Pensions changes

Personal accounts are on their way

The introduction of personal accounts will have an effect on every employer in Britain.  Having one employee will mean that the rules will apply.

 Those employers who already offer employees a pension scheme will will have to ensure that their existing scheme is a Qualifying Workplace Pension.  At the very least they will have to ensure it is exempt and amend their administration systems to be compliant.  This will include auto-enrollment for all employees.

 Those that do not currently offer employees a pension scheme, or those whose schemes do not pass the scheme exempt test and are therefore not considered to be qualifying workplace pension schemes will have to act to comply.  This may include the additional burden of budgeting for, and introducing an employer pension contribution.  This will apply whether employers pay this contribution to an approved "personal account" scheme, or an alternate exempt arrangement.

 This contribution has been set for employers at 3% of band earnings, currently described as 3% of employee earnings between £5,000 and £33,500.

 Employers will be able to phase this in, starting at 1% in 2012 and increasing by 1% in each of the following 2 years.  In addition, each employer will need to offer an auto-enrolment facility for all members of staff which will need to be in place by the beginning of the 2012 tax year.

 The employee will need to contribute 4% of salary, unless they elect to opt-out of the scheme, while HMRC will contribute a further 1% by way of tax relief.  This 8% contribution will have to be paid into a personal account scheme unless the employer already has, or introduces an approved alternate pension scheme.

 It has recently emerged that the planned Personal Accounts will not be fully implemented until 2016, four years later than originally envisaged.

 Eligible employees for Personal Accounts are aged 22 to state pension age and working full or part time.  All workers will have to be put into the scheme, in which 4 per cent of their salary is taken away to be invested in their pension, with the employer having to put in a further 3 per cent of salary.

 However, the Department for Work and Pensions has recently announced that employers will have to contribute only 1 per cent in 2012 and increase their contribution to 2 per cent three years later; the full 3 per cent isn't due until 2016.

 Employers with an existing pension arrangement

If an employer currently pays into a pension scheme, they will want to know if their scheme is "good enough" to allow them to effectively ignore personal accounts legislation and to largely carry on as you do currently.

 In order to establish this it is expected that some sort of scheme exemption test will be created.  Employers who pass this will probably only have to make small changes if any, for example they may have to introduce an auto enrollment facility.  The exact format of any such test is yet to be clarified but it is likely to include the following: 

1. Are employer contributions 3% or more of employee earnings (this may be total earnings and not band earnings)?
2. Do emplyees currently pay 4% or more into the arrangement?
3. What will the investment choices be?
4. How will opt out be catered for?
5. Is the current reporting system compliant?

Employers without existing pension arrangements

If employers do not pay into a pension scheme, the plain fact is that they will have to start in 2012, and by 2016 you they be paying 3% of band earnings.  Proactive employers may want to discuss planning for this cost and discuss ways to gain value from an expense that will have to be met.

 For example, if they were already thinking of introducing a pension scheme for the purposes of staff recruitment and retention, will the personal accounts proposal meet your goals of being better than the competition? or will compliance just make you legal.

 Issues they may consider are: 

1. Why do they wish to offer a contributory pension scheme, and what you hope to gain from it?
2. Do you want professional advice from a financial adviser to help your staff understand the benefits?
3. What are the charges?
4. What are the investment options?  How many funds etc.
5. Is on-line access important?
6. What admin can you cope with in-house, what would you prefer to outsource.

It may be that as a result of these issues, they decide that they would like to implement a scheme which is exempt from the personal account pension legislation.  The details of what will make a scheme exempt have not been finalised, however, current thinking is that one issue will be that contributions will need to be 8% of total earnings, not just salary, which is a very big difference.

 This based on current understanding many pension providers are yet to commit to actually getting involved - the nature of the scheme means that it will be very "low cost" and therefore many will not be in the market - because its not profitable - the same as happened with Stakeholder schemes.

 Over the next few months we should get a firmer idea on where the contributions can be invested and the level of costs - then we will probably see providers come forward with compliant Personal Account plans.

Please contact us if you have any questions on this, and we can put you in touch with an independent financial advisor who can assist you.