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Pension Personal Accounts – Framework legislation in new Pensions Act 2008
Monday, January 26th, 2009
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The Pensions Act 2008 gained Royal Assent on 26 November 2008. The Act provides the framework for the automatic provision by employers of “pension personal accounts”, likely from 2012. The detail of these statutory obligations will be include in future Regulations. The following review of the provisions of the Act updates information that was published in an earlier newsletter.
In December 2006, the Department for Work and Pensions (DWP) published a White Paper entitled “Personal accounts: a new way to save”, describing in detail how this employment-based savings scheme is proposed to work and what will be expected of employers. The Government estimates that the personal accounts could have between 6 and 10 million members, all making contributions through the payroll.
The Pensions Act 2008 (“the Act”) gives effect to the Government’s new pension provisions, although considerably more detail has yet to be provided by means of Regulations that are yet to be defined. Delivery of personal accounts, expected to commence in 2012, will be by means of the National Pension Savings Scheme (NPSS), with which all employers and “jobholders” will deal. Costs in the long term will be limited to around 0.3% of funds under management. Jobholders will be able to choose from a default savings scheme, with decision-making limited to whether to remain in the scheme and how much to contribute, and a range of other schemes offering social, environmental and ethical investments, and branded funds. All contributions, from both jobholder and employer, will be paid over to a single clearing house and, from there, sent to the appropriate funds.
Personal accounts will be defined contributions (money purchase) occupational pension schemes, not contracted-out of the state pension scheme, and will be based on the existing pension framework rather than requiring new regulations. However, no transfers will be allowed into or out of personal accounts from or to existing pension schemes, and an annual limit to contributions will be set, with a higher limit in the first year to allow non-pension savings to be contributed.
Jobholders are defined as workers who are
- contracted to work in the UK,
- aged at least 16 and under 75, and
- paid “qualifying earnings” by the employer in a “pay reference period”.
The Act is limited in its scope to England, Scotland and Wales, but Northern Ireland is expected to have the same or a similar scheme.
The definition of “worker” is the same as for “worker” under the provisions of the Working Time Regulations and the National Minimum Wage Regulations, namely:
- persons who work under a contract of employment
- contractors who may be self-employed but who work for long periods for a single employer
It also includes
- agency workers, and the agency is the employer if the agency pays the agency worker,
- civil servants and staff of the House of Commons and House of Lords, and
- police constables and police cadets
but does not include
- members of the armed forces,
- directors not employed under a contract of employment, unless at least one other person is employed under a contract of employment, and
- persons working on board a ship.
Jobholders will be enrolled automatically, without any waiting period, if they are between age 22 and state pension age and have earnings at or above the defined threshold for the tax year. However, those outside of the lower and upper age limit will be able to opt-in to the scheme. The age 22 limit reflects the age from which the adult rate of the National Minimum Wage is paid and recognises that, below that age, workers, particularly students, are more likely to move jobs frequently.
Scheme membership will not be compulsory, recognising that some may not be able to save, for example, because of paying off high levels of debt. They will be able to opt-out if they choose. In particular, those approaching retirement may wish to opt out or, if their accumulated pension funds amount to less than 1% of the lifetime limit (£16,000 in 2007/08), take these savings as a lump sum, 25% of which may¬be taken tax free.
Jobholders who have opted out of automatic enrolment, jobholders who do not meet the conditions for automatic enrolment and workers who do not meet the conditions to be treated as jobholders, may, if they wish, give notice to the employer that they wish to opt in. Equally, jobholders who have been enrolled in a scheme may give notice to opt out and, in some circumstances, take a refund of their contributions.
Every three years or whenever they change jobs, jobholders who have opted out will be automatically re-enrolled if they are between age 22 and state pension age, but they will be able to opt-out again if they wish.
Jobholders’ contributions will be a percentage of their “qualifying earnings” in the “personal accounts earnings band” (PAEB). The PAEB is set in the Act between £5,035 and £33,540, but will be reviewed annually in line with increases in annual earnings, to maintain the value of contributions. Qualifying earnings are defined as “salary, wages, commission, bonuses and overtime, plus any SSP, SMP, SPP and SAP.
After a transitional two year period, the minimum contributions to a qualifying scheme will be 3% by the employer and an overall minimum of 8% from both employer and jobholder, including around 1% tax relief. Further relief may be claimed by higher-rate tax payers. Lower contributions may be paid by employers and jobholders in the first two years, 1% from the employer and an overall 2% in the first year, and 2% from the employer and an overall 5% in the second year. There will be an annual contribution limit of £3,600, for jobholders’ contributions, although this will be increased in line with earnings to 2012.
Provision will be made so that a new jobholder, who was paying into a personal account with the previous employer, will be able to continue paying into the same account almost immediately with the new employer.
Employers who already provide a pension scheme, or who intend to introduce their own scheme, may obtain exemption from having to operate personal accounts. They will be able to self-certify to gain exemption if their own scheme provides for automatic enrolment in the same way as personal accounts (although provision will be made for phasing in this requirement) and is of equal or better value than personal accounts. The tests used to determine the comparable value of the employer’s scheme will be
- for occupational defined benefit schemes,
- where the jobholders are not in contracted-out employment, whether the pension at retirement age is at least 1/120th of average qualifying earnings in the last three years before the end of pensionable service, multiplied by the number of years pensionable service up to a maximum of 40 (i.e. a maximum of ⅓ of pre-retirement earnings)
- where the jobholders are in contracted-out employment, the same test but with a higher fraction than “1/120th”, but not exceeding “1/80th” (i.e. a maximum of ½ of pre-retirement earnings).
- for occupational money purchase schemes, whether the employer pays contributions of at least 3% of qualifying earnings, and the combined jobholder and employer contributions are at least 8% of qualifying earnings.
- for personal pension schemes, whether the employer is required to pay contributions, however, calculated, equivalent to at least 3% of qualifying earnings, and the jobholder is required to pay contributions, however calculated, of at least the difference between the employer contributions and 8% of qualifying earnings.
Transitional arrangements, similar to those that apply during the first three years of the operation of personal accounts, will apply to employers’ own pension schemes.
- In the above money purchase and personal pension tests,
- in the first year, “3%” will be “1%” and “8%” will be “2%”
- in the second year, “3%” will be 2%” and “8%” will be “5%”.
- In the case of the above defined benefit schemes,
- where the jobholder is entitled to join the scheme but has not yet done so, the employer must automatically enrol the jobholder as a member of the scheme within a (yet to be defined) transitional period (although the jobholder may decide to opt out), but
- where such a jobholder ceases to be entitled to join the scheme on a specific date during the transitional period, the employer must automatically enrol the jobholder as a member of a defined benefits or money purchase scheme from that date (although the jobholder may decide to opt out).
Compliance with the provisions of the Act is enforced by the Pensions Regulator, who is able to issue compliance notices, unpaid contribution notices, fixed penalty notices and escalating penalty notices. Appeals may be made to the Pensions Regulator Tribunal.
The Act also provides a number of associated employment rights:
- employers may not discriminate in recruitment on the basis that an applicant, if employed, may opt out of automatic enrolment, with penalties of up to £50,000
- employers may not offer a worker or jobholder an inducement to join another scheme or to opt-out of a scheme
- employees have the right not to suffer detriment or be unfairly dismissed because of any action taken to exercise an entitlement under the Act or because the employer is prosecuted for an offence under the Act
- any contractual provision is void if it excludes or limits any right under the Act, other than if made by means of a compromise agreement.
Workers who are out of work will be able to continue making contributions to their personal account. Self-employed people will be able to save in personal accounts of their own choosing, subject to the same annual contribution limit.
Further information:
Pensions Act 2008
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