Independent Financial Advisors - IFA Southampton, UK

Pensions Act 2008: Qualifying Workplace Pensions and beyond . . . .

Background

In November the Government enacted the Pensions Act 2008 which imposes responsibilities on employers from 2012. Much of the detail has still to be finalised but this letter is designed to provide basic information with more detail to follow as the legislation becomes clearer.

Our role is to ensure that you can spend your time concentrating on running your business and planning for the new legislation.

1. From 2012 all employees aged 22 and over and earning more than £5,035 (in 2006/07 values) who are not already in a ‘Qualifying Workplace Pension’ must be automatically enrolled in to one.

2. If an employer doesn’t have a ‘Qualifying Workplace Pension’ in place by 2012 they will have to set one up or ensure their employees are auto-enrolled in to a default Qualifying Workplace Scheme called ‘Personal Accounts’ that the Government is establishing.

3. Employers will be compulsorily required to pay pension contributions of 3% of their employees qualifying earnings (between a lower and upper threshold).

4. Employers cannot opt-out only employees can. Penalties for non-compliance include fines or imprisonment.

What is a Qualifying Workplace Pension?

As many workplaces already provide access to a pension scheme, the legislation allows existing schemes to continue as long as they meet or exceed minimum standards. To be eligible as a ‘Qualifying Workplace Pension’ existing schemes must:

• Be a defined benefit / final salary scheme or a defined contribution scheme e.g. Group Personal Pension, Stakeholder or a Trust based Occupational Pension Scheme.

• Have a minimum contribution from the employer of 3% of employees banded qualifying earnings (£5,035 to £33,500: 06/07) and a total overall of at least 8% of employees banded earnings. A qualifying defined benefit / final salary scheme has its own criteria based on accrual rates.

• Automatically enrol eligible individuals (aged 22 to State Pension Age) into a Qualifying Workplace Pension Scheme.

• Automatically, re-enrol eligible individuals into a qualifying or personal accounts scheme (at least once every three years).

• Offer a default investment choice to members.

Employers will be able to self-certify that their plan(s) are a qualifying scheme.

Although Group Personal Pensions and Stakeholder plans are not permitted under existing legislation to ‘auto-enrol’ individuals, legislation is being introduced that permits auto-enrolment from 2012.

What is a Quality Scheme?

There will also be ‘Quality Schemes’ that will enjoy a slightly more relaxed approach to ‘auto-enrolment’. Quality Schemes will be allowed to operate a three-month waiting period before auto-enrolling employees.

The actual definition of ‘Quality’ schemes has been put off until regulations have been finalised.

What are Personal Accounts?

‘Personal Accounts’ are a catch all Scheme being put together by the Personal Accounts Delivery Authority (PADA) and will be a ‘Qualifying Workplace Pension’ Scheme.

They are designed to be a simple, low-cost way for individuals that do not have access to an alternative Qualifying Workplace Pension. Key components of Personal Accounts are:

• Low Charges.

• Basic rate tax relief added to each member contribution and corporation tax relief for employer contributions.

• A very limited choice of investment funds and a default fund for those who do not actively select their own investments.

• An annual contribution limit of £3,600 a year (increased with earnings from 2005).

• It will not be possible to transfer funds between personal accounts and existing pension schemes. The Government plans to review this restriction in 2017.

What are the Minimum Contributions?

The ultimate minimum contribution under the legislation is 8% of qualifying earnings.

In recognising the additional financial burden that the legislation places on employers the minimum contributions will be phased in over three years as follows:

Year 1 (2012/2013) Total of 2% including minimum employer’s contribution of 1%

Year 2 (2013/2014) Total of 5% including minimum employer’s contribution of 2%

Year 3 (2014/2015) Total of 8% including minimum employer’s contribution of 3%

Employee contributions will receive tax relief at the basic rate, currently 20%.

Employers can pay more than the required contribution. There will however be an annual limit on the total value of contributions that can be paid in to a Personal Account in a tax year.

What are Qualifying Earnings?

Many existing employer pension schemes that will be used in place of personal accounts use basic salary as the basis for contributions. The regulations require the use of qualifying banded earnings. In this context qualifying earnings are essentially P60 earnings i.e. including commissions, bonuses, overtime, SSP, SMP, etc.

The following example might help:

• Claire receives a basic salary of £10,000 and her employer makes pension contributions of 3% per annum i.e. £300 p.a.

• Claire’s total earnings increase with overtime to £16,000.

• The legislation requires an employer pension contribution of 3% of qualifying banded earnings. Using the lower and upper bands of £5,035 and £33,540 (06/07) her employer would need to make pension contributions of 3% on £10,965 (£16,000 - £5,035), i.e. £328.95.

• The current payment of £300 would not meet the requirement to pay 3% of Qualifying earnings.

Employer Duties

The legislation sets out additional duties on employers as follows:

• To collect and remit contributions using direct payment i.e. deductions from net pay and remit with employers contribution to the scheme concerned.

• To provide the Pensions Regulator with information about how they are complying, or intend to comply, with their employer duties eg. the scheme(s) they are using to meet their duties.

These additional duties will be expanded as the detail is published, but the onus will be put on employers to ensure that they comply with the new legislation.

The implementation of the new legislation means the removal of the employer stakeholder designation requirement from 2012.

Summary

What is clear from the legislation is that all employers will have to do something, even if your existing scheme looks like it will meet the criteria of a Qualifying Workplace Pension.

In summary from 2012 you will be required to:

• Automatically enrol all eligible employees into a Qualifying Workplace Pension, either an existing scheme, a re-designed scheme or the Government’s Personal Accounts.

• Contribute a minimum of 3% of each employee’s eligible earnings (basic salary plus commissions, bonuses and overtime between £5,035 and £33,540).

• Ensure your existing scheme meets the qualifying criteria and certify so to the Pensions Regulator.

• Complete additional regulatory requirements.

We can help ensure that you meet your legislative requirements, including reviewing your existing arrangements and ‘future proofing’ ahead of the new legislation. I have attached an appendix of questions for you to consider and I look forward to discussing these issues with you at a future meeting.

The information contained in this communication is based on our current understanding of legislation and pensions regulation. It is subject to change as the detail of the legislation and consultation exercises are undertaken and implications interpreted.

APPENDIX 1

What Now?

Although 2012 is still some way off, good preparation will be vital to ensure a smooth transition. We can help guide you through the legislation and ahead of future meetings the following might help you consider some of the issues:

• Does your existing scheme fulfil the criteria for a Qualifying Workplace Pension?

• Does it permit auto-enrolment?

• Does it meet the minimum contribution target of 8%?

• Does it have a default investment fund?

• Does your existing salary/earnings definition meet the minimum employer contribution criteria of 3% of banded qualifying earnings?

• What impact will mandatory pension contributions have on cash flow? How can this be managed?

• How are you going to review your existing Scheme?

• How are you going to complete the self-certify paperwork?

• Does a non-contributory pension Scheme meet the Qualifying criteria?

• What are the implications for Salary Sacrifice pension schemes?

• Do you need to introduce an alternative scheme or Personal Accounts for some categories of workers?

• How are you going to plan for auto-enrolment?

• How will employees be consulted/communicated with?