Pension Personal Accounts – Update to framework legislation in Pensions Act 2008Monday, March 30th, 2009
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 included in future regulations and consultation on the content of the regulations began in March 2009.
The following review of the provisions of the Act updates information that was last published in a newsletter in January 2009. The procedures for automatic enrolment are the subject of the first of three consultation documents to be issued during 2008 and the proposals that are the subject of the consultation and the draft regulations are included in italics in the relevant places in the text below. Note that the text in italics is likely to be changed, in some cases considerably, before the final regulations are made.
Background and summary
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’s objective is to achieve increased overall participation of workers in employer-facilitated pensions saving up to a minimum standard. 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”) introduces two key requirements for employers:
- Enrolment of eligible jobholders who are not in a qualifying pension scheme into an automatic enrolment scheme. Jobholders will be enrolled by their employers from the first day they become eligible but retain the right to opt out of the scheme from this point. Employers may choose the pension scheme they provide, which must meet certain criteria. The Act gives the Secretary of State powers to establish a pension scheme in which employers can choose to participate. This scheme will be run by an independent trustee body.
- Maintenance of the jobholder’s membership of a qualifying scheme, including making relevant contributions, so long as the jobholder chooses to be part of it.
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 duties of employers, as described below, are expected to become law from April 2012, although the Act makes provision for the possibility of a phased introduction for some employers before others.
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 definition of worker is the same as in the Working Time Regulations and the National Minimum Wage Regulations, namely:
- employees, i.e. persons who work under a contract of employment, and
- persons providing services personally to the other party to the contract, but that other party is not a client of the person’s business, e.g. contractors working for the duration of a project for a single employer.
It also includes
- agency workers, (the employer being the agency or the client, depending on which one is responsible for paying, or actually pays, the worker,
- civil servants and staff of the House of Commons and House of Lords,
- police constables and police cadets, and
- offshore workers, if a decision is made by government to include them
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, unless a decision is made by government to include them.
A person’s qualifying earnings in a 12-month pay reference period are that part of gross earnings that (as specified in the Act) exceeds £5,035 but does not exceed £33,540 (2005 levels). If the pay reference period is less or more than a year, the limits are adjusted proportionately. This band of earnings is known as the “personal accounts earnings band” (PAEB) and is the earnings on which pension contributions will be calculated for money purchase schemes. The PAEB will be reviewed annually in line with increases in annual earnings, to maintain the value of contributions and should be expected to be much higher by 2012. Earnings are defined as “salary, wages, commission, bonuses and overtime, plus any SSP, SMP, SPP and SAP.
The pay reference period is a year unless regulations specify periods of different lengths for different types of worker. For example, the pay reference period for agency workers may be considerably shorter than for salaried employees. Regulations will also define how the starting date of each person’s pay reference period is determined.
Employers must automatically enrol jobholders who are at least age 22 but have not reached state pension age into a qualifying scheme that meets the definition of an automatic enrolment scheme. Automatic enrolment occurs when a person first meets the criteria in that employment, i.e. a jobholder and at least age 22. The date on which this occurs is the automatic enrolment date, although there is provision for automatic enrolment to be delayed in circumstances yet to be defined.
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.
Automatic enrolment does not occur if, within a period of time yet to be defined, the jobholder was a member of a qualifying scheme but had chosen to end membership. This prevents jobholders being automatically re-enrolled soon after having decided to end membership.
Employers may be required to provide information about the jobholder to the qualifying scheme in order for the enrolment to take place.
Employers have an ongoing duty to ensure that jobholders always have access to a qualifying scheme. An employer may not, actively or otherwise, bring active membership of a qualifying scheme to an end without putting the member into another scheme.
If a jobholder has two or more employments, automatic enrolment applies in each employment.
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.
The implications for employers are that appropriate procedures are in place to
- identify those workers who fall within the jobholder criteria
- identify those jobholders who will be eligible for automatic enrolment
- identify the automatic enrolment date for each jobholder, i.e.
- the first day of employment if a new employee already meets to criteria, or
- the employee’s 22nd birthday, or
- the date from which the employee’s earnings exceed the lower earnings band threshold for the first time.
In the case of occupational pension schemes, employers have up to 14 days from the automatic enrolment date to take the necessary steps in which to complete the automatic enrolment process. Within the same 14 days, the employer must give the jobholder the enrolment information.
In the case of personal pension schemes,
- the nature and aim of the product,
- the services to be provided by the personal pension scheme provider,
- the value, if any, of contributions payable by the jobholder, and
- the deductions (including charges).
The 14-day joining window, starting from the automatic enrolment date, is the same 14-day period as the information provision window. For some occupational pension schemes, the joining procedure may be completed in one day. The process will always be longer for personal pension schemes as contract and information exchanges with the scheme provider are required and there is a mandatory 7-day period during which the jobholder has to consider the scheme information before the pension contract comes into force. See Information to be given to jobholders and other workers, below.
Postponing automatic enrolment
Automatic enrolment may be postponed in circumstances and for a period of time yet to be defined in regulations. Regulations may also require employers to maintain membership of the scheme at higher contribution rates for a prescribed period of time in order for the member to make up pension savings that were foregone during the initial delay period.
The period of time for which automatic enrolment may be postponed and for which contributions at a higher rate must be maintained is 90 days.
The contributions that are payable in order to make up pension savings foregone during the period of postponement are
- in the case of money purchase schemes and personal pension schemes, employer contributions of at least 6% of qualifying earnings, and total contributions from both employer and jobholder, including tax relief, of at least 11%.
- in the case of defined benefit schemes, contributions that maintain the same pension on retirement as would have applied if automatic enrolment had not been postponed. (See Qualifying Schemes, below)
Where a jobholder is affected by a postponement of automatic enrolment, the employer must give that jobholder the following information in writing within 14 days after what would have been the automatic enrolment date:
- reasons for the postponement,
- the date on which automatic enrolment will commence,
- details of where to obtain further information about pensions and saving for retirement.
Within a period of time, yet to be defined but not less than three years, employers must automatically re-enrol jobholders who are at least age 22 but have not reached state retirement age and who are not currently members of a qualifying scheme. There are a number of situations in which re-enrolment may occur within a period of less than three years, e.g. membership has lapsed because the employee is no longer working in the UK or has no earnings.
Jobholders who are not active members of a qualifying scheme may give the employer notice to make arrangements to enrol them into an automatic enrolment scheme. This provision applies to those who have opted out, or cancelled their active membership, or do not qualify because, although they fall within the worker age limits, fall outside of the jobholder age limits.
Jobholders may give notice to opt-in more than once in a 12-month period but employers are not obliged to accept more than one notice in 12 month. This provision prevents employers having to keep enrolling a jobholder who has opted out a number of times in the same year.
Workers who are not jobholders because they do not have qualifying earnings may also give notice to the employer to arrange to enrol them in a pension scheme. As above, the employer does not have to act on more than one request in a 12-month period and, because the worker is not a jobholder, there is no requirement for the employer to make contributions. In this situation, the pension scheme does not have to be a qualifying scheme, but may be either an occupational pension scheme, or personal pension scheme under which the employer forwards the contributions to the scheme.
Jobholders who have become active members of an automatic enrolment scheme may give the employer notice to opt-out of membership from the date of automatic enrolment. The format and procedures for giving notice are yet to be defined in regulations. In addition, jobholders who have become member of a qualifying scheme have to right to cancel their membership at any time and the term “opting-out” does not relate to the decision to cancel existing membership.
The opt-out notice must be given within 30 days of
- in the case of an occupational pension scheme, the later of
- the day on which the jobholder becomes an active member of the scheme, and
- the day on which the jobholder receives the enrolment information
- in the case of a personal pension scheme, the day on which the contract is deemed to take effect.
A blank opt-out notice may only be obtained by the jobholder from the scheme, not from the employer.
The opt-out notice must contain the following statements:
- that opting out of pension saving may affect the level of income in retirement,
- that a jobholder cannot be lawfully induced into opting out,
- complaints of inducement to opt out should be made to the Regulator,
- that a jobholder may opt in to pension saving and the employer will be required to arrange for the jobholder to become an active member of an automatic enrolment scheme once in any 12 month period.
- (in the case of a money purchase scheme or a personal pension scheme) that by opting out the jobholder will forego rights to the employer contributions required under the provisions of the Act.
Alternatively, the following notice form may be used:
The completed opt-out notice must be signed by the jobholder and given to the employer. If it is given to the employer in electronic format, it must contain a statement that the jobholder personally completed and submitted the notice.
Notice is treated as given to the employer on the day the employer receives it.
If the notice is not valid because the notice procedure above has not been followed, the employer must notify the jobholder within 5 days of receiving it. Otherwise, the employer must send a completed opt-out notice to the scheme in which the jobholder was automatically enrolled within 7 days of receiving the notice.
As opting-out means that the jobholder was never a scheme member, any contributions that have been made to the scheme by the jobholder or employer for the current enrolment will be refunded (but not for past periods of active membership). Regulations will define the rules relating to refunds.
On receiving a completed opt-out notice, the employer must, subject to any tax deductions, refund all contributions deducted from the jobholder’s remuneration within
- 21 days after the day on which the notice is given or, if later,
- the second occasion on which the jobholder receives remuneration from the employer after notice is given.
On receiving a completed opt-out notice, the scheme must, within 21 days after notice is received, refund to the employer any contributions made on behalf or in respect of the jobholder.
The effect of the opt-out provisions is that 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. 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.
Information to be given to jobholders and other workers
Regulations will set out the circumstances requiring employers to give information to
- jobholders about automatic enrolment, re-enrolment, postponement of automatic enrolment, giving notice to opt in and the right to opt out, and
- workers who are not jobholders but who give notice to be enrolled in a pension scheme.
The employer must provide the following information by the end of the 14-day information window:
- a statement which includes the words ‘the object of automatic enrolment is to encourage jobholders to make pension savings’,
- the jobholder’s automatic enrolment date,
- the name, physical and electronic contact details of the scheme into which the jobholder is to be enrolled,
- the value* of contributions that will be made into the scheme by the employer,
- the value* of contributions that will be deducted from the jobholder’s remuneration and made to the scheme,
- confirmation as to whether tax relief will be through net pay arrangements† or relief at source arrangements†,
- that the jobholder has a right to opt out of the scheme,
- the opt out period applicable to the jobholder,
- that opting out can only occur through the completion of the opt out notice and its submission to the employer,
- that the opt out notice must be obtained from the scheme,
- an explanation of how the notice may be obtained from the scheme,
- that opting out means that the jobholder will be considered not to have become an active member of the scheme on that occasion,
- that after a completed opt out notice is received by the employer any contributions paid by the jobholder will be refunded to the jobholder by the employer,
- that the jobholder who opts out may opt in, in which case the employer will be required to arrange for the jobholder to become an active member of an automatic enrolment scheme once in any 12 month period,
- that a jobholder who opts out or who ceases active membership of an automatic enrolment scheme will be automatically re-enrolled into such a scheme by the employer in accordance with the automatic re-enrolment provisions of the Act,
- details of where to obtain further information about pensions and saving for retirement.
* The value of contributions may be expressed as a fixed amount or a percentage of a jobholder’s remuneration.
† See Payroll deductions, below.
Key features information
The employer must provide the following information by the end of the 14-day information window:
- the aim of the product,
- that the value of investments can fall as well as rise,
- the principle features of the product, including—
- its nature and complexity,
- the investment strategy adopted in relation to the default fund,
- other investment strategy choices available to the jobholder,
- deductions (including charges) and the impact of deductions on investments applicable to the jobholder,
- generic projections of the value of investments applicable to the jobholder at the age of 65,
- that the jobholder may choose to contribute an amount greater than the contributions deducted by the employer from the jobholder’s remuneration,
- the age from which the jobholder may realise any investment,
- the services to be provided by the personal pension scheme provider,
- an explanation of where to obtain full details of the product,
- that the contract will be deemed 7 days after the day on which the jobholder is in receipt of the key features information and the enrolment information, and
- that the opt out period commences on the day after the day on which the agreement is deemed.
A default fund is the fund to which any contributions payable by the jobholder or the employer will automatically be allocated.
Information to be given to workers giving notice to join a pension scheme
(The draft Regulations do not appear to include any provisions meeting this requirement of the Act)
Information to be given to active members of a qualifying scheme
Jobholders who are already active members of a qualifying scheme on the automatic enrolment date must be given the following information by the employer within 30 days after the automatic enrolment date:
- the name, physical and electronic contact details of the scheme in which the jobholder is an active member;
- confirmation that the scheme of which the jobholder is an active member is a qualifying scheme.
Information to be given to the scheme
Automatic enrolment must enable jobholders to join a pension scheme without them having to do anything during the joining process. For this reason, employers and their schemes have to communicate promptly and with the necessary level of information in order to create active membership.
The employer must provide the trustees or managers of the occupational pension scheme or the personal pension scheme provider with the jobholder’s
- date of birth,
- automatic enrolment date,
- details of the jobholders remuneration,
- postal or electronic work address,
- national insurance number, and
The employer may provide the information above to the scheme without obtaining the jobholder’s consent.
In relation to personal pension schemes, the information above must be provided within 7 days after the automatic enrolment date.
The employer may give the trustees or managers of the occupational pension scheme or the personal pension scheme provider:
- the jobholder’s postal or electronic personal address,
- the jobholder’s work telephone number,
- the value, if any, of contributions payable by the employer and the jobholder.
The employer may provide this additional information to the scheme without obtaining the jobholder’s consent.
Information to be given to the Pensions Regulator
Regulations will require employers to provide information to the Pensions Regulator about how they will comply with the employer duties and what pension schemes they will use. The information will form part of the registration process.
A pension scheme is a qualifying scheme if it is either a registered occupational pension scheme or a registered personal pension scheme and meets specified quality requirements. Regulations may exclude certain such schemes if, for example, they have high management charges, provide average salary benefits, or have other prescribed features. Money purchase schemes, whether they are occupational or personal pension schemes, will be not contracted-out schemes.
The tax registration requirement will not apply to certain schemes, for example, to schemes that operate outside of the UK with members who will receive UK tax relief on their contributions.
The quality requirements depend on type of pension scheme:
- Occupational money purchase schemes – the scheme must require employer contributions of at least 3% of qualifying earnings, and total contributions from both employer and jobholder, including tax relief, of at least 8%. Regulations may set a minimum amount below which contributions may not be accepted because it is not economical to handle them.The 8% minimum combined contribution is made up of 3% from the employer, 4% from the jobholder and 1% from the State in the form of tax relief (For example, net pay after deducting basic rate tax from £125 is £100. If the employee’s contribution is 4%, reducing gross pay to £120, net pay is £96. The scheme gets £5 but the employee only pays £4.) There will be an annual contribution limit of £3,600 (2005 levels), for jobholders’ contributions, although this will be increased in line with earnings to 2012.
Only the employer’s minimum contribution is defined. This gives employers the option of increasing their contribution and decreasing the jobholder’s contribution, as long as, combined, they come to at least 8%.
- Occupational defined benefit schemes and the jobholders are in
- not contracted-out employment – the pension at retirement age must be 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)
- 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).
- Personal pension schemes – the scheme must only provide money purchase benefits and must require employer contributions of at least 3% of qualifying earnings, and the jobholder is required to pay contributions, including tax relief, of at least the difference between the employer contributions and 8% of qualifying earnings.
- Hybrid schemes – the scheme must meet quality requirements for money purchase schemes or defined benefit schemes, as appropriate.
Certification of satisfying the quality requirements will be required for occupational money purchase schemes and personal pension schemes, and for hybrid schemes in respect of the money purchase quality requirement.
Automatic enrolment schemes
A qualifying scheme is an automatic enrolment scheme if
- it is used for automatic enrolment and re-enrolment and allows members to opt in
- it does not require enrolled jobholders to express a choice, e.g. about the fund in which their contributions are invested, or provide information, in order to remain active members
- it meets other conditions yet to be defined in regulations.
Employers operating qualifying occupational money purchase schemes and personal pension schemes will be able to phase in their contributions over two transitional periods. Both periods will be at least one year in length with the exact duration defined in regulations.
- In the first period, the scheme rules must require employer contributions of at least 1% of qualifying earnings, and total contributions from both employer and jobholder, including tax relief, of at least 2%.
- In the second period, the scheme rules must require employer contributions of at least 2% of qualifying earnings, and total contributions from both employer and jobholder, including tax relief, of at least 5%.
Employers operating defined benefit or hybrid schemes will be able to delay automatic enrolment for a specific group of jobholders for a transitional period, the length of which is yet to be defined. They must be existing workers of the employer who have previously been and remain able to join a qualifying defined benefit or hybrid scheme. The employer must automatically enrol such jobholders into a qualifying defined benefit or hybrid scheme by the end of the transitional period.
Employers who automatically enrol, re-enrol or arrange for a jobholder to opt in to a scheme are permitted to deduct the jobholder’s contributions from the jobholder’s pay on or after the date on which they become active members of the scheme. The deduction is therefore made for the purpose of complying with a statutory duty, ensuring that it is not otherwise an unlawful deduction from wages under section 13 of the Employment Rights Act 1996.
As contributions are due from the automatic enrolment date, not from the later date on which membership becomes active, the first payroll deduction should be made on the payday that falls on or immediately after that later date. The March 2009 consultation document and the draft regulations state that the first deduction should be made on the jobholder’s very first payday on or after the automatic enrolment date, even if that precedes the active membership date, but the wording of the Act does not permit regulations to be made to that effect.
Employee pension contributions will be deducted
- using the “net pay arrangement”, i.e. pre-tax from gross pay, in the case of registered occupational pension schemes, and
- using the “relief at source arrangements”, net of tax from net pay, in the case of personal pension schemes.
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.
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