In December 2002 the Government set up an Independent Pensions Commission to review the Pension System and make recommendations for reform to meet the challenge of providing a fair and adequate retirement income in a society where the population is growing and people are living longer.
After a significant consultation process the Commission put forward various recommendations, which culminated in the Pensions Act 2008. The Act contains a number of measures aimed at enabling and encouraging more people to build up private pension income to supplement their basic State Pension.
How Does it Work?
From 2012 all eligible workers who do not already have a work place pension scheme that meets the minimum requirements will automatically be enrolled in a pension scheme set up by their employer or a new savings vehicle, the National Employment Savings Trust. Both the employer and employee make contributions into the pension scheme and tax relief will be provided.
What are the Minimum Contribution Levels?
Unlike the current stakeholder pension provisions, employers will be obliged to contribute towards the pension scheme. The miniumum level of contributions will increase over time, starting at 1% in 2012 for bigger employers and increasing to 3% in 2014. Employees rates increase from 1% to 4%, and they will get tax relief on their contributions so that in due course the total combined contribution will be a minimum of 8%.
The exact date when an employer has to put the pension provisions in place is staged based on the number of employees they have. Employers with the largest number of workers will have the earliest staging dates. The smallest employers will have the last staging dates in 2016. Details on staging are provided on the Pension Regulator Website.
The Pensions Regulator will contact employers 6 – 12 months prior to their staging date to put them on notice of the date by which they must have implemented the pension provisions.
Which Workers Are Included?
All ‘workers’ who are ‘eligible jobholders’ will qualify for automatic enrollment in the pension scheme. These are workers who:
The definition of ‘worker’ is broad and can include contractors and agency workers. It also includes all employees (part-time, fixed term and seasonal are all included) and there is no proposed service qualification – new employees are entitled to be in the scheme from the commencement of their employment. For many employers who have merely offered access to a Stakeholder Pension Scheme, to which they have not contributed, this legislation brings significant cost implications. There will be a cost not just in funding the pension contributions, but also in respect of administration and changes to employment documentation. This will particularly impact on employers with a large number of workers who earn between £5,035 and £33,540 (in 2006/7 earning terms). It will also place a heavy administrative burden on those who have a high turnover of staff, such as seasonal workers.
What About Offering Employees the Chance to Opt Out?
The Pensions Act provides specific provisions aimed at prohibiting employers from offering employees financial inducments to opt out of the Pension scheme. Whilst employees may expressly opt out of the pension arrangements if they wish, the employer is under an obligation to automatically enrol them every three years. Also, amendment will be made to the Employment Rights Act 1996 to extend protection against unfair dismissal to workers who are seeking to enforce their pension enrollment rights. Provisions in employment contracts which seek to limit or exclude access to compulsory pension arrangements will be automatically void.
Furthermore, employers who don’t enroll their employees in accordance with the legislation may face a compliance notice and/or penalty notice with a fine of up to £50,000.
How Can We Minimise the Impact on Our Business?
Whilst it is not necessary to take any immediate action, employers would be sensible to start factoring the potential costs of the legislation into their business plans and strategies for forthcoming years. For example, provisions should be made in respect of recruitment strategies/policies, and you should also start looking to identify ways of offsetting the additional costs.
In light of our advice, some of our clients have decided to take a proactive approach to implementing the new pension arrangements. One of our larger employers has decided to refrain from any salary increases for 2010, instead offering employees the opportunity to enter into a newly established Company Pension Scheme. The opportunity is open to all employees who are prepared to contribute 1% of their salary towards the scheme. The Company will then match the contribution provided by the employee. Over the coming years it will increase the contribution levels to reflect the statutory minimum levels. Our client has neatly side-stepped the issue of salary increases for this year and has positioned itself so that the legislation will not hit them so hard when it comes into force.
If you are considering setting off salary increases against pension contributions you will need to take into account any provisions contained within your staff contracts about salary increases and any implied rights that may have arisen through custom and practice.