The Impact of Personal Pension Accounts for Employers
On 6th April 2006, new rules came into effect governing pensions. Under the aptly named ‘Pensions Simplification’ legislation, the new rules aimed to offer simpler and more flexible retirement arrangements than was currently in place. The many existing sets of rules governing the taxation of pensions were replaced by a single, universal regime. For the first time, everyone was able to save in more than one pension scheme at the same time. With effect from this date, there was also no limit on the amount of money you can save in a pension scheme although there was a limit on the amount of tax relief that could be received.
Whilst Pension Simplification introduced important legislation, the impact it has had on both employers and their pension schemes has tended to be quite minimal.
From 2012, all employers will have to enrol all employees automatically into a pension scheme, unless the employee opts out or is aged under 22 or earning under £5,000 a year.
The government’s strategy for Personal Accounts was unveiled in its White Paper in December 2007. www.dwp.gov.uk Clarity on the likely pensions regime after the introduction of Personal Accounts in 2012 is beginning to emerge, but slowly. What is apparent already however is that Personal Accounts are likely to impact on almost all UK Employers as well as many existing employer sponsored pension arrangements.
There is still great deal of discussion ongoing behind the scenes on how Personal Accounts can be made to work whilst minimising disruption to existing pension provision. The following paragraphs seek to outline some of the key features and highlight the importance of seeking suitable advice to plan for the introduction of such accounts in 2012.
Personal Accounts – Progress so far
The legislation introducing the Personal Accounts regime – what is likely to become the Pensions Act 2008 – has struggled to get Parliamentary time and will not be finalised until the autumn. This will be followed by regulations, with drafts of those setting out in more detail the compliance regime for employers likely to start appearing before the end of 2008. There will also be a draft Scheme Order and Rules, possibly in early 2009, which will formalise more details of Personal Accounts, including contribution limits.
Key Aspects You Need to Know About Personal Accounts
- Personal Accounts will be pension arrangements organised (but not administered) by the Government effective from 2012. In other words, the government has designed the scheme but plans to privatise the operation of Personal Accounts
- It is expected that employees will be provided with generic information and therefore, no face-to-face advice will be offered. This means that it is unlikely that there will be any checks as to the suitability of the arrangement based on individual circumstances.
- Employees aged at least 22 and earning over £5,035 (in tax year 2006/07 terms, and increased in line with earnings) will automatically be enrolled into Personal Accounts unless other pension provision makes their employer exempt or the employee chooses to opt out.
- The basic contribution level is 8% of “Qualifying Earnings”, with the employee contributing at least 4%, the employer having to pay in at least 3% and 1% coming from the Government in tax relief. The contribution requirements will be phased in over 3 years.
- Additional contributions will be allowed as long as the total is not more than £3,600 in a tax year. The maximum contribution will be increased in line with earnings from 2005. There may be scope to pay more in the first year and/or for one-off special contributions later.
- Personal Accounts are only one way in which employers can meet the requirement to provide pension arrangements for their staff with effect from 2012. Alternatively, employers can be exempt from offering Personal Accounts if they offer alternative pension provision that is deemed at least as good as Personal Accounts.
- Employers will need to consider whether their existing pension schemes qualify. A large proportion of current pension arrangements typically base contributions on basic salary (including the first £5,035). Although this may give higher contributions for some employees, for middle-earners with high non-salary earnings (i.e. overtime and bonuses) the contributions could be lower. There now appears to be a real will to resolve this position, not least because it could leave many people significantly worse off if existing pension arrangements move to the Personal Accounts definition. Additionally, some employers may find that their pension contribution is below the minimum requirement for some staff.
- Another key aspect that employers may need to look at is 'waiting/probationary periods'. This relates to the length of time an employee has to work for before being eligible to join the pension scheme. There is no waiting period for Personal Accounts and the government is proposing a maximum waiting period of 3 months for exempt pension schemes. However, if there is a waiting period the minimum contribution rate may be higher. Mike O’Brien, the Minister for Pensions Reform, suggested in a House of Commons debate that the minimum employer contribution in this case might be 6%, but that has not yet been finalised.
- Employers should be aware that more staff will join the pension arrangements if they are automatically enrolled than if they have to apply to join. This could increase costs and businesses will potentially need to plan for this for cashflow purposes.
Personal Accounts – In Summary
With Personal Accounts still around 4 years away, the current issues they raise for employers may at first sight appear relatively limited.
However, the results of a recent survey conducted by the Association of Consulting Actuaries (ACA) and published on the 4th September 2008, highlighted that employers should have more than just awareness of Personal Accounts. The survey was completed by 394 firms with 250 or fewer employees.
The startling findings featured in the report including the following
- majority of existing smaller schemes would fail the personal accounts exemption test
55% of the firms stated that their current pension schemes would fall short of the Personal Accounts exemption test, with over 60% paying lower contributions than proposed for personal accounts
- pension contributions are well below 8% in smaller firms
where a workplace scheme is offered in firms employing 50 or fewer staff, average combined employer and employee pension contributions are below 5% of earnings. The survey also highlighted that 1 in 5 of these 1.2million firms run such a scheme.
So if you feel like you want more support on this topic why not make contact with Simeon Adams who works with Argentis Financial Management Ltd.
Their services range from keeping our corporate clients abreast of government changes going forward to working with them on solutions inclusive of
- reviewing existing pension provision or setting up new pension arrangements from outset to ensure that they satisfy the Personal Account Exemption Test
- discussing the effect of automatic enrolment in terms of future costs to their businesses
- discussing suitable contribution structures
If you require any further information or would like to discuss how Argentis Financial Management Limited may be able to assist in this area, please contact Simeon Adams at simeonadams@argentisfm.co.uk or call 01932 591680.
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