Introduction

1.These explanatory notes relate to the Pensions Act which received Royal Assent on 26 November 2008. They have been prepared by the Department for Work and Pensions in order to assist the reader in understanding the Act. They do not form part of the Act and have not been endorsed by Parliament.

2.The notes need to be read in conjunction with the Act. They are not, and are not meant to be, a comprehensive description of the Act. So where a section or part of a section does not seem to require any explanation or comment, none is given.

Background

3.The Pensions Commission’s 2005 report A New Pension Settlement for the Twenty-First Century contained a series of recommendations regarding the UK pensions system. This Report formed the basis for the Government’s White Paper Security in Retirement: towards a new pensions system, published in May 2006 and the second White Paper, Personal accounts: a new way to save, published in December 2006.

4.The Pensions Act 2007 made provision for the first part of the reform of the UK pensions system.

5.The second White Paper contained further proposals, with an emphasis on private saving, and formed the basis for measures contained in this Act.

6.For ease of reference, please note the following abbreviations for legislation are used in these notes:

• FA 2004 – Finance Act 2004 (c. 12)

• MCA 1973 – Matrimonial Causes Act 1973 (c. 18)

• PA 1995 – Pensions Act 1995 (c. 26)

• PA 2004 – Pensions Act 2004 (c. 35)

• PA 2007 – Pensions Act 2007 (c. 22)

• PSA 1993 – Pension Schemes Act 1993 (c. 48)

• SSCBA 1992 – Social Security Contributions and Benefits Act 1992 (c. 4)

Summary

7.This Act introduces two key requirements for employers:

• To automatically enrol eligible jobholders who are not in a qualifying pension scheme into an automatic enrolment scheme. Jobholders will be enrolled by their employers from the first day they become eligible but retain the right to opt out of the scheme from this point. Employers may choose the pension scheme they provide, which must meet certain criteria. The Act gives the Secretary of State powers to establish a pension scheme in which employers can choose to participate. This scheme will be run by an independent trustee body.

• To maintain the jobholder’s membership of a qualifying scheme, including making relevant contributions, so long as the jobholder chooses to be part of it.

8.The Act also requires employers to give the Pensions Regulator information about how they will meet their obligations. The Pensions Regulator will be able to use this information to assess compliance with the duties set out in this Act. The Pensions Regulator will be given powers to enforce these duties and the Act sets out sanctions, including criminal penalties, for failure to comply.

9.Provisions in the Act extend the functions of the Personal Accounts Delivery Authority, established in the PA 2007, enhancing its powers from advising on to overseeing the establishment of the infrastructure and processes relating to any scheme created under this Act. In carrying out these functions, the Authority will be required to have regard to a number of guiding principles set out in this Act.

10.Further reforms to the state pension system are contained in this Act. Due to previous changes in legislation, additional State Pension has been accrued on several different bases over previous years. People therefore retire with a number of different entitlements to additional State Pension, some of which are not calculable ahead of state pension age. The Act will consolidate those entitlements into a simple cash valuation.

11.The Act also removes, in most cases, the requirement for people aged 75 or over claiming state pension credit to provide information and evidence on their retirement provision at the end of their assessed income period (usually five years).

12.The Act makes a number of changes relating to the operation of the Pension Protection Fund (PPF) and the Pensions Regulator, including enabling Pension Protection Fund compensation to be shared on divorce or dissolution of a marriage or civil partnership as well as enabling individuals in the PPF with a terminal illness to commute their pension entitlement into a lump sum. It also provides for changes to the operation of the Financial Assistance Scheme.

13.The Act contains amendments to existing private pension legislation – some of which are based on recommendations made by the Deregulatory Review of Private Pensions (see http://www.dwp.gov.uk/pensionsreform/deregulatory­_review.asp).

14.The Act makes changes to the national insurance system and contains a number of measures to bring the existing body of pensions-related legislation up to date. For example, it will update provisions on re-marriage and war pensions in the PA 1995 to include civil partnerships.

15.Finally, the Act allows data to be shared between the Department for Work and Pensions and energy suppliers to enable the energy suppliers to provide targeted assistance to individuals receiving state pension credit.

The Act Overview

16.The Act has six Parts:

• Part 1 sets out the new duties on employers to automatically enrol eligible jobholders into automatic enrolment schemes and to contribute to those arrangements. It defines jobholders, qualifying earnings and qualifying schemes. Part 1 also makes provision for a regime to ensure compliance with these duties, and for the protection of employment and pre-employment rights. Part 1 (which includes Schedule 1) makes provision for the establishment of a trust-based occupational pension scheme and for a trustee corporation. There are also provisions to broaden the functions of the Personal Accounts Delivery Authority so that it can take forward the implementation work necessary to establish a pension scheme.

• Part 2 (which includes Schedules 2, 3 and 4) contains measures to simplify and amend existing private and state pensions legislation. Part 2 reduces burdens relating to private pensions schemes by simplifying the treatment of contracted-out rights for the purposes of pension sharing on divorce and by establishing new rules for the revaluation of accrued rights and removing the remaining rules on protected rights, the majority of which relate to survivor benefits. Part 2 also sets out a new method of assessing certain components of state pensions and fixes the Contracted-Out Deduction in relation to gross Additional Pension to provide a single consolidated additional pension. Finally, Part 2 introduces an extension to the state pension credit assessed income period for most individuals aged 75 or over.

• Chapter 1 of Part 3 (which includes Schedules 5, 6 and 7) establishes arrangements for compensation paid by the Pension Protection Fund to be shared on divorce or dissolution of a marriage or civil partnership in England, Wales and Scotland. Chapter 2 of Part 3 (which includes Schedule 8) also makes changes to the compensation provisions of the Pension Protection Fund, to improve the Fund’s operation. Chapter 2 of Part 3 also enables individuals in the PPF with a terminal illness to commute their pension entitlement into a lump sum.

• Part 4 contains a measure to enable the Financial Assistance Scheme (FAS) to make payments to qualifying members whose benefits would have been met in full by their pension schemes. Currently the FAS can only make payments to those qualifying members of qualifying schemes who will not receive their benefits in full from their under funded pension scheme. Part 4 also allows for the definition of a FAS qualifying scheme in the PA 2004 to be amended so that exceptions can be made through regulations to the condition that schemes need to have wound-up before 6th April 2005. The regulations could allow certain schemes, which are presently unable to qualify for either the FAS or the PPF, to qualify for the FAS. Finally, Part 4 extends the current restriction on the purchase of annuities by trustees of FAS qualifying pension schemes.

• Part 5 (which includes Schedules 9 and 10) contains a variety of measures to update existing pensions legislation. This includes changes to the Pensions Regulator’s powers. Part 5 contains changes to the national insurance system to allow specific groups of people to increase their state pension entitlement. In addition it also contains a provision which will allow for data to be shared between the Department for Work and Pensions and energy suppliers to provide targeted assistance to individuals receiving state pension credit.

• Part 6 contains technical provisions.

Territorial Extent

17.The provisions of this Act extend to England and Wales and Scotland. Certain provisions within this Act also extend to Northern Ireland.

Territorial extent: Wales

18.The Act’s effect in Wales is the same as in England. The Act contains no provisions which relate exclusively to Wales, or affect the National Assembly for Wales.

Territorial extent: Scotland

19.The Act generally applies in Scotland as it does in England. The power to initiate the new mechanism of pension compensation sharing on divorce (contained in Chapter 1 of Part 3) is conferred on courts in England and Wales by amendments of matrimonial and civil partnership legislation (contained in Schedule 5). The Act contains equivalent amendments to the Scottish matrimonial and civil partnership legislation (Schedule 6).

20.The Scottish Parliament’s consent has been sought and obtained for the provisions in the Act that trigger the Sewel Convention. These provisions are contained in Schedule 7 to the Act. The Sewel Convention provides that Westminster will not normally legislate with regard to devolved matters in Scotland without the consent of the Scottish Parliament.

Territorial Extent: Northern Ireland

21.Provisions relating to the Personal Accounts Delivery Authority and the scheme established under section 67 extend to Northern Ireland. The Act also contains provisions dealing with the Pensions Regulator Tribunal, information relating to private pensions policy and retirement planning, the Pension Protection Fund, the Fraud Compensation Fund and the extension of the Financial Assistance Scheme and these also apply in Northern Ireland. The approval of the Northern Ireland Assembly to the extension of these provisions has been given by way of a Legislative Consent Motion.

Commentary on Sections

Part 1: Pension scheme membership for jobholders

22.The aim of Part 1 of the Act is to achieve increased overall participation of workers in employer facilitated pensions saving and implementation of a minimum standard of pension saving for the worker concerned.

Chapter 1: Employers’ duties

Section 1: Jobholders

23.This section defines “jobholder” for the purpose of the employer duty as workers who ordinarily work in Great Britain, are aged between 16 and 75 and who earn qualifying earnings (see sections 13 and 15). This section also provides that where a jobholder has more than one employer, the employer duty provisions apply separately in relation to each employment.

Section 2: Continuity of scheme membership

24.This section prevents an employer in any way facilitating the end of a jobholder’s active membership of a qualifying scheme (by action or omission) without putting the member into another qualifying scheme (within a time period to be prescribed by Secretary of State). For example, an employer would not be able to withhold information from the scheme if by that action of the employer the jobholder ceased to be a member. This means that employers have an ongoing duty to ensure that jobholders always have access to a qualifying scheme. This duty does not apply if the jobholder ends membership of their own accord, and the duty only applies so long as the jobholder is employed by the employer.

Section 3: Automatic enrolment

25.Section 3 introduces the employer obligation to automatically enrol jobholders aged between 22 and state pension age into a scheme that fulfils the criteria for an “automatic enrolment scheme” (see section 17). Automatic enrolment must take place when the individual first meets the relevant criteria (i.e. is a jobholder and is over 22) in that employment. This is known as the “automatic enrolment date” (subsection (7)).

26.The section contains a power which allows the Secretary of State to set out in regulations the steps the employer must take to arrange for the jobholder to be automatically enrolled (subsection (2)).

27.This obligation does not apply if, within a prescribed period, the jobholder has been an active member of a qualifying scheme in that employment, but chose to end membership (subsection (4)). This is to prevent jobholders being automatically enrolled into a scheme soon after they decided to leave.

28.The employer may be required, as part of the automatic enrolment process set out in regulations, to provide prescribed information to any person, in particular the trustees or managers of an occupational pension scheme or the provider of a personal pension scheme (subsection (5)). This will enable the provision of information about a jobholder to the scheme to enable their enrolment.

29.There is a power which enables the Secretary of State to make regulations under subsection (2) to deem an agreement to exist between the jobholder and the provider where the employer fulfils their employer duty obligation by automatically enrolling the jobholder into a personal pension scheme that meets prescribed conditions (subsection (6)).

Section 4: Postponement of automatic enrolment

30.Section 3 establishes that the effective date of automatic enrolment must be the first day on which the jobholder becomes eligible. Section 4, however, provides for the possibility of delaying initial automatic enrolment in circumstances described in regulations. The period of permitted deferral will be established in regulations.

31.Employers that are permitted to delay automatic enrolment may be required to ensure that members remain in such a scheme for a prescribed period of time, unless the jobholder leaves that employment or chooses to leave the scheme. This will enable the member to make up pension savings foregone during the initial delay period.

32.The powers conferred by section 4 are exercisable in relation to any automatic enrolment under section 3 and not just enrolment in the initial period of implementation.

Section 5: Automatic re-enrolment

Section 6: Timing of automatic re-enrolment

33.These sections set out the duty and the timing for employers to periodically automatically re-enrol, into an automatic enrolment scheme, jobholders who are aged at least 22 and under pensionable age and who are not already members of qualifying schemes.

34.As with automatic enrolment, this obligation does not apply if the jobholder chose to end membership in the same employment, within a prescribed period before the re-enrolment date (section 5(4)) or gave notice to opt out under section 8. This enables the delay of re-enrolment if it falls soon after the jobholder has chosen to leave the scheme.

35.Section 6 requires regulations to determine that re-enrolment will not occur more frequently than once every three years. The three year interval may be by reference to the jobholder or the employer. The section then goes on to set out exceptions whereby regulations may be made to enable re-enrolment to take place more frequently than once in a three year period.

Section 7: Jobholder’s right to opt in

36.There may be jobholders who are not participating in workplace saving because they opted out or cancelled their active membership, or do not qualify for automatic enrolment because they are aged between 16 and 22 or between pensionable age and age 75.

37.Section 7 allows such jobholders to require their employer to make arrangements to enrol them into an automatic enrolment scheme by giving the employer notice. The jobholder can give notice to opt in under this section more than once in a 12 month period, although the employer is not obliged to accept more than one notice in 12 months. Therefore employers are not required to keep enrolling a jobholder who has opted out a number of times in the same year.

38.This process, the details of the notice required and the date from which membership must be effected are to be prescribed in regulations (subsection (4)).

Section 8: Jobholder’s right to opt out

39.This section establishes the right of a jobholder who has been automatically enrolled (or re-enrolled) into an automatic enrolment pension scheme to opt out of that membership by providing a signed notice to their employer within a prescribed period indicating that they choose not to participate. The form and content of this notice will be set out in regulations, as will the prescribed period during which they can choose to opt out, to whom the jobholder must give notice of opt out and arrangements which must be made to give effect to an opt out decision. The opt out notice must include information relating to the effect of opting out on the jobholder. Opting out in this context refers to the specific decision not to participate in a pension scheme from the point of enrolment. Once in a scheme, an active member is free subsequently to cancel membership at any time and this section does not interfere with that established right.

40.Once a jobholder has opted out they will be treated as if they had never become a member of that qualifying scheme through that automatic enrolement. In effect this means that they will not have any rights in the scheme and any contributions collected from the jobholder and the employer (subsection (2(b)) will be refunded. However, when a jobholder chooses to opt out after being enrolled or re-enrolled in a pension scheme, any refund of contributions due is only for the current period of membership and not for previously accrued rights from past periods of active membership (subsection (1)).

41.Regulations will also establish how and by when refunds must be made and how they are calculated.

Section 9: Workers without qualifying earnings

42.There may be people who do not qualify for automatic enrolment and who are not participating in workplace saving. Although they ordinarily work in Great Britain and are aged at least 16 and under 75, (two of the three qualifying conditions for a jobholder in section 1) they do not have qualifying earnings, as defined in section 13.

43.Section 9 allows workers without qualifying earnings to require their employer to make arrangements to enrol them into a pension scheme by giving notice. The worker may give notice to opt in under this section as many times as they like, although the employer is only obliged to act on one request in a 12 month period. This doesn’t prohibit the employer allowing workers to join the scheme at other times by agreement. An employer is not obliged to make any matching contribution but may choose to do so.

44.The enrolment process, the details of the notice required and the date from which membership must be effected are to be prescribed in regulations (subsection (3)).

45.For the purposes of this section a pension scheme may be either an occupational pension scheme, or a personal pension scheme registered under the FA 2004. Also, a personal pension scheme must have direct payment arrangements between the worker and the employer. “Direct payment arrangements" are either where the employer makes a contribution and sends it to the worker’s scheme or where the employer deducts contributions from the worker’s earnings and forwards these to the worker’s scheme on behalf of the worker.

Section 10: Information to be given to workers

46.This section requires the Secretary of State to set out in regulations the circumstances in which a prescribed person must give information to individuals about how the employer duty may affect them. This will include information about the effect of automatic enrolment, re-enrolment, postponement of automatic enrolment, giving notice to opt in and the right to opt out.

Section 11: Information to be given to the Pensions Regulator

47.Section 11 gives the Secretary of State power to make regulations requiring employers to provide information to the Pensions Regulator about how they are complying, or intend to comply, with the employer duties, including information relating to the pension schemes that are to be used. This section will enable the process by which employers will be required to register with the Regulator. An example of information that may be required through that process is information identifying the scheme into which an employer has automatically enrolled jobholders.

48.This section works with the provisions in Chapters 2 and 4 of this Part, by enabling the Regulator to obtain the information needed to support the compliance regime.

Section 12: Introduction of employers’ duties

49.This section provides a regulation-making power which, combined with the Secretary of State’s power to bring sections 2 to 9 into force under section 149(1), allows the Secretary of State to make provision requiring some employers to start discharging their duties under this Chapter (including those on continuity of scheme membership, automatic enrolment and re-enrolment, and allowing opt-in and opt-out) before other employers. This will allow the introduction of the employer duties to be staged over a period of time.

Section 13: Qualifying earnings

50.This section defines qualifying earnings. Subsection (1) defines them by reference to an earnings band, with lower and upper limits of £5,035 and £33,540 per annum (see section 14 for duties to review and if necessary amend these limits), on which pensions contributions will be calculated for money purchase schemes. Earning qualifying earnings (i.e. above £5,035) is a criterion of being a jobholder and so is a factor in determining whether a worker is to be automatically enrolled. Subsection (2) deals with cases where qualifying earnings are to be calculated otherwise than on an annual basis.

51.The section then defines “earnings” as sums comprising: wages/salary, commissions, bonuses, overtime and certain statutory benefits. The section enables the Secretary of State to set out (in regulations) other sums that can be considered as part of “earnings”.

Section 14: Review of qualifying earnings band

52.This section provides that the Secretary of State must review annually the value of the “qualifying earnings” lower and upper limits annually against the general level of earnings and must amend the limits if they have not maintained their value measured against earnings.

Section 15: Pay reference period

53.The pay reference period is the period of earnings over which the calculation is made to work out (a) whether the jobholder should be automatically enrolled (i.e. with earnings more than £5,035 per annum) and (b) to calculate the level of contributions that the jobholder and employer need to pay for money purchase schemes. While the qualifying earnings band established in section 13(1) is expressed in annual terms this section allows the Secretary of State to prescribe other periods, where section 13(2) will apply. Because of the different types of workers and different pay periods used by employers, there is a need to enable the pay reference period to be tailored to specific worker and payment type. For example, agency workers might require a much shorter calculation period than salaried employees.

Section 16: Qualifying schemes

54.This section defines a qualifying scheme. Qualifying schemes are those that meet minimum standards and quality requirements, which can be used by employers in discharging their obligations under section 2.

55.A qualifying scheme can be either an occupational pension scheme or a personal pension scheme. Qualifying schemes must meet the quality requirement for the scheme type (see sections 20 to 27). They must also be registered under Chapter 2 of Part 4 of the FA 2004, which means that they are registered for tax relief.

56.Subsection (2) enables regulations to disapply the requirement to be tax registered for schemes based outside the UK if they meet further requirements to be prescribed in regulations. The further requirements are likely to refer to schemes operating outside the UK with members who will receive UK tax relief on their contributions.

57.The Secretary of State may in regulations set out the circumstances in which a scheme, that would otherwise qualify, is not a qualifying scheme. This can be where the payments and contributions – for example annual management charges - that must be made to the scheme exceed a prescribed amount (subsection (2)(a) and (b)); or the scheme provides average salary benefits and contains prescribed features (subsection (2)(c)).

Section 17: Automatic enrolment schemes

58.There will be additional requirements on schemes that are used for the purposes of automatic enrolment, automatic re-enrolment and allowing opt in (as described at section 7). These schemes must be qualifying occupational pension schemes or qualifying personal pension schemes and must also enable automatic enrolment to take place. An automatic enrolment scheme must not require jobholders who are enrolled to express a choice, or provide information, in order to remain active members. For example, a jobholder will not be required to make a choice about the fund into which their contributions may be invested. Nor can the scheme refuse membership on the grounds that the jobholder does not provide information. An automatic enrolment scheme must also satisfy any further conditions that may be prescribed in secondary legislation.

Section 18: Occupational pension schemes

59.For the purposes of this Part, occupational pension schemes are those which fall within the definitions from UK or European legislation (set out in paragraphs (a) and (b)) or are of a prescribed description if they are based outside the European Economic Area (EEA).

Section 19: Personal pension schemes

60.Personal pension schemes are defined as those that fall outside the definition of an occupational pension scheme (see section 18).

Section 20: Quality requirement: UK money purchase schemes

61.In order to be deemed a qualifying scheme a UK occupational money purchase scheme must require an employer contribution equivalent to at least 3% of qualifying earnings and total contributions paid by the employer and jobholder equivalent to at least 8% (including tax relief).

62.The PA 2007 contains repeals of the contracting out arrangements for money purchase schemes currently provided for under the PSA 1993. However, in the event that those repeals have not yet been brought into force when the employer duties commence, subsection (2) enables regulations to be made to modify the contributions required for money purchase schemes with members whose employment is contracted-out of the State Second Pension Scheme.

63.Subsection (3) contains a regulation-making power that allows the Secretary of State to set an amount below which trustees and employers could choose to decline to accept contributions. This could be used, for example, to enable schemes to not have to deal with such minor amounts of contributions which are uneconomic to administer.

Section 21: Quality requirement: UK defined benefits schemesSection 22: Test scheme standardSection 23: Test scheme

64.Section 21 provides that the quality requirement for defined benefit schemes depends on whether or not the jobholder is in contracted-out employment, as defined under the PSA 1993. If a jobholder is in contracted-out employment, evidenced by a certificate issued under section 7(1) of the PSA 1993, the scheme satisfies the quality requirement in relation to that jobholder. Subsection (3) enables the Secretary of State to change, by order, the quality requirement where the jobholder is in contracted-out employment. The quality requirement may be changed so that the scheme no longer qualifies on the evidence of contracting out alone but is required to meet a modified version of the test scheme standard (see sections 22 and 23) with an accrual rate of no more than 1/80th, should this prove necessary in the future.

65.For jobholders who are members of a defined benefit scheme and are not in contracted-out employment, the scheme must meet the test scheme standard. Section 22 provides that a scheme satisfies the test scheme standard if it provides benefits that are broadly equivalent to or better than the benefits provided by a model test scheme – set out in section 23. The comparison to the test scheme must be made by the employer for all of the jobholders they employ who are active members of the scheme and are not in contracted-out employment.