The government has published the new Pensions Bill, which is to become the Pensions Act 2008, intended to come into force in April 2012.
Most of it concerns personal accounts and includes draft legislation on the matters set out in the Department for Work and Pensions (DWP) summary of the responses to consultation on the Personal Accounts White Paper: see the June 2007 issue of Pensions Update.
The following are the key provisions likely to be of greatest interest to employers and trustees: Every “jobholder” aged at least 22 and below "pensionable age" (understood to be state pension age) must be automatically enrolled on the first day of his employment by his employer into an "automatic enrolment scheme" unless he is eligible to be an active member of a "qualifying scheme". Automatic enrolment may be postponed in accordance with regulations.
A jobholder is anyone:
- aged 16-under 75
- who is an employee or worker working ordinarily in GB under a contract and
- who has "qualifying earnings", i.e. gross earning between £5,035 and £33,540 (to be reviewed annually).
The jobholder may opt out but, if so, there will be automatic re-enrolment at prescribed intervals (and each time the jobholder will again have the option to opt out). Any jobholder not subject to automatic enrolment (perhaps because he is under 22 or in a period of postponement) may by notice require his employer to enrol him in an "automatic enrolment scheme".
A qualifying scheme is:
- a registered occupational or personal pension scheme
- a scheme satisfying the "quality requirement".
The “quality requirement” is:
- DC scheme or personal pension with direct pay arrangements - contributions of at least the same level as personal accounts, i.e.:
− employer contribution is at least 3 per cent of qualifying earnings
− total contributions are at least 8 per cent of qualifying earnings (including employee contribution of 4 per cent and 1 per cent generated through the usual tax relief for registered pension schemes);
- DB scheme:
− a contracted-out scheme; or
− a scheme satisfying the "test scheme standard".
The "test scheme standard" is met where the scheme offers benefits "broadly equivalent to or better than" the test scheme:
- all active members must be jobholders of the same employer (this requirement would appear to exclude all multi-employer schemes; we would expect this to be amended in later drafts of the Bill)
- regulations may set out the test for broad equivalence
- pension must commence at age 65 and be payable for life
- pension must accrue at 1/120ths up to a maximum of 40 years
Regulations may modify the requirement for DB contracted-out schemes (essentially to lower it to the test scheme standard but with 1/80th accrual). There are requirements for all employers to provide prescribed information to jobholders.
The compliance regime (to prevent employers from encouraging employees to opt out) is to be enforced by the Pensions Regulator. If it is of the opinion that an employer has contravened the requirements, it may issue a "compliance notice" setting out the steps the employer must take, and the timeframe, in order to comply. A compliance notice may require the backdating of membership for any individual jobholder.
The Regulator may also issue "unpaid contribution notices".
Failure to comply with a compliance notice or unpaid contribution notice could result in a "fixed penalty notice" with a fine of up to £50,000. There is also provision for "escalating penalty notices" with an escalating penalty for failure to comply by specific dates - up to a maximum daily rate of £10,000.
Wilful failure to comply with the automatic enrolment provisions is a criminal offence with a fine up to level 5 and a two-year prison sentence.
The Bill includes amendments to the Employment Rights Act 1996 extending employee rights to protection from detriment (including unfair dismissal) to automatic enrolment. The right not to suffer detriment can be enforced in the employment tribunal.
Any agreement to exclude or limit the operation of the automatic enrolment provisions, or of the rights to bring claims in relation to them, will be void. There is only a limited right to exclude the right to bring a claim as part of a formal conciliation agreement.
Agency workers must be treated the same as any "jobholder", with the person actually responsible for paying the worker (i.e. agency or end-user) to be treated as the "employer".
Chapter 4 gives the secretary of state power to establish registered pension schemes and to make orders and rules in relation to those schemes ("section 50 schemes"). It is understood that this may be a statutory default scheme into which employers may enrol their employees if they do not wish to establish their own automatic enrolment scheme, or if they do not have a suitable qualifying scheme.
Personal Accounts Delivery Authority (PADA)
The original functions of the PADA are set out in PA 2007. These are to be replaced with new functions of:
- giving assistance to the Secretary of State in establishing a statutory scheme; and
- giving assistance to the Secretary of State and the Pensions Regulator in connection with automatic enrolment arrangements.
Principles for the carrying out of the PADA's functions include:
- participation in qualifying schemes should be encouraged
- burdens on employers should be minimised
- adverse effects on qualifying schemes (i.e. levelling down) should be minimised
- the cost of membership of a section 50 scheme should be minimised
- members’ preferences on investment choice should be taken into account
- diversity of members should be respected.
Employers and trustees of existing schemes will be most interested in ascertaining whether their schemes are "qualifying schemes" and, if not, whether they wish to amend them so that they do qualify or whether they wish either to set up a bespoke "automatic enrolment scheme" or whether they wish to participate in a section 50 scheme. If it is desired to use either form of auto-enrolment for new joiners, the issue of "two tier workforces" will need to be considered.
- Safeguarded rights are to be abolished (pension credit derived from contracted out rights)
- PPF and Pension Sharing: a court will be able to make a new type of order, a "pension compensation sharing order" requiring an individual's PPF compensation rights to be shared on divorce/dissolution of civil partnership in the same way as ordinary pension rights, provided that those rights have not already been shared by means of a pension sharing order or earmarking. The mechanism is very similar to a normal pension sharing but it is the PPF Board which is required to implement it.
Revaluation of deferred benefits
Benefits accrued after commencement date will be revalued at 2.5 per cent LPI (rather than the current 5 per cent LPI): see Deregulatory Review below for how it is intended that schemes should implement this.
Changes to state second pension
The changes announced in the recent Pre-Budget Report accelerating the flat-rating of state second pension are introduced. (See the October 2007 issue of Pensions Update).
The Pensions Regulator may currently intervene in scheme funding where the employer and the trustee cannot agree; it will have additional powers to intervene where the methods and assumptions underlying the technical provisions fail to comply with the current prescribed requirements.