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Please be aware that, when answering
questions, Andrew is providing information and not giving advice.
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Andrew in Brighton asks: I have heard that Personal accounts may be delayed due to the state of the Economy. Do you think this is likely? Thank you
Answer: The introduction of the new employer responsibilities has already slipped slightly - from April to October 2012. In any large scale policy change, such as these pension reforms, some slippage is always possible. However, the Government has committed to the changes being introduced during 2012, and they have clearly stated that they see no reason for any further delay.
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Janet Bower in Salisbury asks:
We operate a GFRP from Standard Life, open to all employees. The Ee / Er splits are currently A 3/3, B 3/6 and C 3/12. The band refect position and length of service. We are proposing to increase the lower band to 4/4 to match the increase expected from the A band of staff. All new members of staff will join the company scheme on auto join at 3er/ 4ee for the first year - what steps do we have to to take to record those who opt out of the auto join and what are the steps to gain exemption for the scheme. We are assuming that the other levels are fine as the total contribution is in excess of 8% The contributions are made on basic salary - we do not intend to alter this. Thank you
Answer: To be 'qualifying' (meet the legal requirements), the scheme needs to have a contribution of at least 8% of qualifying earnings (all earnings between £5,035 and £33,540 including overtime, commission, bonus and statutory payments), with the employer paying at least 3%. The employer also needs to operate automatic enrolment and there needs to be a default investment fund.
There is a mismatch between the method of calculating the legal minimum contributions (which use qualifying earnings) and your scheme, which bases contributions on basic earnings. Once the staged and phased introduction is complete, probably around 2016, you need to ensure that at least 8% of qualifying earnings is paid in for every employee in each year. Your category C should be fine as it is has a very generous employer contribution. For the other categories where contributions total 8% or 9% of basic salary, you will probably need to perform a check each year for each employee - comparing the actual monetary payment with the legally required contribution. If the actual contribution falls below the legal minima then a further payment will normally be needed. We are continuing discussions with the Government to find ways to minimise the additional work which employers may face, when ensuring their scheme meets these new requirements.
There will be an automatic enrolment process which employers have to follow which sets out various timescales - for information to be given to employees, for them to be auto-enrolled, and a 30 day period within which the individual can opt-out and be treated as if they were never a member. Employers will want to retain any opt-out forms so they can demonstrate to the Pensions Regulator that they are fulfilling their compliance duties, and to help with any future enquiries from the employee or any employee representative body.
Standard Life will be investigating automated processes to help you with your compliance - for example, we may be able to have an online opt-out form on our scheme website which is simultaneously emailed to you and us if an employee completes it. This will speed up any refund of contributions and provide an audit trail in case of future enquiries.
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Frank Jurga in Swindon asks: Hi Andrew, am I right in thinking that the introduction of the Pension Account will be a true additional cost to the employer and that employer and employee NI will not change? Will people still be eligible to contract out of the S2P in addition to joining the PA system? I can\'t locate any info on retirement benefits - will the funds be unit linked and individual?
Answer: You are correct, NI will not normally change as a result of the pension contributions, unless an employer uses salary sacrifice. The personal accounts scheme is an occupational defined contribution scheme. so each individual will have their own earmarked benefit, or pot of money, which the Trustees will look after, on their behalf. Members will be able to choose from a small range of investment funds and, if they don't make a choice, funds will be invested in a default fund. At retirement people will be able to choose an annuity, probably from a small range of providers. Some people with small value benefits may be able to take their benefits wholly as a lump sum.
If employers want to offer their employees more investment or retirement options, they can use a private sector scheme rather than the personal accounts scheme.
Contracting-out of the state second pension is being scrapped, probably from 2012.
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My question is: I am an employer with over 120 staff, How will the administration of the Personal accounts be carried out and will I still have a reasonable choice of funds from different providers.
Answer: The administration of personal accounts will be outsourced to one private sector company. The tender process is currently underway, and the administration contract will be awarded around July 2010. In a similar way, the investment management of the funds within personal accounts will be outsourced to one or more private sector fund managers. It is anticipated there will be a small investment choice within personal accounts, probably between 5 and 8 fund choices. The management of these funds is likely to be split between several fund managers.
If you want a wider choice of investment options, or access to specific fund managers, then you can choose to use a private sector pension scheme rather than the personal accounts scheme.
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My Question is: 1) I have heard that Employed Directors, those who are paid dividends only, will be exempt from Personal Accounts, is this correct? 2) If an Employee has his/her own personal pension and the Employer contributes 3% plus to their personal pension, which can be subsequently proved via statements etc., would they also be exempt from organising Personal Accounts in 2012? Thanks for your help.
Answer: There are a few issues around directors. The requirements don't apply to sole worker-directors (a company where there is only one employee who is a director), or to non-executive directors who don't have a contract of employment. On a wider note, dividends are not included within the definition of qualifying earnings. So if an individual receives dividends but qualifying earnings (basic pay, bonus etc) are below £5,035, then they will not be a qualifying employee and so the company doesn't need to enrol this individual.
Employers can fulfill their responsibilities by using the personal accounts scheme or good quality private sector scheme(s) (broadly a scheme which has at least an 8% contribution, with at least 3% from the employer). If an employer is happy with the extra administration involved, then they could meet their requirements by paying to various good quality individual personal pensions. However, I imagine most employers will want to automatically enrol all staff into one scheme, to minimise their work.
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My question is: The qualifying earnings are currently between £5035 and £33540. Does this mean that an employee who earns £15000 will only pay contributions on £9965 or will contributions be payable on all earnings?
Answer: The legally required minimum contributions are based on qualifying earnings. So, yes, within your example, contributions would only be based on £9,965. However, an employer can set up, or continue, their scheme in any format they wish. For example, an employer could choose to base contributions on basic earnings only, or on all total earnings. As long as the contribution for each member reaches the legal minima in each year, then that is fine. Please bear in mind the £5,035 and £33,540 figures are in 2006/07 earnings terms, so they will have increased by the time we get to 2012.
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My question is: If an employees earnings fluctuates each pay period will the contributions fluctuate according to that periods earnings or can the employee fix the contribution rate?
Answer: The legally required minimum contributions are based on qualifying earnings, so will vary in each pay period. This will be the normal method used by the personal accounts scheme. Some private sector pension providers may be willing to set up a scheme on a fixed contribution basis. However a check would be needed at the end of each year to ensure the contribution for every member meets or exceeds the legal minima (or top up payments would be required).
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