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Pensions Act 2008
5 February 2009
In 2012 employers will not just have the effects of the Olympic
Games to consider on their businesses but also the relevant parts
of the Pensions Act 2008 (the ‘Act’). The Act received Royal Assent
on 26 November 2008.
From the date the relevant parts of the Act come into effect,
which is expected to be in 2012, employers will be required to:
- automatically enrol their employees; and
- make minimum mandatory employer contributions
into a personal accounts scheme or their own qualifying
scheme.
The Act has also given the Pensions Regulator new anti-avoidance
powers, to enable it to govern and ensure employers’ compliance
with the new requirements of the Act.
The Act is primarily concerned with the introduction and
provision of automatic enrolment. However, it also introduces a
number of other measures relating to occupational pension schemes,
such as:
- compensation paid by the Pension Protection Fund will be able
to be included in a pension-sharing order on divorce
- a ban on inducements offered by Employers to encourage their
employees to opt out of occupational pension schemes
- removing the requirement for Employers to provide access to a
stakeholder scheme
Automatic enrolment
Every employer will be required to automatically enrol every
‘jobholder’ aged 22 and over who has not reached pensionable age,
as an active member of a personal accounts scheme or a qualifying
scheme, from the date they become eligible.
A jobholder is defined as a worker who:
- works (or ordinarily works) in Great Britain under a worker’s
contract (temporary and agency workers are included)
- is between 16 and 75 years old
- has annual gross earnings between £5,035 and £33,540
‘Qualifying Earnings’ of a jobholder are subject to the above
lower and upper threshold and can include, salary, bonuses,
overtime and other payments made in connection with a jobholder’s
employment, such as statutory sick pay and maternity pay.
Where a jobholder’s gross earnings are below £5,035, the
jobholder can require the employer to enrol them into a personal
accounts or a qualifying scheme, but the employer will not have to
make any contributions.
A jobholder who has been enrolled in a personal accounts scheme
or a qualifying scheme will have the right to opt out within a
period and on terms to be defined. A jobholder will also be able to
require the employer to arrange for them to be opted into a
personal accounts scheme or a qualifying scheme.
Qualifying schemes
A pension scheme is a qualifying scheme if:
- it is an occupational or personal pension scheme
- it is a registered pension scheme under the Finance Act
2004
- while a jobholder is an active member, the scheme satisfies the
quality requirement in relation to the jobholder
The quality requirements that must be satisfied for a scheme to
constitute a qualifying scheme will depend on the type of benefits
provided under the qualifying scheme:
- Defined contribution scheme - An employer of a
defined contribution (money purchase) scheme must make a minimum
contribution of at least 3% of the jobholder’s Qualifying Earnings.
The total amount of contributions paid by the employer and the
jobholder must be at least 8% of the jobholder’s Qualifying
Earnings. These provisions may be varied for schemes which are
contracted out of the state second pension.
- Defined benefit scheme - An employer of a
defined benefit scheme must provide broadly equal to or better
benefits than would be provided under the test scheme in the Act
for members of such a scheme. The test scheme benefits are that the
member is entitled to:
- a pension for life from 65
- receive an annual rate of pension that is 1/120th of their
average Qualifying Earnings in the last three tax years
preceding the end of pensionable service, multiplied by the number
of years of pensionable service, up to a maximum of 40 years
pensionable service These provisions may be varied for schemes
which are contracted out of the state second pension.
- Personal pension scheme - For personal pension
schemes, the employer must make minimum contributions of at least
3% of the jobholder’s Qualifying Earnings. If the total
contributions are less than 8%, the jobholder must make up the
shortfall.
To be phased in
The compulsory employer contributions for defined contribution
and personal pension qualifying schemes are expected to be phased
in over three years. The 3% employer contribution will be limited
to 1% for the first year after implementation, and 2% for the year
after.
For defined benefit and hybrid schemes it is presumed that
similar provisions will apply.
Employment protection
From 2012, employers will be prevented from asking a job
candidate whether they plan to opt out of auto-enrolment and
employers will not be permitted to offer financial inducements to
jobholders to opt out of a qualifying scheme. The Pensions
Regulator will have powers to issue compliance notices to employers
who breach these requirements.
It is not known what remedy (if any) will be made available to
the individual who wishes to make a complaint, but an employee will
have the right not to suffer any detriment in their employment
because their employer acted in breach of these new
requirements.
Personal accounts scheme
The Government will establish the central personal accounts
scheme which will be a registered pension scheme under the Finance
Act 2004 and set up under irrevocable trusts. The central personal
accounts scheme’s trustees will be a trust corporation.
Conclusions
Act now. Like the Olympic Games, pension provisions can take
years to put in place. 2012 may seem a long way off but the Act’s
passage through parliament should be used by every employer to
review their remuneration strategy and to consider how to ensure
compliance with the new pension regime.
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