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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 workers 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 jobholders employment, such as statutory sick pay and maternity pay.

Where a jobholders 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 jobholders Qualifying Earnings. The total amount of contributions paid by the employer and the jobholder must be at least 8 of the jobholders 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 jobholders 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 schemes trustees will be a trust corporation.


Act now. Like the Olympic Games, pension provisions can take years to put in place. 2012 may seem a long way off but the Acts 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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