Pensions Newsletter August 2011
Inside this issue
Auto-enrolment – Are you aware of the costs?
Recent research by the Pensions Management Institute has revealed that only 14% of pension schemes have calculated what the cost of auto enrolment will be to them in terms of both contributions and administration.
Over 48% of employers are planning on using existing arrangements for all employees, but many have still not decided what their approach is going to be and over 52% have not entered into any discussions with their scheme administrator regarding changes they will be required to make to systems and procedures to comply with the new regime.
The first date by which compliance with the new rules will be required is the 1 October 2012 for employees with a PAYE scheme size of 120,000 or more. After this first phase the dates are staged by the size of the employer and a year later will hit employers in the 800 – 1249 bracket.
The Pensions Regulator does intend to contact employers approximately 12 months in advance of their staging date to confirm this and will send a further reminder around 3 months before.
Reminder of the duties
The duty that is imposed on the employer is to automatically enrol all eligible jobholders who are not currently in a workplace pension scheme into a qualifying scheme. The emphasis is on the employer and the employee should not be required to make any active decision or steps in order to be included. The only active step they should have to take is if they wish to opt out which they have the right to do, but they must be enrolled initially.
An eligible jobholder is somebody who is over 22, under State Pension Age, works in Great Britain and earns more that the earnings trigger which is currently set at £7475 based on the income tax personal allowance for 2011/12. There are mechanisms in the legislation for this figure to be reviewed annually and the first review date is expected to be in January 2012.
The date on which an eligible jobholder must be enrolled is the first day on which they meet the criteria and from this date active membership of a pension scheme must start. This is also the start date of the joining window of 1 month during which enrolment must be completed.
There are provisions for postponing enrolment for a period of three months where the day on which the employee was assessed as eligible against the criteria was the date of the employee’s 22nd birthday or the date on which they first exceed the earnings trigger.
There are two additional categories of employees who do not require to be automatically enrolled;
Non-eligible jobholder - a person whose qualifying earning are less than the trigger of £7475, but more than the lower level of qualifying earnings figure which is currently set at £5035 and is between the age of 16 and 75, or earning more than the earnings trigger of £7475 and between the ages of 16 and 21 or state pension age and 75.
Entitled worker - a person whose qualifying earnings are less than the lower level currently set at £5035 and is between the age of 16 and 75
Non-eligible jobholders are entitled to opt into the scheme selected for auto enrolment. Entitled workers have a right to join a scheme, although this does not have to meet the auto enrolment or qualifying scheme criteria. The employer is under a duty to provide both of these categories of employees with relevant information as regards their rights.
Any current members of the existing scheme will not require to be automatically enrolled if the scheme meets a number of criteria that are largely based on the level of contributions from both the employer and the employee.
To be a qualifying scheme the rules must require the employer to make contributions, the employer’s contribution must be at least 3% and the total contributions required by the rules from both employer and employee combined must be at least 8%. This is being phased in so up to 30 September 2016 the required contribution rate is a minimum 1% from the employer and 2% in total, this will increase on the 1st October 2016 to 2% and 5% respectively and will reach the figures of 3% and 8% from 1 October 2017.
It is important to note that being a qualifying scheme means that this is suitable for existing members of the scheme, in order to be suitable for auto-enrolment of new members there are further requirements to be met.
Back to top
Acting in Good Faith
The members of the Prudential Staff Pension scheme have failed in their challenge of an employer’s exercise of a discretionary power to increase pensions in payment on the basis that it breached the implied duty of good faith that it owed to them in the case of Prudential Staff Pensions Ltd v Prudential Insurance Co Ltd.
The employer had historically awarded increases to pensions in payment on a basis aimed to protect members from the effects of inflation and where this was not possible immediately in years of particularly high inflation there were “catching up” periods where increases were awarded in excess of inflation. Members were largely of the belief that this policy would continue
In 2005 the employer set out a new policy that increases to pensions in payment would be based on RPI capped at 2.5%. The members claimed, amongst other things, that the decision to change policy on increases was a breach of the implied obligation of good faith by the employer.
The implied obligation of good faith was set down in the case of Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd which established that there was a term implied into any contact of employment “that the employer will not, without reasonable and proper cause, conduct themselves in a manner calculated or likely to destroy or seriously damage the relationship of confidence and trust between employer and employee” and this obligation “applies as much to the exercise of rights and powers under a pension scheme as they do to the other rights and powers of an employer”.
The judge held that there was no express restriction on the rule and the increases that were being provided were still in excess of those required by the scheme documentation. The power in question to increase pensions was not of a fiduciary nature and therefore the employers were entitled to take into account their own interests in making any decisions including considerations of scheme solvency and investment returns.
Back to top
Is your scheme governance up to scratch?
The Pensions Regulator has recently published a report on its 2011 Scheme Governance Survey in which it highlights a number of interesting statistics in relation to scheme governance.
A number of governance issues were investigated and the findings of the survey noted that the only marked improvement since the last survey in 2009 was in the area of record keeping which has been a recent area of focus by the Regulator.
In relation to conflicts of interest the figures show that 20% of trustee boards do not have a conflicts of interest policy, nor any established means of identifying and recording potential conflicts of interest or register of trustees’ interests.
The statistics show that only 28% of respondents strongly agreed that trustee boards ensure a high standard of member communications. The report points out that due to the findings in relation to communications to members the Regulator intends to focus on improving this area.
Back to top
Another change to the Pensions Bill?
The defeat of the DWP in Houldsworth & Anor v Bridge Trustees Ltd & Anor [2011] UKSC 42 could mean another change to the Pensions Bill will be made in order to clarify the definition of money purchase benefits.
The court ruled that it is not essential to have equilibrium between assets and liabilities in order to fall into the current statutory definition of money purchase benefits and it is possible to have a deficit in such a scheme. Also the fact that benefits have to be calculated by reference to contributions does not mean that other factors cannot be taken into account, including allowing contributions to be subject to a guaranteed rate of return.
The DWP has announced that it will introduce legislation to overrule the effect of the decision and that that legislation will have retrospective effect at least from the date of the judgement. The effect of the legislation is expected to be to ensure that any benefits in respect of which it is possible for a funding deficit to arise will not be considered to be money purchase benefits and will therefore be eligible for the protections of the PPF and the FAS.
Back to top
The information contained in these articles is given for general information only, reflects the current law on the date of the article, and does not constitute legal advice on any specific matter
Contacts for Pensions Newsletter August 2011