Updates and Reforms

All eligible workers, who are not already in a good quality workplace pension, are now automatically enrolled into either a qualifying pension scheme or into the NEST pension scheme.

Automatic enrolment means instead of choosing whether to join a workplace pension scheme provided by their employer, all eligible workers will have to actively decide not to be in a scheme.

This meant that all employers are required to set up a workplace pension for all employees by a set staging date. The largest companies were required to take action from 2012.

Employees could and still can opt out* or cease active membership* but employers cannot.

*There are several qualifying conditions.

State Pensions

In May 2014, the Government passed legislation that set up a new State Pension system, referred to as the Single Tier State Pension. The new system comes into effect on 6 April 2016.

The new State Pension system will:

- provide a higher flat-rate pension; and

-only affect those who reach state pension age on or after 6 April 2016.

The full new State Pension will be £155.65 per week and is based on National Insurabce records,National Insurance contributions or credits on the National Insurance record before 6 April 2016 will count towards the new State Pension.

From April 2015 people now have greater flexibility in accessing their pensions.

This means that people can choose how they access their defined contribution pension savings; for example taking all their pension savings as a lump sum, draw them down over time, or buy an annuity.

The main change is that savers over the age of 55 will be given the option of taking a number of smaller lump sums, instead of one single lump sum, and in each case, 25% of the sum will be tax-free.

The default retirement age of 65 is also to be phased out.

08/02/2016

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Pension system

The UK State Pension system is composed of:

•the Basic State Pension - a flat-rate payment that requires a contribution record of 44 years to receive full benefits.

•the State Second Pension (S2P) - replaced the old State Earnings (Related Pension Scheme) in order to provide a more generous additional state pension for low and moderate income earners.

•the Pension Credit.

Occupational Pensions

The UK operates a voluntary occupational pension system. The current reform proposals are intended to counteract the decreasing trend in coverage with supplementary pension provision.
DB schemes have been rapidly falling out of favour and have increasingly been replaced with DC arrangements as employers aim to contain costs and risks as a result of the funding difficulties after the downturn in equity markets, accounting issues and demographic trends.

In April 2006, The Pension Protection Fund was established. Its role is to compensate members of DB schemes in the event the employer has become insolvent and where there are insufficient assets in the pension scheme.

For external funding two plan types are available, namely insurance schemes and pension funds (self-administered plans).

Self-administered plans (pension funds) and insured schemes are set up under trust law as a separate legal entity and the legislation for both is very similar. Most medium and large-sized companies sponsor their own pension plans; industry-wide schemes are not common. Small employers favour insurance schemes, whereas larger companies generally use self-administered funds without insurance.

1. Pension funds (self-administered plans)

For pension funds, the appointment of an investment manager and a custodian is required. Investment managers have to be authorised under the Financial Services Act 1986 and formally appointed by the trustees.

As of 2006, new DB scheme funding regulations replaced the old Minimum Funding Requirement (MFR). The Pensions Act 2004 implemented the Statutory Fund Objectives (SFO), which require that salary-related occupational pension schemes must have sufficient assets to cover their technical provisions. A pension plan is required to set up a recovery plan if it fails to meet the SFOs.

2. Insurance schemes

Insured schemes are arrangements provided directly by insurance companies where the benefits provided are secured by one or more insurance policies or annuity contracts. They are set up under trust and are legally treated in the same way as self-administered schemes (pension funds).

3. Personal Pension Plans

Personal Pensions Plans are arrangements which the employee can establish individually with an external provider. Group Personal Pensions are increasingly being provided by employers as occupational schemes because of their flexibility and cost-effectiveness. The governing rules are the same as for Personal Pensions in the third pillar but are set up in a group arrangement, thereby mixing second and third pillar schemes. All Personal Pension Plans are DC in nature.

An employer can contribute to a Personal Pension scheme and they can also be used as a vehicle to contract out of the State Second Pension in the same way as occupational pension schemes.

4. Stakeholder Pension

Employers with more than five employees have been obliged to provide their employees with an access to a Stakeholder Pension, although neither the employer nor the employee has to contribute to it. Only companies which already offer a comparable standard of pension scheme or which already contribute at least 3% of pay to an employee's personal pension are exempt. The employer selects the provider and all Stakeholder schemes are on a DC basis.

5. Unfunded schemes

Unfunded and unapproved plans, financed on a pay-as-you-go basis from corporate funds, are also possible although these are rather uncommon. A non-tax-deductible book reserve would be established to account for the liability. These schemes are primarily used for executives to provide enhanced benefits.

Tax treatment of contributions and benefits

The previous system was replaced by a universal lifetime allowance on the aggregate value of tax-favoured benefits, with a universal maximum accrual in every year. The lifetime allowance is the maximum amount of pension savings that can benefit from tax relief and is currently £1.8 million. The government has announced that the LTA will be reduced to £1.5 million from April 2012.

From 2011-12 onwards, the annual allowance for tax relief on pension savings for individuals will be reduced from the current level of £255,000 to £50,000.



Additional sources:

The Organisation for Economic Co-operation and Development (OECD) -http://www.oecd.org