UK : Compulsory pensions coming to the UK

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• UK :  Compulsory pensions

2012 is a big year for the British with the Queen's Diamond Jubilee, the London Olympics and a new compulsory pension system.  At the moment, most people seem more interested in the first two but it is the third that will have the most long term effects.  This is the first time that the UK will have had compulsory pensions in this way and the Department for Work and Pensions estimates that it will result in between 5 and 8 million people newly saving or saving more in workplace pensions, with extra contributions of £9 billion annually from 2020.

The system has a number of key legal concepts for employer to get used to:

• Eligible Employees - these are employees who have to be automatically enrolled in the employer's pension scheme.  Broadly they will be aged between 22 and 75 and earning enough to pay income tax.

• Entitled Employees - these are employees not entitled to join probably because they are too young, too old or do not earn enough.  But the employer must allow Entitled Employees to join the scheme if they ask to.  Employees aged over 75 are not Entitled Employees.
• Staging Date - this is the date when the laws first apply to the employer.  Because compulsory pensions is such a massive change, it is being rolled out gradually starting with employers with the largest workforces in October 2012. Some of the smallest employers will not be covered until more than 4 years later!
• Phasing - this is the process of increasing employer compulsory contributions.  At first they will only be 1% of pay in the National Insurance bands used for the UK social security system.  Once all employers have passed their staging dates they will increase to 2% and then 3% of the same pay.
• Qualifying Scheme - this is a pension scheme which the employer uses to deliver compulsory pensions.  It can be an "occupational" scheme - this is the traditional UK model of each employer creating a trust scheme for its own employees.  It can be a "personal" pension scheme where each employee gets his own account to manage with an external insurer or other financial services company.  And now we have seen the development of the "Master Trust" scheme - here a financial services company develops a single scheme which lots of independent employers can join giving them some of the governance qualities of a trust scheme but with economies of scale not available to small employers. For a scheme to count as qualifying it must provide for automatic membership and meet certain contribution thresholds for employers and employees.  Employers with an existing scheme may need to revise their rules to make it qualifying.  For instance, most have an application form system that will need to be reformed.  Amending an existing scheme can take time and can require consultation.

The system was originally proposed as a simple easy-to-understand one.  But the level of detail of UK pensions law is often disturbingly complex and so it has proved with this new system.  Employers will need to first identify their staging date, which they can do here, and next consider their HR and payroll systems, their recruitment processes, their staff handbooks and the way they structure their benefit packages.  The team at Fieldfisher will be more than happy to help.

Contribution by David Gallagher, Field Fisher Waterhouse LLP (London), Employment and Benefits Group