Saving a NEST Egg

Article, Personal Injury Law JournalFebruary 2012

Insurance / Legal / Liability / Casualty

From October 2012 all employers will be obligated to provide employees with a workplace pension – part of the Government’s drive to ensure more people are prepared financially for their retirement.

Much has been written about the pension reforms from an employment/business perspective, but far less has been said about the impact on personal injury and fatal accident claims. There will almost certainly be an increase in the number of pension claims being brought. Indeed some insurers/lawyers are already seeing pension claims being made in anticipation of the forthcoming reforms.

However, before we look at the impact on claims, let us first remind ourselves of the reasons for reform and the changes that will be implemented.

Reasons for reform

Due to the improvements in the standard of living and healthcare, people are living longer and, in the UK, the ratio of workers compared to pensioners has fallen dramatically over the last hundred years from one pensioner for every ten workers in 1901 to one in five in 2010. This ratio is expected to fall to one pensioner for every two workers by 2050. The change in dynamic of the working vs. retired population has led to additional demand for the provision of State pension benefits, leading to an increasing financial strain on the State purse to ensure the cost of State pension benefits can be met.

No longer can people rely on the State pension to provide adequately for their needs in retirement and historically individuals’ private saving for their retirement has been patchy at best. This has resulted from a variety of reasons including:

  • people perceiving private pensions as complex and confusing;
  • a lack of suitable private schemes available for those on low incomes;
  • a lack of occupational schemes for those working for smaller companies; or
  • people simply just not getting around to sorting their pension provisions out.

Because of this, the nation is generally unprepared for their retirement. To help overcome this, the Pensions Act 2008 laid the groundwork to help people save for their retirement and the workplace pension scheme was born.

Overview of the pension reforms

From October 2012, employers must enrol all eligible employees into a workplace pension scheme and provide them with a minimum level of contributions into their pension fund. Eligible employees will include those who:

  • are not already a member of a workplace pension scheme;
  • are at least 22 years old;
  • are under the State retirement age;
  • earn more than the minimum earnings threshold (likely to be £7,475pa in line with the current personal allowance); and
  • work or ordinarily work in the UK under a contract.

In some circumstances, employees not eligible for enrolment can request that their employer enrol them into a workplace pension scheme and, depending on the individual circumstances, employers may still be obligated to make contributions into the scheme. For example, if employees are less than 22 years of age, but meet all other criteria, then their employer will be obligated to make the minimum contributions. However, for employees earning under the minimum earnings threshold but meeting all other criteria, their employer will not be obligated to make contributions but can contribute if they choose.

Employers can choose to implement their workplace pension schemes by using the following methods (or any combination thereof):

  • use existing defined benefit or defined contribution schemes that meet qualifying criteria;
  • amend an existing scheme to meet the qualifying criteria;
  • establish a new qualifying scheme; and / or
  • use a National Employment Savings Trusts (‘NEST’) - NESTs are Government operated schemes established for the purpose of workplace pensions.

NESTs were previously called Personal Accounts until 2009 and will offer low charges to its members regardless of who they are. However, NESTs do not allow the transfer of pension rights to or from other schemes. These limitations will undergo Government review in 2017 but until then, and until the rules are changed, employees will not be able to amalgamate any exiting pension funds into their NEST and similarly they will not be able to transfer their NEST fund into another scheme if they choose.

Employees will also be required to contribute a minimum amount into their pension fund. Employees will be able to opt out of their workplace pension at any time during their membership. However, any contributions they have already made into the scheme will not be refunded, unless the opting out process occurs within one month of their becoming a member of their workplace pension scheme.

The choice to opt in or out of the scheme will remain open to employees throughout their employment and membership. However, employers will be obligated to automatically re-enrol opted out employees every three years to ensure that employees are encouraged to prepare adequately for their retirement (although employees can still choose to opt out if they want to).

Once employers have completed their automatic enrollment they will need to register with The Pensions Regulator who will then provide employers with support and regulate their workplace pensions.

The phasing-in period

The changes will be phased-in over a four year period with each employer having a ‘staging date’ for the implementation of enrolment. The Pensions Regulator will inform each employer of their staging date around 12 in advance and will also send them a reminder around three months before their staging date. This is to enable employers to make any necessary arrangements for the automatic enrolment process.

Inevitably, the impact to employers will be additional costs in terms of contributions payments and scheme administration costs. Large employers will be able to elect to commence enrolment of their employees earlier than their staging date from July 2012. However, this will result in earlier increased costs and, therefore, it is uncertain how many employers, without an existing eligible scheme in place, would opt to do this.

The staging date for employers is determined by the number of employees within the company. In the first year (to 30 September 2013), only employers with 1,250+ employees will be obligated to start a workplace scheme and, throughout this first year, there is a further sliding scale to determine the month in which employers will need to enrol their employees. From November 2013 there are further phasing-in criteria and by February 2016 even the smallest employers will need to have enrolled their employees.

Although, as noted above, employees will be eligible to opt out of the scheme, if they choose to stay enrolled they will be obligated to make a minimum contribution into their workplace pension fund. Employees will be entitled to claim tax relief on the contributions they make into their fund. However, this could also result in increased financial pressures for employees.

In addition to the phasing-in of enrolment, the minimum employer and employee contribution rates will also be introduced on a sliding scale. As illustrated in the table below, the sliding scale results in a variable minimum contribution each year for both employers and employees.

 

 Employer 

 Employee (Net)

 Employee (Tax Relief)

 Total

Oct 2012 to Sep 2016 

1.0%

0.8%

0.2%

2.0%

Oct 2016 to Sep 2017

2.0%

2.4%

0.6%

5.0%

Oct 2017 thereafter

3.0%

4.0%

1.0%

8.0%

The total minimum employer and employee contributions are calculated by applying the above contribution percentages to an employee’s gross earnings (including overtime & bonuses). However, the percentages are only applied to gross earnings falling between specified earnings bands, currently £5,715pa and £38,185pa. Therefore, from October 2017, the highest, minimum contributions an employee could have into their scheme would be £2,598pa (£38,185 less £5,715 multiplied by 8% - the minimum total contribution rate).

Impact to claims

So what does all this mean for personal injury and fatal accident claims? Invariably, in preparing or reviewing the pension elements of personal injury and fatal accident claims, there will be various issues to consider and, given the pension reforms, particular care needs to be taken during the four year start-up phase to ensure claims are not overstated. Key issues to consider include:

1. Phasing-in of enrolment
The size of the company a claimant works for will need to be considered to determine when the employee would be eligible to join the workplace pension scheme and, therefore, when their pension benefits would have accumulated from.

For example, where a claimant works for a smaller company with 50-89 employees, their loss of pension should not be assessed before 1 July 2014, this being the staging date for companies with that number of employees. Alternatively, claimants working for large companies with over 50,000 employees will be eligible for enrollment from 1 November 2012 and, therefore, their loss of pension claim would accrue from this time.

2. Increasing contribution percentages
Until September 2016 the minimum total contribution will be 2%. Therefore, for an individual on a salary of £20,000pa, their total employee and employer contributions would amount to £286pa. However, by October 2017 total employee and employer contributions would be based on an 8% minimum and amount to £1,143pa. Therefore, expected pension contributions need to be calculated with reference to the appropriate rates for each period to avoid misstatement.

3. Actual pension contributions
If a claimant is able to undertake alternative or reduced work following the incident, it is likely that they will still be entitled to join a workplace pension scheme. This being the case, a claimant’s actual contributions will need to be reflected.

In the same way that actual earnings are taken into account in calculating a loss of earnings, any actual pension benefits must also be deducted in any claim for loss of pension benefits. The claimant’s actual salary, size of their post-incident employer and the date of their actual enrollment into the scheme will also need to be factored into any loss calculation.

4. Which loss methodology to adopt?
A further issue to consider is which calculation methodology should be adopted either (i) a pension projection approach, based on an estimate of future benefits payable on retirement, or (ii) the more straight forward contributions approach, where there is no separate pension loss but instead expected pension contributions are reimbursed as part of a claimant’s loss of earnings claim. The reimbursed contributions can then be invested as the claimant chooses.

The contributions approach does limit the speculation of calculating future pension fund performance. Therefore, given the current economic climate and recent poor pension fund performance, this approach may be preferable for claimants retiring in the short to medium term. However, if a claimant’s expected retirement is several years into the future, a pension projection could provide a more appropriate figure on which to calculate lost pension benefits, reflecting potential growth in the pension fund.

In addition, depending on the methodology adopted, any loss of earnings claim may also be impacted and would determine how employee / employer pension contributions should be treated. For example, it is necessary to understand whether pension contributions need to be deducted from any loss of earnings claim or whether only the tax advantage of making those contributions should be taken into account.

5. Impact to future remuneration
The introduction of workplace pension schemes will certainly result in an increased financial burden for employers. With this in mind, an employee’s expected salary may well be influenced by employers offsetting their pension contribution obligations. For example, employers may decide to reduce an employee’s annual pay rise, freeze an employee’s pay or, perhaps controversially, allocate pension contributions from an employee’s existing salary. All of these factors need to be considered in preparing and evaluating employee loss of pension and earnings claims.

6. Additional contributions
If an employee chooses to be part of a workplace pension scheme then, in addition to the minimum employer and employee contribution obligations, there is also the option for the employee, employer or both to make additional contributions into their fund. However, this then presents the question of how much the additional contributions would be and it may be necessary to examine whether the employee, and employer, could have afforded the additional contribution payments.

Summary

Due to the phasing-in rules, inevitably the calculation of lost benefits from workplace pension schemes will be an intricate process in the early years. The rules will be of interest to those both preparing and reviewing employee workplace pension claims to avoid misstatement of losses.

Furthermore, careful consideration will also need to be given to the interaction between the loss of pension benefits and any loss of earnings claimed. However, once through the phasing-in stage the calculation and review process should become more straightforward - until the next round of reforms anyway.

 

As appeared in Personal Injury Law Journal, February 2012.

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