As the UK government moves to ensure the UK (and its employers) save for retirement and issues more consultation on the new regime planned for 2012, now is the time for employers to plan for the new financial and administrative burdens.
With the number of people aged 65 or over expected to almost double by 2055 UK government figures suggest that around 7 million people are not saving enough to ensure the retirement income they want or expect. The new personal pension accounts regime looks to employers to operate and contribute to arrangements to address this financial time bomb.
Personal accounts –automatic enrolment of employees, temps and agency workers
All UK employers will be required to establish a personal accounts scheme in the workplace and automatically enrol “jobholders” into the new personal accounts scheme or their own registered pension scheme. The obligation will arise in respect of jobholders above the age of 22. “Jobholders” include all employees, temporary workers and agency workers.
Employees are to be enrolled in a personal account within 14 days of their employment beginning but there will then be a 30 day period during which they will be able to opt out of the arrangement and be given a refund of any contributions already deducted. Employers must not discourage their employees from joining a pension scheme and run the risk of suffering a severe financial penalty if they do so.
By requiring an opt-out from jobholders the government seems to be relying on employee inaction to swell the ranks of those participating, in effect by default.
Personal accounts will be administered centrally through irrevocable trusts on a not for profit basis by a Trust Corporation. The precise arrangements are being established by the Personal Accounts Delivery Authority (“PADA”).
Minimum level of contributions
An employer will have to contribute a minimum of 3% and there will be a minimum contribution level of 8% of “qualifying earnings”. However, jobholders and employers may decide to contribute above the minimum. “Qualifying earnings” are expected to be those between £5,035 and £33,540 on current rates.
An upper limit will be established (currently proposed at £3,600) for contributions for each tax year which will be revised annually in line with inflation. This will be reviewed in 2017 along with the ban on transfers into and out of the arrangements (see below).
Contributions will attract tax relief for both employer and employee.
Fully portable but a ban on transfers
An important feature of the new arrangements is that a personal account is fully portable. Jobholders can continue to participate when they move from one employment to another. There are plans to allow employees to participate in a personal account even though their earnings may not be high enough to reach the qualifying level. There is also a possibility that the arrangements will be open to self-employed individuals but we require further details on this.
Transfers in and out of the arrangements will be banned, except in some special circumstances such as at retirement.
Employers with an existing pension scheme or with an alternative pension set up to operate from 2012 will be deemed suitable as long as the contributions payable to such a scheme are at least at the level required under the personal account scheme and they meet the other qualifying requirements currently being consulted upon. Employers will need to notify the PADA of any alternative arrangement to a personal account.
More costs and complexity for employers
Employers face extra costs for contributions for agency workers and those to whom they currently contribute less than the proposed minima.
In addition, there are the significant costs of compliance generally as employers struggle to get their heads around the bewildering complexity of the draft legislation currently being consulted on by the Department for Work and Pensions.
Employers need to plan for these costs and start preparing for the administrative burden – they may be tempted to see if implementation survives if a new government is elected in the June 2010 UK General Election.
Not necessarily a good thing for low paid workers
At present an individual who retires with only the state pension as an income is almost certain to be guaranteed some other benefits such as housing benefit, pension credit or income support. It is difficult to see why such an individual should be persuaded to contribute to a personal account – he may well generate some additional pension but as long as that amount is deducted from the top up state benefits he already receives. The government may have a major battle on its hands to persuade the low paid that the personal accounts legislation is a good thing for them rather than a way for it to reduce its social security bill.
Department for Work and Pension Consultations
For further information and to discuss possible strategies for the new legislation please contact Jim Yuill (email@example.com) or Guy Abbiss (firstname.lastname@example.org) on +44 (0) 203 051 5711.
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