Payne Hicks Beach

Payne Hicks Beach

09 December 2010

Pensions Overhaul

Introduction

The worrying extent of the shortfall in future pension provision has been highly publicised. Less well known are the changes to be introduced by the Pensions Act 2008 ("the Act"), the aim of which is to encourage employees to save towards their retirement and to place a burden on employers to contribute towards the pension pot.

Introduced by the Labour administration, the Coalition Government has yet to confirm its intentions and proposed timeline with regard to the Act. This is not to say that the Government is not focusing on the pension time bomb: they have already proposed an increase in the state pension age and stated their intention to axe the default retirement age which currently enables employers to force employees to retire.

The changes

Employers with more than 5 employees are currently obliged to provide employees with access to stakeholder pension schemes, but are not obliged to make any contributions towards pensions.  Subject to intervention by the Coalition Government, this is due to change with effect from 2012 when the Act will require employers to automatically enrol most employees into a pension scheme, and to make contributions. 

Qualifying employees

All job holders, including part time and fixed term workers must automatically be enrolled into a pension scheme from either the date the Act is implemented if already in employment, or the first day of their appointment, if the worker is aged between 22 and state pension age (currently 65), and earns at least £5,035, although this amount will be increased in line with average earnings.  Earnings will include all salary, remuneration and benefits received, so few employees will not comply.  Jobholders for the purposes of the Act means workers working under a contract in the UK, whether implied or in writing, so this appears to include contractors as well as employees.

Automatic enrolment

The requirement for automatic enrolment means that workers should be advised of their enrolment rather than be asked if they wish to enrol or be required to provide information as a pre-condition for enrolment.  They should simply be advised that they have been enrolled in a scheme and of the right to opt out.  The employer may not offer any inducements in return for an worker opting out of enrolment.

Contributions

Qualifying earnings on which contributions must be paid are between £5,035 and £33,540, although this band will be subject to review.  Levels of contributions may be phased in over 3 years, and subject to intervention by the Government, a total contribution of 8% of earnings within the prescribed band must be paid in respect of qualifying staff by 2014.  At least 3% of this must be contributed by the employer, meaning that workers may be required to contribute 4%. The Government will contribute 1% in the form of tax relief.  The proposed phased in contribution levels are as follows:

Year

Employer

Employee

Tax Relief

2012

1%

0.8%

0.2%

2013

2%

2.4%

0.6%

2014

3%

4%

1%

 

As the contribution to be made will relate to earnings within the prescribed band only, the current maximum total contribution (excluding the tax rebate) is capped at £1,995.35 (the employer's 3% contribution towards this would be £855)  although this is subject to revision.  A maximum total payment of £3,600 may be contributed towards the designated scheme in any year.

Implementation

As set out above, the obligations introduced by the Act will be rolled out in stages.  It is proposed that large to medium sized employers only will be affected up to July 2014, followed by smaller employers and then from February 2016, micro employers.  This is subject to clarification and confirmation, and it is thought that employer size will be determined by PAYE data. 

Employers will be able to determine how to administer the requirements under the Act, which can be achieved through the use of personal pension schemes, defined benefit schemes, or by "personal accounts" which will be introduced especially to help implement the requirements.  These are intended to be economic and independent work place pension schemes and will be introduced under an umbrella or national scheme.

Enforcement

Guidance is expected to explain who within an employer may certify the employer as being compliant with the Act.  This must be done annually.  Trustees will, with employer consent, be able to modify existing occupational schemes by resolution, to comply with the Act. Sanctions are potentially harsh: wilful failure to comply with the automatic enrolment provisions will be a criminal offence and on conviction, may lead to up to 2 years' imprisonment or a fine of up to £50,000 in the County Court or £5,000 in the Magistrates Court.  Where a company officer, such as a director or company secretary is complicit in an offence taking place, he or she will potentially be personally liable.

It is anticipated that new employment protection rights will be introduced to safeguard workers from detriment or dismissal because they seek to enforce rights under the Act.  Any resulting dismissal will be automatically unfair, without the requirement to have worked for at least 12 months.

Preparatory steps

Employers should use the intervening period before the Act is brought into force by preparing for administrative changes, additional costs and management training, as well as reviewing employment documents.  Whilst the Act will make statutory provision for deductions to be made from salaries in respect of the contributions to be made by workers, employers will wish to consider how to prepare for and absorb the cost of making their own contributions. This may include awarding lower pay rises than it might otherwise do to absorb this future cost.  Pension arrangements should be reviewed to ensure compliance with the Act and employment documentation, including offer letters and employment contracts, should be amended to reflect automatic enrolment and to provide the option of opting out.  Staff involved in recruitment and personnel administration should be trained to understand and implement the new legal requirements.

 


 

If you would like to discuss any of the issues raised in this article please contact either Peter McRoberts or Sarah Rushton on 020 7465 4300.

10 New Square, Lincoln's Inn, London WC2A 3QG

DX 40 London/Chancery Lane
Tel: 020 7465 4300 Fax: 020 7465 4400 www.phb.co.uk

This publication is not intended to provide a comprehensive statement of the law and does not constitute legal advice and should not be considered as such. It is intended to highlight some issues current at the date of its preparation. Specific advice should always be taken in order to take account of individual circumstances and no person reading this article is regarded as a client of this firm in respect of any of its contents.

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