Pension reform update (not for public release) - September 2010

This text reflects Redbourne's current understanding of the pension reform situation. As there is a major review of this underway at present, it is subject to change - the review completes on 30th September and details of the findings are expected in October.

RS is also in correspondence with the Pension Regulator over the issue of flex benefits and financial inducements and we are expecting some guidance from them in October/November.

Also, a recent paper released by the Association of Actuaries (see attached paper) which calls for an easing of the DC contribution test to reflect employers’ payroll practices and clearer guidance for flex and inducements.

Pension reform planning and update

Key facts

The Pensions Acts 2007 and 2008 make changes to the Basic State Pension, the State Second Pension and introduce new employer duties for pensions.

On 24 June 2010 the Government announced details of a full review of automatic enrolment into workplace pensions. The review will consider whether the current approach strikes the right balance between cost and benefits to individuals, employers and for the tax-payer, particularly in the light of current economic conditions. The Review Team is on schedule to conclude the review by 30^th September.

Employer duties

Starting from October 2012, employers will be required by law to:

automatically enrol all their eligible employees not already in a good quality pension scheme into a Qualifying Workplace Pension Scheme (QWPS) on the day the employee becomes eligible (automatic enrolment period is one month), and
pay contributions for every employee who does not opt-out of the QWPS.

Timetable

The employer duties will be staged in over 4 years from 2012. Larger employers will have their duties imposed first, smaller employers last. Any employer with less than 50 employees will have their staging date set depending on the last two digits of their PAYE reference number.

Size of employer	Staging date
120,000 – 800	Over 12 dates from 1^st October 2012 to 1^st October 2013
799 – 250	Over 3 dates from 1^st November 2013 to 1^st February 2014
Less than 50 (sample)	On 1st March 2014
249 – 50	Over 4 dates from 1^st April 2014 to 1^st July 2014
Less than 50	Over 18 dates from 1^st August 2014 to 1^st February 2016
New businesses that start up after October 2012	Over 5 dates from 1^st March 2016 to 1^st September 2016

The costs

The amount of contributions that must be paid in order for a scheme to be treated as a QWPS is being phased in as follows:

Date	Total minimum contribution %	Minimum employer contribution %	Minimum difference to be made up by employee % (gross) *
October 2012 to September 2016	2%	1%	1%
October 2016 to September 2017	5%	2%	3%
October 2017 onwards	8%	3%	5%

The contributions will be based on a percentage of band earnings between £5,035 and £33,540 (qualifying earnings) at 2006/2007 levels. These amounts will be increased in line with earnings to 2012 and beyond.

* The minimum difference includes tax relief available on employee contributions.

Quality Qualifying Workplace Pension Scheme (QQWPS)

Employers can avoid much of the administration burden associated with automatic enrolment by setting up a QQWPS where:

the total minimum contribution is 11% of qualifying earnings, of which
at least 6% must come from the employer,
there is no option to phase in contributions, and
automatic enrolment dates can be postponed up to 90 days allowing a ‘sweep up’ of eligible employees all at once at the employer’s convenience.

Eligible employees

All employees will have to be auto-enrolled unless:

they are already in a qualifying workplace pension scheme,
they are under the age of 22, although those aged under 22 can request to join and the employer must them pay the required amounts,
they are over the State Pension Age, or
they earn less than £5,035 a year (in 2006/2007 terms).

Employees can only ‘opt-out’ once they have been auto-enrolled.

Non-eligible employees must be given the option of opting in to pension saving.

Auto-enrolment is the responsibility of the employer, not the Government or the pensions industry. The Pensions Regulator will oversee employer compliance and has the power to fine employers for non-compliance.

National Employment Savings Trust (NEST)

Employers who do not have, or who will not set up, their own QWPS will have the option of using NEST. This scheme is designed to be low cost and is specifically aimed at low to medium earners. There will be certain restrictions applying to NEST:

there will be a general ban on transfers in or out (to be reviewed in the future),
there will be an upper contribution limit (currently £3,600 each year),
limited retirement options and
limited investment options.

Areas of uncertainty

Workplace Pension Reforms review

The Review Team is on schedule to conclude the review by 30^th September.

Flexible benefits and financial inducements

Part of theguidance from The Pensions Regulator issued 12^th January 2010 looked at flex schemes and the issue of inducements. The guidance form the DWP states that:

“On the possible impact of inducements on flexible benefit schemes: such schemes which feature qualifying pension scheme membership as one of the core benefits ought not to be at any risk of contravening this measure.

Where such schemes offer alternative benefits when a worker opts out of qualifying pension scheme membership there may be a contravention, but it will depend on the detailed circumstances of the case and whether the offer of such a scheme could be considered to be an action the ‘sole or main purpose’ of which was to induce opt out.”

The Pension Regulator (TPR) is responsible for employer compliance and Redbourne is waiting for their guidance on this issue. We expect progress after the Government review in completed after 30^th September.

Administration and compliance

The new contribution regime suggests a different approach compared to the existing way pension contributions are calculated. The contributions are to be based on band earnings (earnings between £5,035 and £33.540 in 2006/07), which make them very similar to the way that National Insurance operates. Therefore, employers will potentially save money compared to contributions that are calculated against, say, basic salary but contributions will be payable on variable earnings within the band. There are two possible routes for employers to follow on this:

Employers can do a reconciliation at least yearly for all employees, and if the contributions actually paid are lower than the legal minimum the employer must make up the difference.
Employers can certify in advance that they believe they will meet the minimum requirement for all employees. At the end of the year they must do a sample check, with the minimum proportion of staff sampled depending on employer size. There are then three circumstances in which they must take further action:
1. If the contribution for any individual has been more than 5% below the required amount, the employer must make good the shortfall for that individual.
2. If more than 10% of those sampled have a shortfall, the employer will have to make good the shortfall for all scheme members who have lost out.
3. If any individual has lost out in two consecutive 12 month periods, the employer will have to make good the shortfall.

We are still waiting to see the final regulations for employer compliance where existing schemes with different contribution structures are being used. Once this has been issued, Redbourne will be able to provide guidance on the administration requirements.

Please note that all band earnings will be subject to the new contributions so bonus and other one off payments are likely to have a pension contribution liability.

Joining and opt out administration will also be subject to strict compliance requirements with prescribed employee information and, again, we are waiting for final regulations about how this will be applied to existing schemes. Employees cannot choose to opt out of the pension until they have received the required information and been automatically enrolled. They then have one month to opt out. In general, employers will be forbidden from providing opt-out forms to their staff and they must be obtained from the pension provider.

Employers will be required to inform the Pension Regulator about how they have met their obligations within nine weeks of their staging date, and every three years after that. Employers, pension schemes and pension providers will have to retain records for six years, including details of opt-outs. There will be a fixed £500 penalty for employers who fail to comply, followed by penalties of between £50 and £10,000 a day for persistent or serious non-compliance, depending on employer size. Various other sanctions are also being put in place. Redbourne is confident that much of the compliance requirements can be automated and held on the Redbourne benefits management system.

Appendices

Appendix – overview of legislation

The Pensions Act 2007

In July 2007 The Pensions Act legislated for the reforms to the State Pension system set out in "Security in Retirement: towards a new pensions system". The Act also created the Personal Accounts Delivery Authority to advise on the introduction of a new, simple, low cost pensions savings vehicle.

The Pensions Act 2008

In November 2008 the Pensions Act 2008 introduced measures aimed at encouraging greater private saving. This included a duty on employers to automatically enrol all eligible workers into a qualifying workplace pension scheme (provided they are not already in such a scheme). Most of the measures in the Act will come into effect from 2012. The Act broadened the remit of the Personal Accounts Delivery Authority giving it powers to enable it to establish NEST (National Employment Savings Trust).

Abolition of contracting out March 2010

The Government confirms that the option to contract out of the additional State Pension into a Defined Contribution pension scheme will be abolished from 6 April 2012. Individuals who are contracted-out into a Defined Contribution pension scheme will be automatically brought back into the additional State Pension from this date.

NEST Order and Rules March 2010

The National Employment Savings Trust (NEST) Order and the NEST Rules take effect from 5 July 2010. Together, the Order and Rules set out the framework for the operation of NEST.

Workplace Pension Reforms review June 2010

On 24 June the DWP announced a review to look at how best to support the implementation of automatic enrolment into workplace pensions. The review will consider whether the current approach strikes the right balance between cost and benefits to individuals, employers and for the tax-payer, particularly in the light of current economic conditions. Findings are due to be published by 30^th September 2010.

Appendix – State Pension changes summary

As well as reforms to work place pensions, State Pensions are also being changed. A summary of the key changes are as follows:

Increasing the State Pension age (SPa) for women from 60 to 65, so that it will be the same as for men. (This change was legislated for in 1995 to come into effect from 2010)
From 6th April 2024 gradually increasing the SPa for men and women from 65 to 68.
Reducing the number of qualifying years needed to get a full basic State Pension.
Removing the current minimum National Insurance contribution conditions required to obtain a basic State Pension
The introduction of new weekly credits for parents and carers.
Abolition of Adult Dependency Increases (ADIs).
Changing the rules to enable husbands and civil partners (as well as wives) to get a State Pension based on a spouse’s or civil partner’s National Insurance contribution
Changes to age thresholds and qualifying ages for other Pensioner and Working Age benefits.
Uprating the basic State Pension in line with earnings.
Increasing the number of people eligible for State Second Pension (S2P), which will also become flat-rated in the future.
Allowing certain customers to buy additional voluntary National Insurance contributions.

Source: The Pensions Regulator, State Pensions Reform – briefing pack for advisers. Version 2, February 2010

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. The information provided is based on our current understanding of the Pensions Acts 2007 and 2008.