Employee pension enrolment and employer contributions are to be made compulsory as part of the Government's attempt to tackle the UK's looming demographic crisis. These provisions, contained in the Pensions Act 2008, are due to come into force in 2012 and cover the automatic enrolment of qualifying workers into a qualifying workplace pension scheme and a duty on employers to make contributions to such a scheme. To ensure that employers are able to comply with these duties a universal personal account scheme is being created.
Particular points to note include:
- automatic enrolment of eligible jobholders aged between 22 and state pension age earning over £5,035 per annum
- employer contributions of 3% (along with employee contributions of 4% and a 1% tax-funded contribution)
- a ban on employers encouraging or inducing workers to opt out of personal accounts or any other pensions scheme
- an enforcement regime led by the Pensions Regulator, with powers to penalise employers who do not comply with the regime
- the maximum annual contribution will be £3,600 (in 2005 terms)
Consultations and regulations are being, and will continue to be, issued throughout this year; these should make it clearer what is expected of employers and pension schemes in anticipation of the new regime in 2012.
The need for reforms
The pensions industry has long been aware of an impending demographic crisis that threatens to leave millions with little or no additional pension provision above the meagre state pension. In response to this the Government set up the Pensions Commission in 2002 to consider ways to tackle this crucial issue. After three years of deliberations the Commission issued the Pension Commission Full Report (more commonly called the Turner Report) in 2005. This called for urgent changes in three key areas:
- reform of the state pension system (e.g. restoring the link to increase in earnings);
- boosting private savings (e.g. setting up a new national pension savings scheme); and
- longer working (e.g. application of age discrimination legislation, later state pension age).
The Government's response to this is in two Acts - the Pensions Act 2007 (the 2007 Act) and the Pensions Act 2008 (the 2008 Act), with the main thrust for the new workplace pension arrangements in the 2008 Act.
The Pensions Act 2008
The 2008 Act covers a number of areas, but mainly focuses on:
- automatic enrolment - the duty on employers to automatically enrol 'jobholders' into, and to contribute to, a 'qualifying workplace pension scheme'. Alongside this is the employee's right to opt out;
- compliance - a compliance regime, involving the Pensions Regulator and extended unfair dismissal rights, will be created to enforce the duties described above; and
- personal accounts - the universal 'personal accounts scheme' will be set up by the Personal Accounts Delivery Authority and ultimately run by an independent trustee corporation; and
- other measures - tidying up various areas of pensions law (e.g. moral hazard provisions).
These provisions will come into force in 2012, bringing in the employer duty to make contributions to a qualifying workplace pension arrangement, the automatic enrolment of qualifying workers and the universal personal accounts scheme. The Pensions Regulator (Regulator) was given powers under the 2008 Act to penalise employers who do not comply. Such powers are likely to be used only if employees complain and the Regulator will adopt a risk-based approach - concentrating its resources on those employers who pose the greatest risk to enforcement.
Under the 2008 Act employers will, from 2012, have to enrol all eligible jobholders aged between 22 and state pension age who earn over £5,035 into a qualifying workplace scheme. This duty will be triggered for existing eligible employees from the outset and will then apply to new employees and existing, previously non-eligible employees, whose circumstances change to meet the criteria (e.g. those who turn 22, or whose earnings rise to take them over the minimum threshold). Accrual will be based on earnings between £5,035 and £33,540, with these figures rising in line with national average earnings. Enrolment must be in a qualifying workplace pension scheme, which can be an employer's existing scheme (as long as it is of a minimum standard and capable of implementing automatic enrolment) or the universal personal accounts scheme (which will be launched in time for the commencement of employer duties in 2012).
Inducements to give up pension membership or opt out
The 2008 Act prohibits employers from offering inducements which encourage workers to give up future membership of a pension scheme or to opt out of automatic enrolment, such as offering a salary increase if the employee opts out. Inducement is not defined, but the section is widely drafted to cover 'any action' which has the 'sole or main purpose of' achieving the above. As a result this also covers an employer forcing employees to opt out, e.g. by threatening them with dismissal.
The 2008 Act also gives protections to workers to ensure they do not suffer a detriment by an employer's act or deliberate omission. Workers will be able to present a complaint to an employment tribunal if they suffer a detriment and the employment tribunal will be able to order payment of compensation.
In addition, the Employment Rights Act 1996 was extended to give unfair dismissal protection to employees who are dismissed when trying to enforce rights covered in the 2008 Act (e.g. the right to be opted into a workplace pension). The 2008 Act will automatically void any provisions in workers' contracts which seek to exclude or limit these protections.
Prohibited recruitment conduct
Further worker protections are included in the 2008 Act covering prohibitions on prospective employers making reference to, or asking questions about, whether an applicant might opt out of automatic enrolment. This covers conduct in interviews, seeking references, providing information about the job and in proposed terms and conditions (e.g. making opting out an explicit term of the job).
The personal account regime does not seem to offer any comfort in terms of high earners given the contribution limit of £3,600 per year. In particular it does not assist in respect of the removal of higher rate tax relief for these employees.
The 2008 Act has a series of measures aimed at ensuring compliance from employers. The Regulator will be responsible for enforcing these employer obligations and the Regulator will also police the restrictions outlined above.
If an employer contravenes any of the sections 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 2008 Act will be set by further regulations, but, under the 2008 Act, these will not exceed £50,000.
It is likely that the Regulator will use powers after being informed of breaches by employees, along similar lines to the enforcement regime covering payment of the national minimum wage. Former pensions minister Mike O'Brien was careful to calm worries from business, stating at the Insurance Industry Summit that the Regulator's powers:
"... are not intended to hinder business as usual; they are not intended to be an unnecessary tangle of red tape; and we are certainly not giving a carte blanche to the Pensions Regulator."
Defined contribution governance
The pension's regulator's regime will become the new 'gold standard' by which all defined contribution schemes are measured. This would mean administration and investment, including default funds and lifestyling. Trustees and employers will need to ensure they are prepared for the new DC governance regime.
Employers need to be aware of the extent of their obligations under the 2008 Act. Although Mike O'Brien said the enforcement regime will not lead to an over zealous Regulator, it does provide for penalties. Employers will need to think carefully about the wording of any employment related documentation that deals with pensions and ensure that they do not inadvertently make inducements for workers to opt out of their future pension rights.
This is likely to be a big issue for large employers as, even if they have more generous pension arrangements in place, take up rates are generally low. In addition it will become an issue for companies employing temporary, agency or seasonal workers as the provisions will restrict flexibility and require pension provision. Further regulation to be issued later this year should make it clearer what is expected of employers, giving them time to make any necessary adjustments before the new regime's implementation in 2012.