Pensions Bill 2011 – summary of the main measures
The main changes introduced by the Pensions Bill 2011 have been highlighted below. They will impact on businesses from now until 2020.
In 2010 the Government announced a review of a number of current pensions policies which included, amongst others: the timing of the planned increase in State Pension age, the provisions for automatic enrolment into workplace pension schemes and the use of Consumer Price Index (CPI) for the revaluation and indexation of private sector occupational pension schemes.
On 13 January 2011 the Pensions Bill 2011 was published and revealed various measures that followed up on the Government’s previous announcements. At the time of writing the Bill is being reviewed by the House of Commons after moving from the House of Lords on 27 April 2011.
The regulatory proposals of the Bill, therefore, largely build on previous legislation introducing changes that reflect recent Government decisions, or refining existing legislation.
The key measures introduced are:
- accelerating the existing timetable for increasing the state pension age to 66
- amending the legislative framework requiring employers to automatically enrol employees into a qualifying pension scheme and to make contributions to such scheme
- amending legislation providing for the indexation and revaluation of occupational pensions and payments from the Pension Protection Fund.
State pension age increase to 66
Under current legislation the state pension age for women is to be equalised with men, rising from 60 in 2010 to 65 by 2020. In addition the age for both is set to rise from 65 to 66 by 2026.
The Pensions Bill 2011 introduces an amendment to the timetable for the increase to 66 to take place progressively between 2018 and 2020. To enable the increase to be implemented from 2018, the Bill also introduces an amendment to the timetable for equalising the state pension age for women with men so that the women’s pension age will rise more quickly from 2016 to reach 65 by 2018.
The Government estimates that the changes in state pension age will affect approximately 5m men and women in Great Britain, the majority of whom will qualify for their state pension a year later than under the current timetable, while some women will see their state pension age rise by more than one year. In turn the Government estimates that the changes will result in significant net savings for the public purse of £41bn circa by reason of reduced pensions-related expenditure and additional tax and National Insurance contributions.
Automatic enrolment into workplace pensions review
The Pensions Act 2008 and subordinated legislation introduced a series of reforms for private pensions with the aim of enabling and encouraging individuals to save more for retirement.
These reforms focus on the use of automatic enrolment into workplace pension schemes, from which an individual would need to actively opt-out, to boost private saving. Starting from 1 October 2012, a new requirement will be introduced in stages upon employers to provide eligible employees with automatic enrolment with a workplace pension plan or with the National Employment Savings Trust (NEST), a pension scheme created ad hoc. Employers will be required to contribute to the plan and to operate payroll deductions of their employees’ contributions.
In 2010 the Government set out an independent review of the workplace pension reform, called Making Automatic Enrolment Work, to examine the scope of the auto-enrolment policy, including consideration of whether the institution of NEST was necessary, and to consult on possible amendments.
The Pensions Bill 2011 introduces measures that implement the findings of the independent review. In particular the key ones are:
- aligning the earnings threshold for automatic enrolment eligibility with the personal allowance for income tax
- permitting an optional waiting period of up to three months before the automatic enrolment duty applies
- simplifying the process for employers to certify that their pension scheme meets the necessary quality requirements
- increasing flexibility for employers on re-enrolment dates.
Below is a brief summary of the main requirements relating to automatic enrolment in light of the amendments introduced by the Pensions Bill. This is also available as an ACCA UK ‘Guide to...’, designed to be passed to clients to keep them aware of key issues.
The basic requirement placed on an employer by amended section 3 of the Pensions Act 2008 is that of automatically enrolling eligible workers into a qualifying workplace pension arrangement. An eligible worker is defined in the legislation as one that:
- is aged at least 22
- has not reached pensionable age, and
- to whom earnings of more than £7,475 are payable by the employer per annum.
The limit of £7,475 is defined as an earnings trigger and is in line with the current level of personal allowance for income tax. As the Bill contains provisions for the annual review of the earnings limit, it is expected that the trigger limit will move in line with individuals’ personal allowance.
In terms of qualifying pension schemes the employer can, in broad terms, either:
- make a minimum 3% contribution, calculated on qualifying pensionable earnings, towards a defined contribution scheme, which could be either an occupational or a personal pension scheme, or towards NEST; or
- offer membership of a defined benefit pension scheme or a hybrid scheme that meet specific criteria.
Employers will also be under the duty of maintaining qualifying pension provisions for workers who are already members of qualifying schemes or become members of such schemes.
Phasing in of automatic enrolment
As already mentioned, the automatic enrolment requirements will be introduced gradually on individual employers starting from 1 October 2012 and the relevant date for each, or staging date, will depend on the size of the employer, normally the PAYE size. The staging date of 1 October 2012 will be applicable for employers with a PAYE scheme size of 120,000 employees or more, while for employers with a scheme including between 500 and 799 employees the relevant date will be 1 November 2013. For employers with less than 250 employees the staging date will not be earlier than 1 March 2014. The phasing in of auto-enrolment will be completed by 1 September 2016.
The regulator will write to all employers around 12 months before their staging date so that they will know when to automatically enrol eligible workers. A further reminder will be sent three months before the employer’s staging date.
However the Pensions Bill 2011 introduces an optional waiting period into the automatic enrolment process. That would allow employers to defer the automatic enrolment date of a worker for up to three months by providing them with a notice to that effect.
The optional waiting period may be applied by the employer in accordance with their specific circumstances which could be:
- from the set employer’s staging date
- from the worker’s first day of employment, if falling after the staging date
- from the date when a worker become eligible for automatic enrolment, i.e. when they turns 22 or their earnings trigger eligibility.
During the waiting period workers may nevertheless opt into the employer’s workplace pension at any point.
Defined contribution schemes need to meet defined quality requirements in order to be qualifying schemes for auto-enrolment purposes. In particular for such schemes it would be necessary for the total contributions paid by the worker and the employer, however calculated, to be equal to or more than 8% of the worker’s qualifying earnings per annum. The employer is specifically required to pay a minimum of 3% of the worker’s qualifying earnings.
Effectively if the employer contributes the minimum 3% of qualifying earnings in a money purchase scheme, the worker will be required to contribute 4% of qualifying earnings to the scheme, with a further 1% paid by the Government directly to the scheme as tax relief. In fact contributions by employees to registered pension schemes are deemed to take place net of the basic rate of income tax at 20% and therefore a 4% contribution by a worker will attract a 1% top up contribution from HMRC as tax relief.
The minimum contributions are calculated with reference to a worker’s qualifying earnings, which are defined in section 13 of the Pensions Act 2008 as gross earnings between £5,035 and £33,540 payable to a worker in a pay reference period of 12 months. Earnings in the Act include salary, wages, bonuses, overtime, commission, statutory sick pay, maternity and paternity pay.
The qualifying earnings band is set to be reviewed annually under the measures introduced by the Pensions Bill 2011.
The minimum contributions levels will be subject to transitional periods that will gradually bring them to the required minimum by 2017. The transitional periods will be as follows:
- from October 2012 to September 2016 the total minimum contributions will be 2% of qualifying earnings with at least 1% from the employer
- from October 2016 to September 2017 the total minimum contributions will be 5% of qualifying earnings with at least 2% from the employer
- from October 2017 the total minimum will rise to 8% with a minimum of 3% from the employer.
Workers automatically enrolled in a workplace pension scheme will be able to voluntarily opt out of the scheme by giving their employer notice within a specified period. The period is broadly one month from the date on which the worker became a member of the scheme or received enrolment information, whichever is the later.
Workers giving a valid opting out notice will be put back in the same position they would have been in if they had not become members in the first place, which may include obtaining a refund of any contributions taken.
Employers will be notified by the regulator about their staging date 12 months in advance, however it would be advisable for them to consult the schedule of the phasing in dates to find out their specific relevant date and start planning accordingly. See the detailed phasing in schedule.
Employers that currently do not offer workplace pension arrangements should start considering whether it would be appropriate to set up a pension scheme, as opposed to contributing to NEST. For such purpose employers should contact an Independent Financial Adviser (IFA) who will be able to illustrate and propose suitable schemes from a number of suppliers. Further information on the matter can be found in the ACCA UK Guide to Pensions for Employees.
Revaluation and indexation of private sector occupational pensions
The Pensions Bill 2011 introduces an amendment to current legislation to ensure that schemes are not required to increase pensions in payment by the higher of Retail Price Index (RPI) or CPI. This measure will decrease the expected value of pensions liabilities of employers arising from existing defined benefit schemes.