The Pensions Act 2008 has received Royal Assent. Although it is not expected to come into force until 2012, the requirements to automatically enrol workers into a pension scheme and make employer contributions to that scheme compulsory, represent a radical change in current pension obligations.
The Pension Act requires all employers to pay contributions on behalf of their workers into a personal accounts pension which will be established by the Secretary of State. If their own contributory pension scheme is broadly equal to the personal accounts pension then they will be exempt from this requirement and can pay the contributions into their own scheme instead. Therefore, employers need to check with their pension provider that their pension scheme qualifies for exemption.
From 2012 all workers aged over 22 years and who earn over £5,035 will be automatically enrolled into one of the pension schemes.
Therefore, employers who do not currently provide a contributory pension scheme will, from 2012, have to pay contributions on behalf of their workers into one of the pension schemes.
The Pensions Act replaces the existing stakeholder pension system which has failed to encourage more workers to save into a pension scheme.
The key points under the Act are:
- All workers who are aged over 22 and whose annual earnings are over £5,035 per annum will be automatically enrolled into a "qualifying work place pension".
- Temporary and agency workers, as well as directors employed under a Service Contract are included. The responsibility for contributions for agency workers will depend on whoever is responsible for paying their salary.
- Employees will be required to pay contributions of around 4% on their earnings between £5,000 and £33,540 per annum (qualifying earnings).
- Employers will be required to pay a contribution of 3% of qualifying earnings. There will also be a 1% contribution from the Government in the form of the normal tax relief available on individual pension contributions.
- Employees can choose to opt out of the scheme. However, employers cannot offer any financial inducement (such as a pay rise or bonus) to their employees to opt out nor will they be able to ask job applicants at interview whether they plan to opt out.
- Employers will be required to pass on the 4% contribution from their worker's salary along with their 3% contribution to a central clearing house who will implement the personal accounts pension.
- Employers who offer their own pension scheme will be exempt provided they contribute at least 3% of the workers "qualifying earnings" in respect of money purchase schemes. The test for defined benefit schemes is more complex and is based on the existing scheme reference test.
- There is no proposed qualifying period of service for employees to be members of the pension scheme nor is there a small employer exemption. Therefore, all workers will be eligible for membership of one of the pension schemes from day 1 of their employment, assuming that they meet all other qualifying criteria.
- The requirement for employers to contribute to these pension schemes will however be phased in over a 3 year period from 2012, with a 1% contribution for the first year and 2% contribution for the second.
Regulations implementing the legislation are expected in 2009 and 2010 and further details about the new pension system are likely to be contained within them.