The Pensions Act 2008 - Retirement, Superannuation & Pensions

The Pensions Act 2008 ("the Act") received Royal Assent on 26 November 2008. The Act marks the next step on the route to the introduction of personal accounts; but makes a number of other significant changes to previous legislation, including the extension of the powers of the Pensions Regulator. We take a look at its key provisions:

Personal Accounts

The Government's May 2006 White Paper, Security in Retirement; towards a new Pension system, proposed a new structure for the long-term future of UK pension provision. Of most note was the introduction of the Personal Accounts system; billed as a nationwide low-cost automatic enrolment pension system for all, which would for the first time require employers to contribute to their employees' pension provisions. The Pensions Act 2007 established the Personal Accounts Delivery Authority (PADA), the independent authority responsible for delivering Personal Accounts. The Act now introduces the key requirements for the Personal Accounts system.

From 2012, all UK employers will be required to make arrangements to enrol "jobholders" automatically in an "automatic enrolment scheme" if they are aged at least 22 and have not reached state pensionable age. A "jobholder" is a worker who:

works or ordinarily works in Great Britain under a contract of employment;

is at least 16 and under 75; and

receives "qualifying earnings" (currently set at between £5,035 and £33,540) from his employer.

The requirement to make suitable arrangements will apply for the benefit of temporary agency workers, apprenticeships and directors employed under a contract of employment. An "automatic enrolment scheme" is either the new central Personal Accounts Scheme being established by the Government or a pension scheme established by the employer which meets the quality requirements contained in the Act. These requirements vary depending upon the type of scheme the employer has.

1. Personal Accounts Scheme The Act establishes the framework with most of the detail contained in regulations.

The Personal Accounts Scheme will be an occupational pension scheme established under trust. An, as yet, unnamed trustee corporation will act as trustee and may be given the power to make the rules of the Personal Accounts Scheme.

The Personal Accounts Scheme will have an annual contribution limit, which the Government has indicated will be initially set at £3,600. Members will not be able to take transfers from the Personal Accounts Scheme (and the statutory right to a transfer has been amended accordingly). Transfers to the Personal Accounts Scheme will also be restricted, although it is recognised that members may wish to make a lump sum contribution. The reason for this is because the aim of Personal Accounts is to be focused on moderate to low earners and not as a replacement for good quality employer schemes. However, the Government is committed to reviewing this in 2017.

The Personal Accounts Scheme will operate on a money purchase basis and employees will contribute four per cent, employers three per cent and the Treasury (in the form of tax relief) one per cent.

2. Money Purchase Occupational Pension Scheme

To qualify as an automatic enrolment scheme, a money purchase occupational scheme must be registered with HMRC and the employer must contribute at least three per cent of the jobholder's qualifying earnings. The total amount of contributions from both the jobholder and the employer must be equal to at least eight per cent of the jobholder's qualifying earnings.

3. Defined Benefit Occupational Pension Scheme

Defined benefit schemes must either be contracted-out or satisfy the "test scheme standard" to be an an automatic enrolment scheme. This requires the pensions for relevant members to be broadly equivalent or better than benefits provided under a test scheme. A test scheme must provide a pension at 65 calculated at 1/120th of the average of the jobholder's qualifying earnings for the three years preceding retirement, multiplied by pensionable service (up to a maximum of 40 years).

4. Personal Pension Schemes

If the scheme is a personal pension scheme then to qualify as an automatic enrolment scheme the employer must contribute at least three per cent of the jobholder's qualifying earnings in the same way as money purchase schemes. Where total contributions fall below eight per cent, the jobholder must make up the shortfall. The employer must comply with Section 111A Pensions Scheme Act 1993 and ensure that direct payment arrangements are in place setting out a record of the contributions payable, and that payments must be made within 19 days of the day following the last day of the month in which the deadline was made from the employees' earnings.

Opting out

A jobholder may opt out of automatic enrolment. However, the Act requires periodic enrolments (probably at three yearly intervals) unless the jobholder again opts out. Further, a jobholder who is outside of the age range for automatic enrolment, or has previously opted out may, by notice, require his employer to enrol him into an "automatic enrolment scheme". However, this can only be done once a year.

Workers who do not satisfy the qualifying earnings requirement can also require their employer to enrol them in the Personal Accounts scheme or a qualifying scheme, although the employer will not be required to contribute in either case.

Transitional arrangements

The full effect for employers of Personal Accounts will be phased in over three years. The employee contribution for money purchase or personal pension schemes will be one per cent for the first year and two per cent for the second year. For defined benefit occupational pension schemes, the Act requires the employer to make arrangements - to be detailed in regulations - so that a jobholder will become an active member with effect from the end of the transitional period. The detail of these arrangements is as yet unknown, but presumably the transitional period will also be three years.

Safeguarding employee's rights

Employers are prohibited from asking at interviews whether an applicant is willing to opt out of automatic enrolment. Further, an employer must not induce a worker to give up enrolment of a qualifying scheme without offering them membership to another relevant scheme, nor allow a worker to suffer a detriment because action was taken to enforce a worker's rights. It also becomes an offence for an employer wilfully to fail to comply with the duties regarding automatic enrolment, re-enrolment and the jobholders' right to opt in.

The Pensions Regulator is given a new statutory objective of maximising compliance with the Personal Accounts regime. The Regulator may issue a "compliance notice" directing the employer to take or refrain from taking certain steps in order to remedy the contravention. The Regulator will also have powers to issue penalty notices, including for failing to comply with a compliance notice or when the employer carries on prohibited recruitment conduct.

Removal of the stakeholder requirements With the introduction of the Personal Accounts regime there will no longer be a requirement on employers to designate a stakeholder pension scheme.

Changes to the Regulator's anti Avoidance powers

The Act introduces a new basis on which the Regulator will be able to issue a contribution notice where the Regulator considers that an act (or failure to act) is materially detrimental to the likelihood of a member receiving his accrued scheme benefits. This looks at the effect of an act (or failure to act) and removes the "fault" element as previously required. However:

1 the exercise of this power is subject to an assessment whether to use the power by reference to a list of specified factors. These include:

The value of the assets or liabilities of the scheme and the effect on the value of those assets or liabilities of the act (or failure to act);

The scheme obligations on any person and the effect of the act (or failure to act) on any of those obligations; and

The extent to which any person is likely to discharge those obligations to the scheme in any circumstances (including insolvency) and the extent to which that has been affected by the act (or failure to act).

2 the possible recipient of the contribution notice can rely on a statutory defence if it can be shown, after consideration of any possible detrimental impact, that it was reasonable to conclude that there was no such impact, or that all reasonable steps to eliminate or minimise such impact were taken.

3 a draft Code of Practice has been published by the Regulator for consultation setting out the circumstances when it will use the new power. It lists the following occasions: when the scheme is transferred out of the UK, transfer of the sponsoring employer out of the UK where this results in a material reduction in employer support or legal or regulatory protection for its members, the removal or substantial reduction of employee support (effectively "scheme abandonment"), the transfer of liabilities to another scheme which does not have sufficient employer support or is not sufficiently well funded and where the operation of the scheme or a business model is designed to create a financial benefit for the employer (or some other person from the scheme) where inadequate account has been taken of members' interests.

The consultation period ends on 6 February 2009. The material detriment test will be brought into force by commencement order at the same time as the final Code of Practice. It will have retrospective effect from 14 April 2008.

The draft code is available at http://www.thepensionsregulator.gov.uk/pd f/MaterialDetrimentCOPConDoc.pdf.

The Act has made several other changes to the Regulator's existing anti-avoidance powers:

A contribution notice can now refer to a series of acts as well as a single act. (This was likely to be the interpretation the courts placed on the legislation in any event);

Previously the Regulator could only issue a contribution notice where, otherwise than in good faith, an employer prevents a section 75 debt becoming due, compromises or otherwise settles such a debt, or reduces the amount of such a debt which would otherwise become due. The "otherwise than in good faith" will now be removed;

The Regulator's power to issue a financial support direction where an employer is insufficiently resourced is to be amended so that they can now be issued where two or more group companies have sufficient resources to meet the difference between the resources of the employer and half the estimated section 75 debt; and

The Regulator can now issue a contribution notice or financial support direction in relation to a scheme which has received a bulk transfer of members from another scheme, if the criteria for a notice or financial support direction would otherwise have been met in relation to the transferring scheme.

Pensions Regulator powers: Appointment of independent trustees

When deciding whether to appoint an independent trustee, the Regulator need now only be satisfied that it is "reasonable" to appoint the independent trustee as opposed to "necessary". Further, the circumstances when the Regulator may appoint an independent trustee have been extended to include occasion when the Regulator considers it reasonable to do so in order to "otherwise protect the interests of the generality of the members of the scheme". This will make it easier for the Regulator to appoint an independent trustee.

Pensions Regulator powers: technical provisions

The Regulator's power to intervene where a scheme's technical provisions have been improperly determined have been extended. The Regulator will be able to intervene when the trustees, in determining the methods and assumptions to be used in calculating a scheme's technical provisions, have failed to take into account matters and principles set out in the Occupational Pension Schemes (Scheme Funding) Regulations.

PPF pension compensation on divorce

Compensation payable from the Pension Protection Fund will now be included in a member's "shareable rights" and be subject to a pension-sharing order following divorce proceedings or dissolution of a civil partnership.

Simplification of contracted-out rights

Section 15 of the Pensions Act 2007 introduced provisions not yet enacted, to abolish contracting-out on a defined contribution basis. Under the Act, there will no longer be a requirement to keep separate records of members' Protected Rights (which are the part of a member's pension that derives from rebates from National Insurance Contributions by virtue of the scheme being contracted-out). This section is likely to come into force at the same time as the Pensions Act 2007 provisions.

Safeguarded rights, which are the accrued contracted-out rights attributable to a pension credit following a pension-sharing order, are to be abolished entirely under the provisions of the Act. This section is likely to take effect in 2012.

The Financial Assistance Scheme ("FAS")

The temporary ban which prevented trustees of schemes eligible for the FAS from buying annuities was due to expire on 25 June 2008. The Financial Assistance Scheme (Halting Annuitisation) Regulations 2007 provided that trustees would be unable to buy annuities on behalf of scheme members for a period of nine months unless the trustees had already entered into a binding commitment to purchase the annuities or FAS had approved the deal. The Act extends the ban on purchasing annuities indefinitely, subject to the two same exceptions.

The FAS will also be widened to include a small number of schemes which are currently ineligible for either the FAS or the PPF. The schemes which will be covered by this extension started winding up after 5 April 2005, but their employers experienced insolvency events before that date.

Pensions revaluation

The pension of a deferred member is revalued by the lesser of RPI and five per cent for the period from leaving pensionable service to normal pension date. This increase is deigned to ensure that the deferred pension maintains its purchasing power. The Act relaxes this requirement so that for pensionable service after the sections come into force, revaluation will be at the lesser of RPI and 2.5 per cent. This will mean that members who leave pensionable service after it comes into force - expected to be April 2009 - will have two tranches of pensions revalued at different rates. The saving in the cost of schemes will therefore come at the price of increased complication in administration.

This brings revaluation in line with the statutory requirements on increases to pensions in payment. The Pensions Act 1995 introduced increases of the lesser of RPI or five per cent for the pension earned from 6 April 1997. The Pensions Act 2004 allowed schemes to reduce this to RPI or 2.5 per cent for service from 6 April 2005.

Some schemes may need to amend their rules to take advantage of this change, in which case the 60 day consultation requirement may be triggered.

Interest payments on late payment Of levies

The Board of the PPF will be able to charge a prescribed rate of interest on late payment of the Pension Protection Levy (and also waiver of interest charges in certain circumstances). The Board will also be able to charge interest on late payment of the Fraud Compensation Levy, the PPF Administration Levy, the PPF Ombudsman Levy and the General Levy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

UK: The Pensions Act 2008