Clear the high hurdles

Pensions are currently dominating finance directors’ thoughts and the political agenda. Faced with an ageing population, employers in both the private and public sectors must now finance pension obligations for longer than originally forecast.

New compulsory personal accounts, known as NEST (National Employment Savings Trust), are being phased in from 2012 with a mandatory 3 per cent employer contribution, unless employers have a ‘qualifying scheme’. Registered social landlords need now to consider their unpensioned employees and the additional employment cost that NEST will impose. Employers who fail to comply could face fines of up to £10,000 per day.

Housing associations taking stock transfers from the public sector face changes from the new-look Local Government Pension Scheme and the new options available under the Social Housing Pension Scheme. These factor in how to comply with best value requirements (more of which later). The risks and liabilities of each option need to be examined.

Pensions 2012- NEST

NEST is to be phased in from 2012 to 2017. All employees age 22 and over and under state pension age will be automatically opted into NEST after one month of starting employment, if they are unpensioned employees of registered social landlords.

Employers can use their own pension arrangements if they constitute a qualifying scheme, which would exempt them from NEST. In broad terms, a defined benefit scheme or a defined contribution scheme with a minimum of 3 per cent employer contribution of qualifying earnings will meet the test. Qualifying earnings means total employment income rather than just basic salary, so would include bonus and overtime payments. Employees will have to make a 4 per cent contribution. Tax relief will add a 1 per cent contribution.

Ex-public sector employees - SHPS or LGPS?

Generally, housing associations with ex-public sector employees participate in either the SHPS or the LGPS. This allows them to meet local authorities’ best value requirements on stock transfer, which specify participation in the LGPS or a broadly comparable defined benefit pension scheme, such as SHPS.

Defined benefit schemes are based on the length of pensionable service and the member’s salary at retirement or leaving service. New options now apply under the LGPS and, from 1 April 2010, under SHPS.

New look LGPS

The new look LGPS was introduced from 1 April 2008 for both current members and new joiners. It has an improved accrual rate of 1/60th rather than the previous 1/80th. This means that for every year of service, a member earns 1/60th of their final pensionable salary. Member contribution rates have increased to between 5.5 per cent to 7.5 per cent to reflect the scheme’s cost.

New SHPS options

SHPS is offering three new options:

• a 1/80th defined benefit option
• a career average revalued earnings option based on 1/80th of annual salary
• a new defined contribution option, which will be a qualifying scheme for NEST.

Defined contribution benefits are based on the contributions paid in by employer and/or employee, the investment growth and annuity rates on retirement. SHPS requires three months’ notice of any proposed changes to the new options.

If an association has more than 50 employees and wants to move to one of the new SHPS options for current members of SHPS, 60 days’ consultation is required as this involves a listed change to benefit structures. Failure to consult can result in a fine of £50,000 from the Pensions Regulator.

Employment contracts should also be carefully checked as changes may need to be made, and this could require up to 90 days’ consultation.

Actions required

• Begin consultation on SHPS options now if a housing association wishes to move SHPS members to a new option
• Take advice from a specialist pensions lawyer on whether current pension arrangements are considered to be qualifying schemes for NEST
• If tendering for a best value contract, consider whether new look LGPS or SHPS is the better option

Sasha.butterworth@tltsolicitors.com

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