely making an existing scheme available (even if it meets the quality test) is not enough '“ the need is for eligible jobholders to be automatically enrolled, rather than merely being able to opt in. Jobholders will be able to opt out of an automatic enrolment scheme, although there is provision for those jobholders to be re-enrolled every three years. And there is also provision for jobholders who are not automatically enrolled to ask to be included, although this is subject to restrictions.

Employers should be careful to avoid anything that has the effect of interfering with a jobholder's automatic enrolment or offering an inducement to opt out of enrolment. Employers may not, for example, simply make a higher salary payment as an alternative to providing a workplace pension.

Some other points to note are that the contribution requirements on employers are to be phased in over three years, in effect, 1 per cent in year one, 2 per cent in year two, and then the standard 3 per cent after that. The Pensions Regulator has been given a new role to ensure compliance by employers with their obligations under the 2008 Act.

Detail on a number of other aspects of the new pensions saving regime will be included in regulations to be made under the 2008 Act.

Finally, since the new pensions savings regime will largely replace the Stakeholder Scheme requirements, most of the latter (for example, the obligation on most employers to provide access to a stakeholder scheme) will fall away when the new regime comes into play in 2012.

What else does the 2008 Act do?

A key change is to the powers of the Pensions Regulator regarding anti-avoidance (of employer pension liabilities), and in particular the basis for issuing contribution notices to employers and financial support directions. There are also changes to the Regulator's powers regarding the appointment of independent trustees and intervening in a scheme's funding. There are some other detail changes too, including to: the Pension Protection Fund; contracting out; the Financial Assistance Scheme; re-valuation of deferred benefits; and a correction to the rules on the return of surplus assets. Detail on these is outside the scope of this article.