Impact of the new Pensions Act – major changes for employers

The Pensions Act 2008

More of us are older than used to be the case and this trend is set to continue as birth rates stay low and we live healthier lives. Yet, too many of us are not making adequate provision for our retirement. In order to address this issue, the government has, since 2001, required employers with five or more employees to provide access (but not to contribute) to a 'stakeholder pension scheme'. This has not, however, achieved widespread pensions savings and so the Pensions Act 2008 makes provision for a 'personal accounts' regime which aims to "make saving for retirement the norm". In this month's Working Times, we look at the impact of the Pensions Act 2008 and at what employers should be doing to prepare for the new pension regime.

Automatic enrolment and jobholders

Employers will, from 2012, be required to enrol all 'jobholders' between age 22 and state pension age automatically if they earn between £5,035 and £33,540 per year into the 'personal accounts scheme' or a 'qualifying scheme' and make mandatory contributions. Those jobholders who earn less can require their employer to enrol them in a scheme but their employer does not have to contribute to it.

The regime applies to jobholders so that it reaches out to those temporary and agency workers who have no pension provision, rather than just employees.

Personal accounts scheme

The personal accounts scheme is currently being set up by the Personal Accounts Delivery Authority and will be implemented from 2012. It will be a money purchase (defined contribution) pension scheme (where benefits are calculated by reference to the contributions made by or on behalf of the member and any investment return, rather than the member's final salary). It will be established under trust and operated by a trustee corporation, independently of government.

Employers will be required to contribute 3% of jobholders' 'qualifying earnings' (again, this is earnings between £5,035 and £33,540 per year). The jobholder will be required to contribute 4% and the government will contribute 1% in the form of tax relief.

Qualifying schemes

Many employers already provide a pension scheme which will be regarded as a qualifying scheme, if it meets particular conditions. For a pre-existing money purchase (defined contribution) pension scheme to be regarded as a qualifying scheme, the main condition is that contributions are made to it at the same rate as the personal accounts scheme.

Employers who already have a qualifying scheme will not have to change their pension provision in 2012. However, a significant number of employers who, for example, do not provide a pension scheme to their employees because they employ fewer than five employees and many employment agencies will need to make appropriate arrangements to comply.

Opting out and jobholder protection

Under the new regime, it will be open to an employee who does not want to make pension contributions to opt out of the personal accounts scheme or a qualifying scheme. Employers will be prohibited from indicating during the recruitment process that an application may be determined on the basis of whether the applicant might opt-out of the personal accounts scheme or a qualifying scheme and offering inducements to jobholders to do so.

The Pensions Regulator

The Pensions Regulator will be responsible for ensuring that employers comply with their duties and jobholders are protected. The Pensions Regulator has actively ensured compliance with previous pension legislation and there is no reason to suspect that it will not do so in this case. Under the Pensions Act 2008, it will, for example, be able to issue a 'compliance notice' and/or a 'penalty notice' to an employer. If it thinks that employer contributions have not been paid, an 'unpaid contributions notice' may also be issued.

Who will benefit?

Those who may benefit from the personal accounts regime include:

• temporary and agency staff who do not have access to a pension scheme;

• employees of employers which do not provide a pension scheme because they employ fewer than five employees; and

• employees of employers which provide access to a stakeholder pension scheme but do not contribute to it.

From 2012

It is expected that the personal accounts regime will be phased in from 2012. It is likely that it will first apply only to employers with a large number of jobholders and over a period of time be expanded to apply to all employers. It seems likely that the contributions employers have to make will also be phased in. At first, it is likely to be 1% of qualifying earnings, increasing to 3% in due course. The provisions in the Pensions Act 2008 will be supplemented by detailed regulations and the government and the Personal Accounts Delivery Authority have published consultation papers in relation to some of those regulations.

Conclusion

2012 may seem like a long way off but it is not too soon for employers to start planning now. For those that do not currently provide a pension scheme or do not contribute to a stakeholder pension scheme, putting in place the necessary administrative, payroll and contractual arrangements could well take some time. For employment agencies in particular, the new regime will present a challenge, not least in terms of record-keeping.