Pensions Act 2008 - A brief guide
The measures contained within the Pensions Act 2008 can be divided into four areas, but the Act will
be remembered for the first—extending coverage of pensions. The provisions of the Act and their
implementation dates (confirmed where known) are summarised below.
The printer friendly PDF of the brief guide to the Pensions Act 2008 is also available for download.
- Extension of coverage
- Simplification
- Guarding the pension promise
- Compensation and assistance
Extension of coverage
The main thrust of the Pensions Act 2008 is the introduction of the system of auto-enrolment and Personal Accounts which, together with changes to the State pensions system legislated for in the Pensions Act 2007, form the centrepiece of the Government’s current phase of reforms of the pensions landscape.
| Subject | Description | Comment | Planned implementation |
|---|---|---|---|
| Auto-enrolment |
Imposes a duty on all UK employers to make arrangements for their workers to become active
members of an “automatic enrolment scheme” and specifies the requirements applicable to
such schemes. Personal Accounts will be one of a number of automatic enrolment scheme possibilities for UK employers to consider. Others may include schemes that they currently sponsor – but only provided that they meet a quality test. |
Implementation is fraught with uncertainty, not least that a new government might review
the policy. For many employers autoenrolment will result in significant (in some cases vastly so) increases to their employment costs. The credit crunch may currently be keeping auto-enrolment off corporate agendas, but between now and 2012 wholesale reviews of pension strategy may be required in the light of the potential costs imposed by auto-enrolment. |
The introduction may be phased in over perhaps up to 18 months, starting from October 2012. |
| Personal Accounts | Puts in place the legal framework for the creation of Personal Accounts – a low cost defined contribution scheme accessible to all workers. | The $64,000 question is whether a functioning pension scheme for up to nine million employees of over a million employers can be built in just over three years. | October 2012 |
Simplification
TheAct contains a number of welcome deregulatory measures, but no big ideas that could stem the tide of defined benefit scheme closure. Any initiative on risk-sharing schemes will have to wait for another day.
| Subject | Description | Comment | Planned implementation |
|---|---|---|---|
| Safeguarded rights | Abolishes the safeguarded rights requirements (restrictions in the manner in which the pension share to the ex-spouse that derived from the member’s contracted out rights can be applied). | A welcome piece of deregulation. Scheme rules may require amendment. | 6th April 2009 - confirmed |
| 2.5% revaluation cap | Reduces the cap on revaluation of deferred benefits from 5% to 2.5% for accruals from “the 2008
Act commencement date”.
Revaluation of PPF compensation is similarly impacted, regardless of whether or not the scheme implements the 2.5% cap. |
Action will be required by all defined benefit trustees and sponsors and will be dictated by the scheme rules. Amendments will be required either where the change is automatic but its introduction is not wanted or where it is not automatic and it is. The financial savings are unlikely to be very great. | 6th April 2009 - confirmed for scheme benefits but not PPF compensation. |
| Protected rights | All protected rights requirements are abolished. The Government says that “schemes will no longer have to track protected rights separately and individuals will be able to choose the pension or annuity that best suits their circumstances.” The Government also does not intend to introduce any further changes in advance of abolition. |
A radical piece of simplification but there could be unintended consequences of assuming away
a requirement that has existed for over twenty years. One important aspect which is unclear is the impact on final salary schemes with a protected rights underpin. |
6th April 2012 |
| Stakeholder Pensions | Removes the requirement for employers to provide access to a stakeholder pension (ie scheme designation, workforce consultation, supplying employees with scheme information, supplying information to the pension provider or permitting its representatives access to the workforce and setting up suitable arrangements for the payment of contributions). | This is logical – it makes no sense to keep the compulsory stakeholder access requirements once auto-enrolment is in force. However, member contributions will still have to be deducted through payroll for those employees for whom the employer is so doing when the access requirements are abolished. | 2012 – should be simultaneous with the auto-enrolment requirements. |
| State benefit consolidation |
Individuals’ entitlements from the Graduated Retirement benefit scheme (GRB), State Earnings
Related Pension Scheme (SERPS) and State Second Pension (S2P) up to and including the 2011/2012
tax year are “converted into a cash valuation” which is revalued in line with earnings until the
individual retires. Only applicable to individuals reaching State Pension Age on or after 5th April 2020. |
The Government believes that this approach will enable individuals to estimate in a straightforward way
what their additional state pension will be at retirement and will also permit considerable cost savings
as civil servants will no longer need a detailed knowledge of the complex rules of these schemes. A bold idea but not enough details are available yet to assess its viability/impact on private pensions. |
From 2011/12 |
| The Government is separately pursuing a number of other deregulatory measures – including minor amendments to the Employer Debt regime, a review of the conditions governing surplus repayments to employers and an examination of employee consultation when employers propose changes to future benefits. | |||
Guarding the pension promise
The Act contains some important extensions to the powers of the Pensions Regulator designed to assist it in protecting accrued rights in defined benefit schemes.
| Subject | Description | Comment | Planned implementation |
|---|---|---|---|
| Moral hazard II |
Extension of the Pensions Regulator’s anti-avoidance powers in relation to Contribution Notices and Financial Support Directions. The key change is that the Pensions Regulator will also be able to issue a Contribution Notice if an act or failure to act has “detrimentally affected in a material way the likelihood of the accrued scheme benefits being received”. | Although the legislation has potentially broad application, the intention is that a Code of Practice will limit its application – in particular to certain types of non-insured buyout. The measures will be backdated – in most cases to 14th April 2008. | Spring 2009 for powers linked to the new material detriment test. 26th November 2008 (confirmed) for other powers. |
| Appointment of trustees | The Pensions Regulator becomes able to appoint trustees in certain circumstances where it is reasonable to do so, instead of necessary. It will also be able to appoint trustees in order to protect the interests of the generality of scheme members. | Another incremental increase in the Regulator’s powers. | 26th January 2009 - confirmed |
| Scheme funding | The Regulator’s existing power to intervene and fix the actuarial assumptions for the calculation of technical provisions is extended to where the actuarial assumptions and method chosen by the trustees do not appear to be prudent. | This could influence scheme funding negotiations as the Regulator will now have explicit intervention powers where it is unhappy with the technical provisions, but there has been no other failure in the scheme funding process. | 26th January 2009 - confirmed |
Compensation and assistance
Finally, theAct contains some amendments to the operation of the Pension Protection Fund and the Financial Assistance Scheme.
| Subject | Description | Comment | Planned implementation |
|---|---|---|---|
| Financial Assistance Scheme (FAS) | Makes permanent the temporary ban on purchasing annuities by trustees of occupational pension schemes that intend to seek assistance from the FAS. | Merely maintains the status quo, preparing the ground for residual scheme assets to be transferred to the FAS. | 26th November 2008 - confirmed |
| PPF compensation on divorce | PPF compensation will be capable of being directly shareable between the member and exspouse following divorce. | A sensible reform – should have little if any impact on PPF-eligible occupational schemes. | 6th April 2010 |
| PPF compensation | Amendments include enabling compensation to be delayed in the interests of the member and to ease PPF administration (and be actuarially uplifted); clarifying the “normal pension age” at which PPF compensation commences and the admissible rules used to define the level of compensation paid. | These are technical changes which can only be delivered through an Act of Parliament. They should have little if any impact on occupational schemes. | 6th April 2009 |
| Late payment of levies | Provision to charge interest on late payment of the pension protection levy, the fraud compensation levy, the pension protection fund administration levy, the pension protection fund ombudsman levy and the general levy. | The rate will be set out in regulations on which the Government intends to consult. Trustees should be aware of the potential for punitive interest applying to late payments. | 6th April 2009 |
