Pension Reform

Key Aspects
The Government wants to encourage more people to save more – in particular those on moderate to low incomes. There are two key aspects to the pension reform: -

1. A new set of obligations making it compulsory for employers to automatically enrol all of their eligible jobholders into a qualifying pension scheme;

2.The creation of a new, universal, low-cost pension scheme, ‘personal accounts’ (PA).

The Personal Account (PA)
The PA aims to make saving for retirement the norm for those on low to middle incomes and is designed to provide a low-cost, independent, workplace pension scheme that any employer can use.

The Pensions Act 2008 provides that from 2012, all employees not in a suitable pension at work will be automatically enrolled in a personal account and employers will need to pay a contribution of 3% for those who remain members.

Individuals will be able to opt out if they wish, but employers will not be able to ask job applicants at interview whether they plan to opt out of auto-enrolment, or offer financial inducements to opt out of membership.

Employers will have to automatically enrol all of their employees aged between 22 and state pension age, earning more than £5,035 per annum, into either a ‘good’ pension scheme or a personal account. A ‘good’ pension scheme is one which has at least the same contribution levels as personal accounts.

Employers will be required to make a minimum contribution of 3% of band earnings (between £5,025 and £33,540 in 2006/2007 earnings terms), sitting alongside a minimum employee contribution of 4% and 1% from the government in the form of tax relief.

Key Requirements
The key requirements from 2012 are: -

• Employers must auto-enrol all jobholders in a pension scheme if they are aged between 22 and state pension age and earning more than £5,035 unless:
  
  
  
  • He /she is a member of the firm’s final salary pension scheme that meets certain minimum standards, or
    
  • He/she is a member of the firm’s money purchase pension scheme and there is a minimum level of employer contributions, or
    
  • He/she is a member of the firm’s personal pension plan or stakeholder pension scheme and there is a minimum level of employer contributions.
  
  
• A contribution of 8% of band earnings must be paid, with the employer paying at least 3%
  
• People can opt-out of the scheme and, if they do, no contributions need to be made on their behalf
  
• Employers need to re-enrol employees who opt-out - at least every three years
  
• Band earnings are earnings between £5,035 and £33,540 (in 2006/07 earnings terms)
  
• Jobholders younger than 22 or older than state pension age can opt-in.
  
• Jobholders include temporary staff and contract workers
  
• Employers can choose to use a good quality private scheme, the new Government personal accounts scheme or a combination of the two to fulfil their responsibilities.

Implications
For employers who don’t currently offer a scheme, the requirement to pay 3% of band earnings for those who don’t opt out will increase business costs.

This may be an extra 2% or 2.5% of payroll, given that the first £5,035 of earnings is ignored and depending on how many employees opt out.

Most employers who currently offer pension schemes will also be affected. Many schemes in the UK operate on an ‘opt-in’ basis where employees need to choose to join their employer’s pension scheme.

The switch to automatic enrolment, where people are members unless they actively decide not to be, is likely to see average take-up increase significantly.

And the requirement for a contribution of 8% of band earnings, with at least 3% being paid by the employer, may be higher than in many current schemes. Again, an increase in employer costs is likely.

All schemes will also need a default investment fund as auto-enrolment means some people will become members without their active involvement.

Some pension schemes, such as stakeholder pensions, currently offer default funds but others will need to ensure a suitable default is put in place by 2012.

Disclaimer
The above is based on Gresham Financial Ltd’s current understanding of the Government’s pension reforms due to be introduced in 2012, the details of which are subject to change. The information contained should not be taken as advice; individual advice should be sought before taking any action.