Pension Reforms – Employers must contribute 3%

19 October 2009

David Wilsonhead of the employment law unit here at Warners, discusses the forthcoming changes to The Pensions Act 2008 and how it will impact employers.

The Government is currently undertaking a landmark reform of the UK pension scheme which is aimed at providing greater financial security for the ageing population. The Pensions Act 2008 is expected to come into force in April 2012 and aims to encourage greater private pension saving.

The Act includes a number of measures designed to simplify the existing system - for both state and private pensions. These reforms build upon the Pensions Act 2007 and are aimed at enabling and encouraging more people to build up a private pension income to supplement the money received from the basic State Pension.

There will be an impact on all employers as the Act introduces two key requirements which must be complied with. The first is to automatically enrol eligible “jobholders” who are not in a qualifying pension scheme into an automatic enrolment scheme. Jobholders will be enrolled by their employers from the first day they become eligible (see criteria below) but can opt out at any point. Employers may choose the pension scheme they provide, which must meet certain criteria. Secondly, the employer will be obliged to maintain the employee’s membership of a qualifying scheme, including making relevant contributions, so long as the employee chooses to be part of it.

A jobholder is defined as an employee who meets the following three criteria:

• Works (or ordinarily works) in Great Britain under a contract. This will include temporary workers. There are special provisions which detail how the requirements apply in the case of agency workers. A government amendment has clarified that the definition of "jobholder" also includes directors who are employed under a service contract. Non-executive directors will therefore not be covered.
• Is aged between 16 and 75.
• Is paid "qualifying earnings" by an employer. These are earnings between £5,035 and £33,540, including bonuses, overtime and any statutory maternity, paternity and adoption pay.

Employers will therefore be required to automatically enrol employees into a qualifying pension scheme or a new savings vehicle, which is currently known as a personal account scheme. The personal account scheme will be run as a defined contribution occupational pension scheme.  This is the first time that employers will be required to contribute a minimum of 3% (on a band of earnings) to an eligible employee’s workplace pension scheme.  This will supplement the 4% contribution from the employee and around 1% from the Government in the form of tax relief.

It is intended that the requirements for mandatory employer contributions will be phased in over three years. Broadly, employers will have to pay a 1% contribution in the first year, rising to 2% in the second year and the full 3% from the third year onwards.

The stakeholder pension requirements will be abolished when the new regime comes into effect

Employers will be required to give the Pensions Regulator information about how they will meet their obligations and self certify annually that whichever scheme they operate complies with their obligations under the Act. The Pensions Regulator will be able to use this information to assess compliance with the duties set out in the Act. The Pensions Regulator will be given enforcement powers and the Act sets out sanctions, including criminal penalties, for failure to comply.

It is clear that there will be an onerous burden placed on employers as a result of the reform. There will be various decisions to make. Employers must decide whether to automatically enrol employees into their own company pension scheme, or the new personal accounts scheme. This is not a stark choice; employers may choose one solution for one set of employees and another for a different set of employees.

It is worth noting that employers will not be able to offer financial inducements to workers to opt out of auto-enrolment, nor will they be able to ask job applicants at interview whether they plan to do so. If a worker suffers any detriment because his or her employer breaches the regime, they will be able to bring a claim in the employment tribunal. Employers will not be able to contract out of or exclude any of their new duties, except when compromising an employment tribunal claim.

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