the
Pensions Act 2008
(auto enrolment and moral hazards)
by
Roderick Ramage, solicitor, www.law-office.co.uk
first
published (by distribution to professional contacts) on 30 December 2008
DISCLAIMER
This article is not advice to any
person and may not be taken as a definitive statement of the law in general or
in any particular case. The author does not accept any responsibility for
anything that any person does or does not do as a result of reading it.
The Pensions Bill, summarised in
last year’s update (see item 22 in the list of my pension articles), received
Royal Assent on 26 November 2008. Most
of its provisions complete the primary legislation for a new system intended to
provide pensions for those on low to middle incomes. The new system, to be introduced in 2012,
will replace stakeholder pensions, the Government’s previous failed attempt to
achieve the same objective. Personal
accounts have probably been the most publicised feature of the new system, but
auto enrolment is the most important.
This note does not cover the whole
of the 2008 Act but just two topics likely to be of general interest.
automatic
enrolment
All employers will be required to
make arrangements by which a jobholder “becomes an active member of an automatic
enrolment scheme with effect from the first automatic employment date”,
unless the jobholder is an active member of a qualifying scheme on that
date.
jobholder A jobholder is a
worker working in Great Britain under a contract, aged at least 16 and under 75
with qualifying earnings.
“Worker” includes both employees and others working or providing
services for an employer, which is a definition broadly similar to that used in
connection with the working time regulations and some other employment
protection rights.
automatic
enrolment scheme
A qualifying scheme which does not prevent the employer from arranging
automatic enrolment or require the jobholder to express a choice or provide information
in order to become an active member.
This can include the personal accounts scheme.
automatic
employment date
The first date on which the automatic enrolment provisions apply to a
jobholder of the employer, ie the commencement date of the legislation in 2012
or, if later, the start date of a jobholder’s employment. Regulations are expected to permit the start
date for automatic enrolment to be postponed, which will be valued by employers
with a large casual workforce or high turnover of employees, but it seems
probable that employers will be permitted to impose a waiting period only if
their contributions are not less than 6%.
qualifying scheme A qualifying scheme may be an occupational or
personal pension scheme and must by registgered under the Finance Act 2004 and
satisfy the quality requirement.
The quality requirement is
met by a scheme which:
-
if money purchase (defined
contributions) requires contributions by the employer of not less than 3% of qualifying
earnings and total contributions by the employer and jobholder of 8% of
qualifying earning, which is expected to be, typically, employer’s
contributions of 3%, members’ of 4% and 1% through tax relief on them; or
-
if salary related (defined benefits)
is either a contracted-out scheme or one in which a pension accrues at 1/120ths
of qualifying earnings (averaged over the last three years of
employment) up to a maximum of 40 years, starts at age 65 and is payable for life.
qualifying earnings Annual gross earnings over
£5,035 and not more than £33,540, which will be reviewed in each tax year. The Government has announced that maximum
contributions to personal accounts by or for any individual may not exceed
£3,600 pa, which will increase in line with earnings, leading to fears that
employers might move to personal accounts to reduce pension costs and defeat
the purpose of improving the provision of workplace pensions.
Employees will be permitted to opt-out of an
automatic enrolment scheme and receive a refund of contributions. Regulations will provide details of the
operation of the opt-out and the calculation of refunds.
‘Moral hazard’ – strengthening
the Regulator’s hand
The existing powers of the Pensions Regulator (TPR) in the Pensions
Act 2004 (see moral hazard article on my website) will be reinforced with
retrospective effect from 14 April 2008.
TPR will be able to issue a contribution notice, making individuals
personally liable, if from that date, the employer or any company in its group
is, in TPR’s opinion, party to any act or failure to act, which “has detrimentally affected in a material way the likelihood of
accrued scheme benefits being received”.
It no longer matters whether the parties intended this consequence,
which was a prerequisite for liability under the 2004 Act; it is sufficient
this consequence is the result of the act or omission. TPR may not issue a contribution notice
against any person (P) if it is satisfied that:
A P gave due consideration to the extent to which the act or
failure might have a materially detrimental effect;
B (if
applicable) P took all reasonable steps to eliminate or minimise the potential
detrimental effects; and
C it
was reasonable for P to conclude that the act or failure would not have a
materially detrimentally effect.
So far as I am aware TPR
has not made a single contribution notice, but the threat is now greater and
the test more severe.
The test for making a
financial support direction, under which other companies in the same group as
the scheme employer can be make liable for all or part of the pension debt if
the employer is under-resourced, has been extended to enable TPR to take into
account the resources of the whole of the group.
See also item 22 in the list of my pension articles)
END
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