The Pensions Regulator

Q&As: Pensions reform

Here we provide some Q&As on pensions reform, grouped together under the following subjects.

Background
Communications
Qualifying schemes
Auto-enrolment
Opting out
Opting in
Inducements
Compliance with the employer duties
Leaving a scheme
Responsibilities across Government

Note: This is our understanding of the current position and it should not be relied upon as a definitive interpretation of the law. The requirements may change as regulations are introduced.

The Act means the Pensions Act 2008 unless stated otherwise.

Background

What is pensions reform aiming to achieve?
The reform is aiming to encourage greater private pension saving, particularly amongst those on low or moderate incomes.

The Pensions Act 2008 takes these reforms forward and includes a duty on employers to automatically enrol their eligible employees into a good quality workplace pension scheme and provide a minimum contribution.

Automatic enrolment is designed to overcome the fact that many workers miss out on valuable pension benefits because they do not apply to join their employer's scheme, or their employer does not offer them access to a workplace scheme.

The Act also allows for the establishment of the personal accounts scheme, a simple, low-cost pensions savings vehicle.

How will it affect the individual worker?
Individual workers, if they are eligible jobholders, will be automatically enrolled into their employer's pension scheme.

This means that the employer must make all the arrangements and the individual need do nothing in order to be put into the scheme. When the system reaches maturity, their employer must also contribute at least 3% of their employees' pay to the scheme.

The individual may choose to opt-out of saving if they wish. To help ensure that the employer's scheme is of a suitable standard it must meet a number of qualifying criteria.

How will it affect an employer?
An employer will need to ensure that they provide a qualifying scheme and automatically enrol all their eligible jobholders into the scheme when the duty starts.

An employer will be required to pay a minimum contribution of 3% of a jobholder's qualifying earnings into the scheme (although this contribution will be phased in during implementation).

I'm a professional adviser to an employer, what will I have to do?
You will have a key communications role in informing your client about their responsibilities in the new regime. Employers will probably come to you first to find out what they need to do.

The Pensions Regulator will support you in helping communicate the changes.

When will it all start?
The employer duties are being introduced in 2012 when there will be a staggered implementation called staging.

To avoid a 'big-bang' launch, the duties are expected to be introduced for largest employers first, based on PAYE data. The detail of how staging will work is being developed with the DWP and PADA and will be consulted on in 2009.

Will the policy be reviewed after 2012?
The DWP will monitor the effectiveness of the regime from 2012, so that they can identify whether there are any areas for improvement.

A public commitment has been made to review a number of policies of the personal accounts scheme in 2017.

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Communications

How will employers be informed about their new responsibilities?
The Pensions Regulator will be responsible for ensuring employers are aware of their duties and how to comply with them. We will use a programme of targeted communications campaigns to ensure this.

Our campaigns will target both employers and intermediaries – such as accountants, advisers and trade associations – who employers are likely to turn to for information and advice.

Will the Pensions Regulator provide individual advice to employers?
Our communications campaigns will be targeted to the requirements of the particular employer groups.

We will focus our activities on educating and enabling employers to comply with the requirements. Information and advice will be available to individual employers from our website and customer contact centre.

Who will communicate the new requirements to employees?
The DWP will be responsible for keeping employees informed about how the pensions reforms will affect them. We also expect that Trade Unions and advisory bodies such as The Pensions Advisory Service and Citizens Advice Bureau will play a role.

In addition the law will require employers to provide information to their employees about how automatic enrolment will affect them.

When will the regulator's communications campaigns start?
Our communications will start in 2010, two years ahead of the new employer duties being introduced.

We'll target intermediaries initially to ensure they are able to advise employers, and then employers directly.

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Qualifying schemes

What is a qualifying scheme?
Qualifying schemes are pension schemes that satisfy the quality criteria prescribed in the Pensions Act 2008.
The criteria establish a minimum standard for the level of contributions made to the scheme or the level of benefit provided. This will help ensure that the schemes into which employers automatically enrol their staff will put them on track for a reasonable level of pension saving.

There are different quality standards depending on whether the scheme is defined benefit (DB), defined contribution (DC), or hybrid. The basic elements of the tests are as follows although further details will be added in regulations.

Defined benefit schemes
There are 2 ways in which DB schemes can qualify.

All schemes that are contracted out of the State Second Pension (S2P), ie they hold a valid contracting-out certificate, will meet the quality requirement.

Schemes whose members are not contracted-out of S2P must meet the Test Scheme Standard. This standard requires an employer to compare the benefits their members will receive with those received from a hypothetical benchmark known as the Test Scheme. The Test Scheme has an accrual rate of 1/120th.

Defined contribution schemes
To qualify, a DC scheme must require contributions worth at least 8% of a jobholder's qualifying earnings in the prescribed pay reference period, of which the employer contribution must be at least 3%.

Hybrid schemes
Hybrid schemes must satisfy the DB and DC tests in proportion to the benefits that are defined benefit and defined contribution.

What makes a pension scheme suitable for automatic enrolment?
A scheme may only be an automatic enrolment scheme if it is a qualifying scheme and jobholders are not required to make any choices or provide any information in relation to joining or remaining a member of the scheme.

This means that a jobholder cannot be required to complete an application form before they can be enrolled.

Not all schemes need to be used for automatic enrolment. An employer can choose to use a combination of schemes to meet their duties across their workforce. For example a DB scheme closed to new members can still qualify for its existing members

Can a group personal pension (GPP) be used as an automatic enrolment scheme?
Yes, contract-based workplace personal pensions such as GPPs can be used. It is expected that regulations will deem the contract between the jobholder and the provider to have been made automatically when certain information requirements to the jobholder have been satisfied.

Personal pensions must meet the same contribution requirements as other DC schemes.

What are the implications for employers with existing pension schemes?
The new duties require employers to enrol all of their eligible staff into one or more qualifying schemes. Employers with an existing scheme will need to understand whether their scheme qualifies.

The employer can then decide whether they want to use their existing scheme to enrol any workers who are not currently members, or whether they want to open a separate scheme to fulfil their new obligation.

What happens if my scheme's rules don't include bonuses and overtime in the definition of pensionable pay?
The Act defines qualifying earnings as including fluctuating pay elements such as overtime, bonuses and commission.

It is recognised that many schemes do not include these elements in their definition of pensionable pay, but that the overall level of contributions received by an individual will still be at least as good as that required by law.

The DWP have therefore legislated for an alternative standard that allows an employer to certify that their scheme will meet the qualifying test for all individuals without having to change their scheme rules.

Full details of how certification works will be in forthcoming regulations.

What will happen to an employer who currently pays more than 3% to a scheme but decides to pay only 3% when the reforms are introduced?
This is often referred to as 'levelling down'. As long as the legislative minimum is met there is nothing to prevent this happening, although employers may need to consult their employees before doing so.

However, many employers offer more for than 3% for the benefit of their workforce and the Government's reforms have been designed to minimise the risk of 'levelling down' by employers with existing schemes.

Will charges made by qualifying schemes be similar to those for stakeholder pensions?
The personal accounts scheme that is being set up by the Government is aiming to have a low annual management charge of about 0.5%.

The Act doesn't set charging requirements for qualifying schemes because the Government doesn't want to discourage good existing provision which may have charges above that level.

However, the Act does contain a reserve power, which would allow DWP to prescribe charging levels if there was evidence that excessive charges were being imposed on members who had been automatically enrolled.

How are contributions going to be collected?
Once an employer has automatically enrolled its workers into the scheme(s), the scheme will include a contribution schedule.

The employer has to pay over the employee and employer proportions of the contributions in accordance with the schedule.

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Automatic enrolment

What is automatic enrolment?
Automatic enrolment is the core employer duty of the pensions reform. It means that employers must ensure that they provide a qualifying scheme and that they must then automatically place all their eligible employees into that scheme.

When does automatic enrolment start?
The automatic enrolment duty will be introduced in 2012.

However, the introduction will be staggered, with large employers expected to come in first, followed by medium, and then small and micro employers. Employer size will be based on PAYE scheme size.

Due to the large number of small and micro employers, there may need to be further divisions to make the stages manageable. The regulator and the DWP are working on how this will be done.

The detailed implementation strategy will be in regulations.

What is registration?
Registration is a duty on employers to tell the regulator which pension scheme they are using to comply with the duties. This will help us to identify employers who are not complying.

Which 'eligible' employees have to be automatically enrolled?
The law applies to 'jobholders'. A jobholder is broadly defined as a worker who works, or ordinarily works, in Great Britain, who is aged at least 16 and under 75, and to whom qualifying earnings are payable by the employer.

The qualifying earnings band is currently between £5,035 and £33,540 in each pay period. From 2012, a jobholder who reaches 22 and who has not reached pensionable age must be automatically enrolled in a qualifying scheme by the employer.

Won't the compulsory contribution levels be a big financial shock for both employers and employees?
The minimum contribution levels are not being introduced in full at the start. Instead they are being 'ramped-up' to help employers and employees adjust to the cost. This is being referred to as 'phasing'. For DC schemes the obligations will be built up over three phases:

• Phase 1 – employer pays 1%, worker pays 1%
• Phase 2 – employer pays 2%, worker pays 3%
• Phase 3 – employer pays 3%, worker pays 5%

Each phase will last at least a year – the exact length will be set in regulations.

Why is automatic enrolment different to how a person joins their employer's scheme now?
The key difference is that the jobholder cannot be required to make any choices or provide any information in relation to joining or remaining a member of the scheme. In effect this means they must not be required to give any consent or make any application before being accepted into the scheme.

A jobholder will have the opportunity to opt-out of the scheme for a period after they have been enrolled. If they do they will get a refund of the contributions they have made.

Can employees be automatically enrolled into a scheme ahead of 2012?
Some occupational pension schemes already have a form of automatic enrolment built into their rules.

Employers may have made the fact that an employee will be automatically placed into the pension scheme part of their contract of employment. This does not stop the employee from deciding to leave the scheme if they wish.

Legislation currently prevents automatic enrolment into a contract-based scheme such as a group personal pension. However, providers can offer a 'simplified' joining process which reduces the employee's involvement but still requires them to give consent to having pension deductions taken from their pay.

What about temporary, fixed term, part time and foreign workers?
Whether a jobholder is a worker, and therefore falls under the requirements, is defined in the Act.

A worker is defined as an individual who has entered into, or works under, a contract of employment or any other contract by which an individual undertakes to do work or perform services personally within Great Britain. It does not matter whether it is a temporary, fixed-term or part-time contract or whether the contract is express or implied, oral or written. Agency workers are specifically included within the system.

Special rules apply to company directors, members of the armed forces, Parliamentary staff, police officers, persons working on vessels, and people in offshore employment. Genuine professional-client or business-customer relationships are explicitly excluded from the system.

Further clarification as to which categories of workers are, or are not, included within the system may be provided in future regulations.

What will happen about employers who are registered abroad?
The issue of cross-border schemes is complex and an employer should take advice about how the law applies to them.

As a basic principle though, where a jobholder is working in Great Britain, the employer is obliged to auto-enrol them into a qualifying scheme – that applies no matter where the employer is based. For example, if an employer is in France yet the jobholder works in Great Britain, the French employer (or their UK subsidiary if there is one) must auto enrol that jobholder.

Will the same rules apply to Scotland?
Yes. The Pensions Act 2008 will apply throughout Great Britain. It is expected that the devolved parliament in Northern Ireland will also pass legislation implementing it there.

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Opting out

How will a jobholder tell their employer they want to opt out?
There will be a period of time after the jobholder has been automatically enrolled during which they may choose to opt out of their employer's scheme.

Before they can opt out they must be provided with certain information about the scheme they have been enrolled into. This is to ensure that a jobholder fully understands the effect and benefits of auto enrolment before deciding to leave the scheme. If they choose to opt out the jobholder will receive a refund of any contributions made.

The process for opting out (what form of notice is required and to whom it is sent etc) will be prescribed in regulations.
 
Why should people be able to opt out at all? You can't opt out of PAYE or NI contributions.
The Government's proposals follow the recommendations made by the Pensions Commission. Individuals are free to decide whether or not to save in a private pension. Outright compulsion is unlikely to work in the best interests of everyone because people's circumstances and preferences vary.

If an employee opts out then does the employer have to still pay the contribution?
No. If an employee chooses to opt out of pension saving then the
employer is no longer liable for their 3% contribution.

What do employers do if people choose to opt out?
The employer must ensure that the prescribed opt-out process is followed.

This means deduction of the employee pension contributions must be stopped by the employer and the necessary notifications made to the scheme.

The employer must refund any contributions deducted prior to the employee deciding to opt out during the opt-out period within a prescribed period of time.

The employer will be required to ensure that the employee is automatically re-enrolled into the scheme within the prescribed period of time to be outlined in the regulations.

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Opting in

If an employee is under 22 and isn't automatically enrolled, can they require their employer to put them into a qualifying scheme?
Yes, any jobholder aged between 16 and 22 may choose to opt in to their employer's pension scheme. The process for opt-in will be prescribed in regulations.

Are part-time workers who don't earn the minimum level of qualifying earnings excluded from pension saving?
No, they can require their employer to arrange for them to become a member of a pension scheme.

However that scheme does not have to be a qualifying scheme and there is no requirement on an employer to pay contributions themselves.

Inducements

What is inducement?
Inducement is considered to be any action taken by an employer for the sole
or main purpose of encouraging an individual to opt out of, or cease being an active member of, a qualifying pension scheme.

Would an employer who offers flexible benefit packages be considered to be inducing staff to opt out? What about offering a company car or holiday instead of a pension?
An employer who offers a flexible benefit package which offered alternative
benefits instead of the basic 3% employer contribution could be at risk of
breaching the inducement clause.

An employer is of course free to offer alternative benefits in addition to the 3% pension contribution, but may breach their duty if such rewards were offered in a way that they were mutually exclusive to the minimum 3% pension contribution.

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Compliance with the employer duties

Why was the Pensions Regulator given the role of overseeing employer compliance?
The DWP announced in November 2007 that the regulator would be given this role, as explained in their press release issued at the time.

What approach will the regulator take to enforcing compliance with the employer duties?
Our approach will focus on educating employers about their duties and helping them to comply.

Through enabling employers to comply we hope to establish a culture whereby they consider their pensions duties as a normal part of their business.

If we need to take action it will be risk-based, and we will use our powers proportionately. Use of our powers will aim to demonstrate to the compliant employer that those who fail to comply do get caught. This will ensure fairness, and will ensure that compliant employers feel good about their decision to comply with the law.

Will the regulator be able to fine employers for failing to comply?
The regulator has been given a range of new powers in the Act. This includes the ability to issue notices which impose financial penalties.

However, the first step will usually be for the regulator to issue a compliance notice of some sort formally directing an employer to comply with a relevant legal duty, or to make the required contributions to the relevant pension scheme.

Where an employer continues not to comply with such a formal notice, they may receive a fixed penalty or an escalating penalty. A fixed penalty will be a fixed amount. An escalating penalty will continue to accrue day-by-day until the employer remedies their non-compliance.

Will advisers be expected to 'police' employer compliance?
Whilst there will be a whistle-blowing facility to report non-compliance, there is no statutory duty on advisers to whistleblow to the regulator if they become aware of an employer's non-compliance.

The existing duty on advisers to report breaches of scheme administration requirements to the regulator under s70 of the Pensions Act 2004 will continue to apply.

What sort of protection will there be for employees who whistleblow?
Employees who whistleblow against their employer are protected by the Public Interest Disclosure Act 1998. Broadly this means that an employee cannot suffer detriment from their employer if they whistleblow that the employer is breaking the law. You can find out more about the protection provided by this Act on the Public Concern at Work website. 

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Leaving a scheme

What is the earliest age you can draw benefits from a scheme?
In the UK, individuals are allowed to take 25% of their pension funds, tax
free, as cash on retirement, but are required to use the remainder of the fund to secure an income stream, typically by purchasing an annuity.

Currently, an annuity can be purchased from age 50 and an individual must have secured an income by age 75. This age threshold will rise to 55 in 2010.  

What about pension sharing on divorce?   
The law is being changed to extend pension sharing to include compensation payable from the Pension Protection Fund. Otherwise, pension sharing on divorce is largely unaffected by the 2012 pension reforms.

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Responsibilities across government

What is the Pensions Regulator's role?
The Pensions Regulator is the UK regulator of work-based pensions. The Pensions Act 2004 gives us 3 main statutory objectives:

• to protect the benefits of members of work-based pension schemes;
• to promote good administration of work-based pension schemes; and
• to reduce the risk of situations arising that may lead to claims for compensation from the Pension Protection Fund.

In order to meet these objectives, we concentrate our resources on schemes where we identify the greatest risk to the security of members' benefits.

The Pensions Act 2008 will give us a new objective to maximise compliance with the new employer duties, as well as 2 new safeguards to protect employees who want to save in a pension. We are currently developing our approach to making sure employers comply with their new duties.

What is the Personal Accounts Delivery Authority's role?
The Personal Accounts Delivery Authority's (PADA's) role is to set up a new national occupational pension scheme currently known as 'personal accounts'.

Personal accounts will be a trust-based scheme, run by a trustee corporation and independent of government. It will be a qualifying scheme under the government's reforms and is intended to complement existing workplace pension provision.

PADA's website provides more information.

What is the Department for Work and Pensions' role?
The DWP is the government department responsible for the development of UK pension policy and the law governing UK pension schemes.

The department sponsors a wide range of public bodies to achieve its objectives including the Pensions Regulator and PADA.

What is the Financial Services Authority's role?
The Financial Services Authority (FSA) is an independent non-governmental organisation responsible for regulating financial services. This includes the regulation of the sale and marketing of personal and stakeholder pensions to individuals.

The FSA also oversees the financial viability of organisations that manage pension investments, and can take action to make sure that the individuals who run financial organisations are fit and proper for the task.

How is input to consultation shared between DWP and the regulator?
Responses to public consultation exercises run by either DWP or the regulator are usually published unless the respondent indicates that they would prefer not to be identified.

Any information given in confidence to either body will be respected.

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