The Pensions Regulator

Pensions reform

Government reforms aim to make sure that more people have adequate and well-protected pension savings.

The Pensions Bill 2007 introduces new duties on employers to:

• register with the Pensions Regulator and enrol employees automatically to a qualifying workplace pension scheme; and
• make a minimum contribution of 3% of pay to an employee’s pension scheme.

Background to the Pensions Bill 2007
Our new responsibilities
Aspects of the new policy and how we will support them
Our approach
How will we communicate the new policy?

Background to the Pensions Bill 2007

Without action, millions of today’s workers could retire without having built up enough pension savings to fund the lifestyle they are expecting.

Research by the Financial Services Authority (Financial Capability in the UK: Establishing a Baseline (FSA, 2006)) has found that only 4 out of 10 working people are saving for their retirement at all, yet 8 out of 10 say that they will need more than a state pension to live on.

The problem is not new but it could have more serious consequences as people live longer and fewer children are born. Without an increase in private saving, future generations could retire poorer than today’s pensioners, and poorer than they expect to be.

The Government wants to encourage more people to save more – in particular those on moderate or low incomes. In 2006, the Government consulted people about the issues and asked them to suggest changes.

Following the consultations, the Government published two White Papers: Security in Retirement: towards a new pensions system (May 2006), and Personal accounts: a new way to save (December 2006).

The Government introduced the Pensions Bill 2007 to take forward these changes.

Our new responsibilities

The Pensions Bill 2007 will give the Pensions Regulator a new objective to maximise compliance with the employer duties set out in the Bill, and ensure safeguards to protect employees are adhered to.

We are currently developing our approach to making sure employers comply with their new duties.

The approach needs to:

• be risk-based (based on an understanding of potential problems);
• be based on good practice (based on real examples of successful approaches);
• be cost effective;
• include ways of enforcing duties; and
• minimise the compliance burden on employers.

Aspects of the new policy and how we will support them

In summary, employers must register with the Pensions Regulator and enrol employees in a qualifying workplace pension scheme.

They will be required to make a minimum contribution based on qualifying earnings, starting at 1% and rising to 3% in subsequent years, to an employee’s pension scheme. Employees have the choice to opt out. The specific employer duties are explained in more detail below:

Employer registration
The intention of the new policy is that employers must take part in a registration process to record how they plan to carry out their new pension duties.

The Government hopes that getting employers involved in the process early on will mean that the employers are more likely to comply with the duty to enrol eligible employees into a qualifying scheme.

The registration process is likely to be web-based, making it cost effective and minimising the burden on employers. We are working with HM Revenue & Customs to identify employers.

Automatic enrolment of employees
Employers must automatically enrol eligible employees into a qualifying scheme.

We will be responsible for making sure employers comply with this duty, and will be educating and enabling them to do so.

As a last resort, we will be able to prosecute employers who wilfully fail to enrol employees.

If employers fail to automatically enrol employees, we will use sanctions against the employer and will aim to put right the situation for the employees.

We will also make sure employers comply with the duty to manage the process of employees joining the scheme or exercising their individual right to opt out.

Employees who are members of the scheme will be required to pay a contribution. Employers are not expected to give advice to their employees about whether it’s appropriate for them to join, or opt out of, the scheme.

Recruitment conduct
Employers will be prevented from trying to avoid their new duties by not recruiting people who want to join a pension scheme – for example, by:

• advertising jobs on this basis; or
• asking questions on an application form or at an interview about whether the applicant is part of a scheme and whether or not they would wish to join one if offered the job.

We have the power to act if employers break these rules. These rules are not intended to interfere with the negotiations about pay and other employment benefits that often happen during the recruitment process.

Inducement and coercion
The Pensions Bill prohibits employers from offering ‘inducements’ – incentives such as higher salaries or one-off bonuses to encourage workers to opt out of pension provision.

It also prohibits an employer from coercion – behaviour that forces their workers to opt out. This will leave employees free to decide if they want to be a member of a workplace pension scheme without unfair pressure.

We will be responsible for making sure employers do not offer inducements or coerce employees.

If an employer is found to be breaking these rules, in addition to bringing sanctions against the employer, the regulator will also aim to return the employees’ situation to how it was before the inducement or coercion.

Employer contributions
Employer contributions into a qualifying scheme will be phased in over a number of years, starting at 1% and rising to 3% of qualifying earnings. We will have the power to pursue employers for unpaid contributions.

Our approach

To carry out our new responsibilities, we are designing an ‘employer compliance regime’ based on the following steps.

Prepare
This step involves building up the skills and data that will allow the regulator to make initial contact with employers and other groups, and to support the later stages of the value chain.

Engage
This step involves identifying and segmenting stakeholders (including employers, pension providers, payroll providers, intermediaries such as accountants and so on) and finding out how much stakeholders understand about employer duties, motivations and likely behaviours.

We will use this information to plan targeted campaigns and communications.

Increase understanding
This step involves raising awareness to encourage and enable existing and newly-formed employers to comply with their duties at as high a level as possible.

Register/enrol
We will need employers to register with us and to provide evidence of how they are complying with their duties (ie to offer all employees access to a qualifying pension scheme). This will help us to identify employers who are not complying.

Enable compliance
This step involves monitoring employers’ compliance with their duties, including checking that employers maintain pension contributions and keep records.

It involves targeted working to make sure rates of compliance remain high in the long term.

Enforcement
We will use the powers granted by the Pensions Bill 2007 to use sanctions and penalties against employers who fail to carry out their duties.

Supporting the employer compliance regime
Support activities will help all parts of the process run smoothly and improve continually.

In developing its approach, we want to:

• make complying accessible for employers by avoiding the creation of unnecessary barriers;
• make sure the burden of extra administrative tasks is proportionate and that it falls on the right people; and
• make sure sanctions and penalties are proportionate and risk-based, and that any enforcement actions are evidence-based and auditable.

How will we communicate the new policy?

We will meet widely with trade bodies and intermediaries before the new policy starts. This is so that any advisers or professionals an employer is likely to contact for information about the new duty will have been briefed already.

We will follow this activity with a programme of direct contact with employers to enable the employer to comply with the new duty.

This programme of direct contact will be tailored to an employer's:

• size;
• experience of pension provision;
• existing relationship with government bodies.

Because of the mix of employers and ways of interacting with them, we will use many communication channels.

However, we plan to make our website and other electronic mediums a main method of communication.