26/02/09 Personal Accounts
26 February 2009
Overview
The Pensions Act 2008 (“PA08”) will require all employers to automatically enrol all employees into a pension scheme. This can either be a scheme sponsored by the employer which meets specific quality requirements ( a “qualifying scheme”), or the new Personal Accounts scheme.
Personal Accounts (“PAs”) are intended to be launched in 2012. However, Tim Jones, the chief executive of the Personal Accounts Delivery Authority (“PADA”), the government body responsible for overseeing the establishment and operation of PAs, has recently stated that PAs will have a ‘soft launch’ in 2011 and may not be fully operational until 2014.
PAs and auto-enrolment are being introduced to ensure that every UK employee will have access to a good workplace pension scheme, as they are aimed at employees who are not members of an existing “qualifying scheme”. The government estimates that some 10 million employees will be eligible for PAs as many existing stakeholder schemes in particular will not meet the requirements of a “qualifying scheme”.
The principal elements of the scheme establishing PAs and the main eligibility and exemption criteria are set out in PA08, although the detailed rules will be published in regulations expected to be issued during 2009/10.
Personal Accounts Scheme (“PA Scheme”)
The PA Scheme will be a registered trust-based occupational pension scheme, and the trustee will be a trust corporation. The trustee is required to make arrangements for consulting the scheme’s members and participating employers about the operation, development and amendment of the scheme, which must include the establishment of representative member and employer panels.
It is intended that the PA Scheme should be a low-cost arrangement, and will be run primarily as an e-business.
PADA
PADA was established by the Pensions Act 2007. PADA’s remit is set by the government, and it must have regard to the following principles in particular:
-the participation in “qualifying schemes” should be encouraged and facilitated;
-the burdens imposed on employers as a result of the establishment of PAs should be minimised;
-any adverse effects on “qualifying schemes” and their members which result from the establishment of PAs should be minimised;
-the cost of membership of the PA scheme should be minimised;
-so far as is practicable, members’ preferences should be taken into account in making provisions about investment choice in PAs;
-diversity among members of PAs should be respected.
Once the PA scheme is up and running, PADA will transfer its responsibilites to the trustee corporation.
Membership and Auto-Enrolment
A “ jobholder” in receipt of “qualifying earnings” in a relevant “pay reference period” who is aged between 22 and state pension age must be automatically enrolled into a PA from the first day of employment, unless they are a member of their employer’s “qualifying scheme”.
If a “qualifying scheme” provides better benefits than the PA scheme, it is expected that the employer will be able to impose a waiting period as an eligibility condition of its scheme.
A “jobholder” is any individual who is working under a contract, and the person responsible for paying the individual will be responsible for the auto-enrolment requirements. This may have particular significance for temporary and agency staff.
Opting-Out/In
Individuals can choose to opt-out of a “qualifying scheme” or a PA. On opting-out, an individual must be automatically re-enrolled every three years unless they are a member of a “qualifying scheme” on the re-enrolment date or ceased to be a member within a prescribed period before the re-enrolment date.
Regulations will contain the requirements for refunding contributions. Although current legislation regarding refunds for leavers from occupational schemes with less than two years’ pensionable service will continue, it is expected that for PAs only employees who opt-out within 30 days will be entitled to a refund.
Jobholders who do not qualify for automatic enrolment can give notice requiring the employer to arrange membership of a “qualifying scheme” or a PA.
“Qualifying Earnings”
“Qualifying Earnings” are gross earnings in a “pay reference period” of 12 months between £5035 and £33,540 ( ie the Primary Threshold and the Upper Earnings Limit for National Insurance Contributions for 2006/07.) Earnings include salary, wages, commission, bonuses and overtime. The limit is to be increased annually in line with National Average Earnings and “pay reference period” is to be clarified in regulations.
“Qualifying Schemes”
A “qualifying scheme” is a registered occupational or personal pension scheme that meets prescribed tests so that the employer is exempted from the need to offer PAs. The tests are as follows:
(a) Final Salary Schemes:
The exemption will apply to contracted-out schemes, or schemes satisfying the test standard – ie schemes paying a pension for life from age 65 where the benefits are 1/120th of average “qualifying earnings” in the 3 tax years preceding the end of pensionable service, up to a maximum of 40 years.
(b) Money Purchase Schemes:
The exemption will apply if the employer contributes at least 3% of “qualifying earnings”, with the total amount paid by the employer and the employee being a minimum of 8% of “qualifying earnings”.
Personal pension schemes have the same contribution requirement as occupational money purchase schemes, but the minimum contributions must be agreed between the employer and the employee.
It is intended that contributions will be phased in over 3 years.
PA Scheme
(a) Contributions:
The minimum contribution rate for PAs will be the same as for other money purchase schemes, and again, contributions will be phased in over 3 years. Employees can contribute more than the minimum but there will be a maximum combined employer and employee rate, currently expected to be £3,600 (increasing each year in line with National Average Earnings).
(b) Transfers:
There will initially be a ban on transfers in and out of the PA scheme, although this is likely to be reviewed in time.
(c) Investment and Charges:
Our understanding is that PAs will offer a limited investment range, and members will automatically be put into a default fund in the absence of an explicit choice.
There is ongoing consultation on the charging structure, but the initial intention that this would be a 0.3% annual management charge is now viewed as unlikely.
Compliance
Employers will be required to give the Pensions Regulator details of how they are meeting the requirements. The Regulator has wide powers to monitor compliance, and it will be able to issue a compliance notice to an employer if it is of the opinion that it has contravened any of its new duties. This will include inducing existing employees to opt-out, and offering employment on condition that the new employee will opt-out.
An offence is punishable by a criminal conviction of up to 2 years’ imprisonment and/or a fine up to a maximum of £50,000.
Summary
Employers need to re-evaluate their existing pension arrangements to determine if any elements need re-designing to ensure compliance with the new PA regime. The following areas in particular may require attention:
-whether an existing scheme is a “qualifying scheme” – eg the definition of pensionable salary in an existing money purchase scheme may differ considerably from the definition of “qualifying earnings”;
-the administration and cost of auto-enrolment;
-whether existing arrangements should be opened to all employees or whether PAs should be used in addition;
-whether existing arrangements should be closed, and only PAs used;
-staff turnover and issues regarding refunds and opters-out;
-communication to employees.