Pension reforms

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.

Before we look at the impact on claims however, let us first remind ourselves how the pension reforms work.

Recap on pension reforms

Employers must enrol all eligible employees and provide them with a minimum level of contributions. Eligible employees include those working in the UK who:Employers can choose to implement workplace pension schemes using a combination of (i) new, existing, or amended qualifying schemes and/or (ii) a National Employment Savings Trusts (‘NEST’) - a government-operated scheme established for the purpose of workplace pensions (previously called Personal Accounts).

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

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. Inevitably, the impact to employers will be additional costs in terms of contributions and administration. Employers can elect to commence enrolment earlier than their staging date. However, this will result in earlier increased costs and, therefore, it is uncertain how many employers, without an existing eligible scheme, 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.

Employees, although eligible to opt out of the scheme, will also be obligated to make a minimum contribution and, while they will be entitled to tax relief on contributions made, this could also result in increased financial pressures for employees.

In addition to the phasing-in of enrolment, the minimum employer/employee contribution rates will also be introduced on a sliding scale (as illustrated below), resulting in variable contributions each year.

	Employer	Employee (net)	Employee (tax relief)	Total
From October 2012 to September 2016	1.0%	0.8%	0.2%	2.0%
From October 2016 to September 2017	2.0%	2.4%	0.6%	5.0%
From October 2017 thereafter	3.0%	4.0%	1.0%	8.0%

These contribution percentages will be applied to an employee’s gross salary (including overtime & bonuses) falling between specified earnings bands, currently £5,715pa and £38,185pa. Therefore, from October 2017, the minimum contributions an employee could have is £2,598pa (assuming the minimum 8% total contribution rate).

Impact to claims

In preparing or reviewing pensions aspects of personal injury and fatal accident claims, there will be various issues to consider and particular care needs to be taken during the four-year start-up phase to ensure claims are not overstated. 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 they 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 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.

2. Increasing contribution percentages

Until September 2016 the minimum total contribution will be 2%. Therefore, for an individual on a salary of £20,000pa, total contributions would amount to £286pa. However, by October 2017 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, they may still be entitled to join a workplace pension scheme. This being the case, a claimant’s actual contributions will need to be accounted for and must reflect their actual salary, size of post-incident employer and the date of their actual enrolment into the scheme.

4. Which loss methodology to adopt?

A further issue to consider is which calculation methodology to adopt 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 which can then be invested as they choose.

The contributions approach does limit the speculation of calculating future pension fund performance. Therefore, given the current economic climate and poor pension fund performance, this approach may be preferable for claimants retiring in the short/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.

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.

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, reduced annual pay rises, a pay freeze or, perhaps controversially, an allocation of existing salary. All of these factors need to be considered in preparing and evaluating employee loss of pension/earnings claims.

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 concern 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/review process should become more straightforward - until the next round of reforms anyway.

Amanda Fyffe is director of RGL London, Caroline Bedford is manager of RGL Manchester