The Pensions Act 2008 laid the foundations for the latest attempt to tackle the looming pensions crisis. Since then, there has been a plethora of draft regulations issued for consultation, setting out the proposed basis for the personal accounts scheme and the requirement for auto-enrolment of workers into suitable pension arrangements. The latest set of consultation documents was issued in September.
While the details are not yet finalised, now seems an ideal opportunity to review where we are on personal accounts and the key features of the proposed auto-enrolment regime. Before analysing any detail, it may help to clarify some of the terminology used:
- Job holder: Broadly, any worker aged at least 16 and under 75 with ‘qualifying earnings’ of between £5,035 and £33,450 a year (based on 2006-07 earnings and up-rated annually).
- PADA: The Personal Accounts Delivery Authority is a non-departmental public body accountable to Parliament, which will set up a national trust-based pension scheme called the personal accounts scheme.
- Qualifying workplace pension scheme: An umbrella term covering defined benefit or defined contribution schemes that are operated by an employer and certified as meeting certain criteria (an employer may offer its own qualifying workplace pension scheme instead of the personal accounts scheme).
The proposals state that job holders aged between 22 and the state pension age will be eligible for auto-enrolment into either the personal accounts scheme or a qualifying workplace pension scheme. Following a recent Department for Work and Pensions (DWP) change to earlier proposals, the requirement will now be staged over a three-year period from 2012, with the largest employers (those employing more than 250 employees) becoming subject to the requirement first. So-called micro employers (those employing one to four employees) will be required to comply by 2015.
The staged introduction aims to alleviate concerns that PADA and the Pensions Regulator (as compliance monitor for the new requirements) would be unable to cope with a ‘big-bang’ approach. It is also hoped that the staged introduction will assist smaller employers by providing more time for them to adjust financially to the new requirement
As for contributions, the DWP says employers will eventually be required to contribute a minimum of 3% of employees’ qualifying earnings, with employees eventually contributing 4% plus 1% provided by tax relief. As with the introduction of the auto-enrolment requirement, the payment of contributions will now be phased in over a period from 2012 to 2016. For defined contribution schemes, employer contributions will start at 1% in October 2012 rising to 3% in October 2016. Phasing arrangements will also apply to qualifying workplace pension schemes with a defined benefit or hybrid structure.
There are detailed administrative requirements regarding enrolment to ensure that all eligible job holders become active members of the personal accounts scheme or a qualifying workplace pension scheme within one month of starting work. This is a change to the original proposals, where the timescale was significantly shorter and varied for trust-based and contract-based schemes. During the one-month period, the employer must arrange for specific information to be provided to the job holder.
But a job holder who has been automatically enrolled may give notice to opt out of membership within one month of completing the joining process. The member will be treated as never having been a member and will be entitled to a refund of contributions.
Auto re-enrolment means that every three years, employers will be required to re-enrol eligible job holders who opted out or cancelled their membership. Job holders who have left the employer’s pension scheme within the previous 12 months will be exempt from this requirement.
Employers will also be required to register with the Pensions Regulator and set out how they will meet the new duties. This will need to be done within nine weeks after the employer’s ‘staging date’. They will also be required to re-register every three years.
The new draft regulations have done little to reduce the complexity of the original proposals. It is hard to see how the current consultation papers support the mantra of simplification. There have been some amendments in light of the earlier industry-wide consultation – for example, by extending the initial joining period to one month – but the proposals will still place unwelcome administrative and cost burdens on employers.
As part of its impact assessment, the DWP looked into and estimated administrative costs associated with the introduction of auto-enrolment. Excluding the actual cost of employer contributions, these are not expected to be very significant, but it is anticipated that the costs will hit micro employers hardest at a time when they may be struggling to take on any extra financial burdens. Strikingly, the DWP has estimated that some 10,000 to 60,000 job losses may arise as a result of these changes, as employers try to fund the additional contributions by finding cost savings elsewhere. The DWP considers that the hotel, restaurant and manufacturing sectors are most likely to experience job losses.
Looking more specifically at the proposed staged introduction of the regime, the DWP was clearly concerned about the impact on PADA and the Pensions Regulator as well as the economic impact on smaller employers. The staged introduction may, therefore, be welcome on some levels, but may have a few side effects.
First, it is potentially even more confusing and administratively complex for employers than the big-bang approach, as they will need to understand where they are in the staging cycle. Second, this may put an unfair burden on the larger and medium-sized companies, which will be required to begin contributing earlier. On the other hand, many large and medium-sized employers already contribute to a pension scheme on behalf of their employees, so these employees may have little or nothing to gain from the early introduction of the requirements. Analogous to this, for job holders at small or micro employers – who are less likely to benefit from pension contributions at present – the later introduction of employer contributions may severely impact on the investment returns available.
Turning now to the rather vexed issue of job holders. This term is designed to cover the majority of employees. However, the definition will also catch many agency workers and those employed for short periods. This could prove to be an administrative nightmare for employers, given the obligations of auto-enrolment and contribution refunds.
Furthermore, consideration has to be given to those employees who exceed the £5,035 threshold for part of a year. These are so called ‘accidental job holders’, and the draft regulations set out complex provisions covering their rights.
Only job holders aged between 22 and state pension age who earn more than £5,035 must be enrolled automatically into the personal accounts scheme or a qualifying workplace pension scheme. Confusingly, however, for those who fall outside the criteria for automatic enrolment, employers must inform them that they can join the personal accounts scheme or a qualifying workplace pension scheme in the same manner as a standard job holder. This is yet another administrative burden for the employer. Moreover, if an employee earning more than £5,035 joins the arrangement, there is an obligation on the employer to contribute.
Terry Saeedi, pensions partner, Eversheds
The price of getting it wrong
Employers will need to ensure they are fully up to date with their detailed obligations, which will come at additional cost in terms of time and resources.
These obligations include complying with the employer duties summarised in this article and ensuring that any qualifying workplace pension scheme is registered with the Pensions Regulator. This in turn will bring significant burdens on the Pensions Regulator in terms of policing compliance with the new regime.
And, of course, there is a price for getting it wrong. The draft regulations envisage a fixed £500 penalty for non-compliance with employer duties and an escalating penalty up to £10,000 per day for persistent or serious non-compliance.
Questions have also been asked as to why the government is introducing the personal accounts regime in the first place, given the level of complexity and burdens on employers. To some commentators, the use of the national insurance scheme would be a far more sensible mechanism to cater for savings on this scale.
Too little, too late?
Will the new provisions actually address the matter in hand, namely the looming pensions crisis?
The aim is to get a further five to nine million people saving (or saving more) for retirement. This could be too little too late for many people. With the vagaries of the stock market and the expected long period of poor economic growth ahead of us, pensions contributions of these amounts may not go far enough. This is a particular issue for those at the lower end of the pay scale, who are most vulnerable and in need of financial assistance.
The new provisions are not, according to government policy, intended to undermine good-quality workplace schemes. There is, however, a very real risk that the cost and complexity of compliance with the new regime will push employers to level down and standardise their arrangements via the personal accounts scheme.
No doubt the industry will have many comments for the DWP in relation to the draft proposals, but wholescale change is unlikely.