The government is expected to pass the Pensions Bill 2008 (the "Bill") into law in November to become the Pensions Act 2008. This will set in motion changes that will affect over 10 million employees in the UK. You may have come across the main concepts of auto-enrolment, compulsory employer contributions and an enforcement regime led by the Pensions Regulator, but there has been relatively little coverage of the impact this legislation will have on employers. In advance of the Bill's enactment we present the most frequently asked questions, and give our answers and views.
1. What is this all about? Aren't stakeholder pensions designed to cover the gaps in pension provision?
Stakeholder pensions have not worked - millions of people are still not saving at all, and millions more are not saving enough for their retirement. The Government is concerned that there is a looming crisis in old age pension provision and something needs to be done now. The Bill is part of the Government's attempt to tackle the demographic challenges, along with the age discrimination regime, increasing the state pension age and improving state pension provision.
2. What is auto-enrolment, and who will we have to enrol?
The employer will have to put in place procedures so that all its workers are automatically enrolled into a 'qualifying workplace pension'. This must be done from the first day of work (although see point 5 below) as long as the employee is over 22 and earns above £5,035. If they are younger, or earn below this lower threshold, the obligation begins when the employee turns 22 or if their earnings rise above the threshold. The earnings threshold will change annually in line with annual earnings growth.
Employers will have to enrol all their employees, workers and agency workers. Contributions for agency workers will be paid by whoever is responsible for paying the worker's wages and if this isn't clear, by whoever in fact pays them. Workers must be enrolled in either an occupational pension scheme that meets certain criteria (see point 6 below) or into a personal account (either in the scheme set up by the Personal Accounts Delivery Authority or a private sector equivalent).
3. When will this come in? Is there an implementation period?
The personal account and auto-enrolment regime will come into force in 2012. The specific date for implementation will be set out in subsequent regulations, along with the final details of the system. The Bill envisages an implementation period where employers can introduce contributions over a three year period, e.g. contributing 1% in year 1, 2% in year 2 and 3% in year 3.
4. What will it cost? Do we have to contribute anything?
There are two main costs for employers. The main cost will be the compulsory contributions of 3% of the worker's earnings (between £5,035 and £33,540 a year) subject to the implementation period described at point 3 above. There will also be administrative costs which the Department for Work and Pensions (DWP) estimates will be minimal on an ongoing basis but higher in the first year. Employers with a large number of temporary, part time, low paid or seasonal workers may see greater costs, especially if they do not provide pensions at present.
5. Do we have to enrol people straight away? What about temporary or season workers?
The Bill currently envisages all workers being enrolled immediately on starting work (as long as they are over 22 and earn more than £5,035). However, there will be an option where 'quality' occupational pension schemes can operate a three month deferral (or waiting) period on membership. The definition of a 'quality' scheme will be left to subsequent regulations, but is likely to cover money purchase (DC) schemes that offer employer contributions of between 6-10% of the worker's earnings and final salary (DB) schemes that have an accrual rate of at least 1/80ths.
6. We already have an occupational scheme. Do we need to do anything else?
Yes - at the very least the employer will have to check that their existing occupational scheme satisfies the requirements for qualifying workplace pensions. For money purchase (DC) schemes this will be based on matching the minimum contributions of 3% from the employer and 8% overall contributions of a worker's earnings. In addition, qualifying schemes will not be permitted to require members to actively make investment choices.
For DB schemes the only requirement currently envisaged is that they either hold a contracting out certificate or meet a test scheme standard. Both these requirements may be amended, either in the Bill or in subsequent regulations, but currently the test scheme standard requires that the scheme provides a pension for life and has no more than 40 years of accruals at a rate of at least 1/120ths. In addition, qualifying schemes must allow automatic enrolment from the start of employment, subject to possible deferral exemptions described at point 5 above.
Offering access to an occupational scheme will not be enough; employers will need to automatically enrol their employees into a scheme.
7. Can we not just give employees a bit of extra pay and ask them to opt out?
Definitely not! The Bill contains specific provisions which are aimed at prohibiting employers offering inducements or forcing workers to opt out. Inducement is widely drafted to cover any action which has the sole or main purpose of making a worker opt out. The Employment Rights Act 1996 will be amended to extend unfair dismissal protection to cover workers who are trying to enforce their pension enrolment rights. Any provisions in a worker's contract which seek to exclude or limit these protections will be automatically void.
8. What will happen if we don't enrol our employees?
If an employer contravenes any of these provisions the Regulator can issue compliance notices or penalty notices. The former will require the employer to remedy whatever they were doing which contravened the prohibition, and, if the Regulator believes the employer has failed in this, the latter will open the door for fines. The penalties under the Bill will be set by further regulations, but currently are not expected to exceed £50,000 (for a breach of the provisions).
9. What happens if employees opt out? Are they permanently excluded from the regime?
No - the Bill provides for re-enrolment to occur every three years, automatically enrolling employees including those who opted out previously. They will, however, be allowed to opt out again.
10. Is the legislation final, or can we expect more changes?
We do not expect many more changes to the Bill before it is enacted in November. However, the Bill does defer several decisions to subsequent secondary legislation, and we will find details of phasing periods, deferral options and definitions of 'quality' schemes in regulations to be published in 2009 and 2010. Before implementation in 2012 there may be a change of government, but it is useful to note that the current Bill enjoys support from the Conservatives and Liberal Democrats. In addition there has been consultation between the DWP and various stakeholders, including representatives of small employers, industry and various other employer groups. In our view, it is unlikely that there will be a major departure from the fundamental principles of automatic enrolment and compulsory employer contributions.