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Back in 2001 the government decreed that companies with five or more ‘relevant’ employees must designate a stakeholder pension plan unless there was already an acceptable pension scheme in place. The idea was to get low and middle earners to actively save for retirement. As there was no requirement for either the employer or the employee to pay any money into these stakeholders, many of them have never seen a single contribution and lie empty.
This time the government means business and from 2012 it will introduce a new nationwide occupational pension scheme called Personal Accounts. It will be a low charge arrangement with a basic fund range including a default fund.
All ‘eligible’ employees will be auto-enrolled into Personal Accounts albeit with the ability to opt back out. For those employees who decide to stay in Personal Accounts the employer and employee will both have to make compulsory contributions. Those who opt out will be auto-enrolled again, probably after three years. They’ll again have the chance to opt out at this stage.
The contribution amounts will be based on band earnings and be set at 3% from employers, 4% from employees with an additional 1% coming from tax relief. It is planned that these contribution levels will be phased in over the first three years. Annual contributions will be capped at a level of around £5,000 per annum. Personal Accounts will not allow transfers in or out at least for the first 5 years.
Eligible employees are those between age 22 and the state pension age, and earning above approximately £5,000 a year. There won’t be a waiting period before auto-enrolment into personal accounts. Those aged between 16 and 22 will be allowed to opt in to personal accounts and, if they do, employers have to contribute for them.
The employer does not have to go down the Personal Accounts route if they have a ‘qualifying’ work place pension. To be classed as a qualifying scheme, defined benefit schemes would need to offer a minimum level of benefits (along the lines of the Reference Scheme Test). Defined contribution schemes, such as group personal pensions, would need to offer at least the same total level of contributions as the Personal Accounts scheme. Employees would still need to be auto-enrolled into the qualifying scheme. Qualifying pension schemes can have a waiting period of up to three months before auto-enrolment.
There was concern that the European Union Distance Marketing Directive and Unfair Commercial Practices Directive did not allow auto-enrolment into contract based schemes such as group personal/stakeholder pension schemes. This would have a major impact on the proposed pension reforms and the Government has sought clarification from the EU Commission. On the 16th of May the Department for Work and Pensions announced that the EU Commission had confirmed that auto-enrolment into contract based schemes would be consistent with European law.
Advisers with an understanding of the 'qualifying scheme' exemptions can help employers alter existing schemes (if necessary) or implement new schemes that satisfy the new rules and may be a better match for employer/employee needs than the default Personal Accounts route. Schemes that exceed the minimum qualifying requirements may be more efficient to administer over time and also do more to enhance the employer's market standing.
Over the coming year employees will start to hear more and more in the media about the move to compulsory contributions. So if, as a company, you don’t currently make contributions there is still time to be ahead of the wave of new pension regulations and be seen to be a caring, generous employer. Or you could wait and look as if you have been reluctantly forced into it!
As this is a summary of the main points we can email you a full factsheet on request. The details provided in this article are based on our current understanding of the situation and are liable to change in the run up to 2012.