The Pensions Act 2008 (PA 08) introduced a number of changes, the most high profile being auto-enrolment in personal accounts. The scope of the Act is, however, wider than just personal accounts. The key changes introduced by the Act are highlighted below:

  • Personal Accounts

From the date personal accounts take effect (likely to be during 2012), employers will be required to automatically enrol their employees who fall within a specified definition of a "jobholder" into either a personal accounts scheme or their own qualifying scheme. Mandatory employer pension contributions will be phased in over 3 years and will be 1% in the first year, 2% in the second year and 3% thereafter.

Impact of Personal Accounts on existing occupational pension schemes

Employers who already provide membership of occupational pension schemes will be able to self-certify that their existing schemes meet a quality test and are, therefore, "qualifying schemes" as defined in the PA 08. Regulations setting out the quality test have still to be introduced.

It seems though that defined benefit schemes will need to satisfy a "test scheme standard" such that the benefits provided are better than or broadly equivalent to the benefits provided by the test scheme. The test defined benefit scheme provides members with a pension at the age of 65 with an annual rate of pension that is 1/120th of average qualifying earnings in the last 3 years preceding the end of pensionable service multiplied by the number of years of pensionable service, up to a maximum of 40.

In the case of a defined contribution scheme, the employer must make minimum contributions of at least 3% of the jobholder's qualifying earnings. The total amount of contributions paid by the jobholder and the employer must be at least 8% of the jobholder's qualifying earnings.

The quality tests for both defined benefit and defined contribution schemes are likely to be different in the case of schemes that are contracted out.

  • Statutory revaluation changes

The cap on limited price indexation (LPI) for deferred pension benefits is to be reduced from 5% to 2.5%. This change will only apply to deferred pension rights relating to service accrued after the new cap comes into force and only applies to pensions in excess of guaranteed minimum pensions. Although the DWP had originally intended to introduce this change from 1 January 2009, fortunately they acknowledged that schemes and administrators would need more time to review rules and if necessary make amendments. This new lower cap will take effect from 6 April 2009.

(Note – in a related change, the DWP have just finished consulting on a set of draft regulations introducing a number of miscellaneous amendments, likely to come into force for most provisions on 6 April 2009. Amongst other things, these draft regulations provide for a statutory power to enable trustees to modify scheme rules by resolution to reflect the lower statutory revaluation cap provided for in the PA 08. Where schemes wish to change the rate at which they revalue pension benefits, this new power will be able to be used. Significantly, the DWP's intention is this new power will allow a change to be made where the scheme rules do not allow that change.)

  • Changes to Regulator's powers

A number of provisions included within the PA 08 impact on the Regulator's powers. We focus on these changes within our February Pensions Bulletin, which you will receive later this month.

  • Other miscellaneous changes

Safeguarded rights (the contracted-out rights that arise when a pension credit is created following a pension-sharing order) are to be abolished and measures providing for PPF compensation to be subject to pension-sharing on divorce proceedings have been introduced.